The Government has announced measures to assist directors and businesses that have been affected by COVID-19. The changes flow from concerns that numerous companies could be placed into liquidation due to the uncertainty caused by the pandemic.
The temporary changes include:
- giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act
- enabling businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again
- allowing the use of electronic signatures where necessary due to COVID-19 restrictions
- giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation
- giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.
“These measures will support the Government’s work to cushion the economic impact for New Zealand and to support businesses and protect jobs and incomes,” Finance Minister Grant Robertson said.
“We are announcing these decisions now to give businesses certainty that these measures are being worked through. We will be asking Parliament to agree to make some of these changes retrospective.
“While they will help increase certainty and provide practical assistance to business owners and directors, the changes must not be seen as a workaround for obligations to creditors and the responsibility of directors to act in good faith.
“I want to emphasise that these changes will not mean that directors are free to disregard the consequences of their actions for the next six months. Other protections in the Companies Act, such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place,” Grant Robertson said.
Consumer Affairs Minister Kris Faafoi said the changes would help retain jobs and support the New Zealand economy to recover as quickly as possible.
“We know that, whether real or perceived, the threat of a director being held personally liable for a company’s solvency problems will likely make them inclined to advise closing down a business,” Consumer Affairs Minister Kris Faafoi said.
“A ‘safe harbour’ will help them keep trading, rather than prematurely closing up, which will minimise disruption to the economy as much as possible,” Kris Faafoi said.
The proposed move to place existing debts into hibernation, to be known as a Business Debt Hibernation (BDH), would only happen with the agreement of 50 per cent of a business’s creditors.
“Going into a Business Debt Hibernation will give businesses the space to talk to their creditors about prioritising paying some debts, and deferring others for six months,” Grant Robertson said.
”It is inevitable that some businesses are going to have to go into liquidation. However these measures provide an accessible and pragmatic means of helping some businesses to weather the storm in a way that does as little harm as possible to creditors’ interests,” Grant Robertson said.
He urged businesses to talk to their creditors and banks, and also reminded them that the Government had a Wage Subsidy Scheme in place as well as a Business Finance Guarantee Scheme, which can offer loans up to $500,000 over three years.
How the measures will work
Subject to it being agreed to by Parliament, the announcement today will provide a safe harbour from sections 135 and 136 of the Companies Act 1993 on the following terms:
Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties if:
- in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors;
- the company was able to pay its debts as they fell due on 31 December 2019; and
- the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).
The Government will be asking Parliament to agree that the safe harbour be backdated to the date of this announcement.
COVID-19 Business Debt Hibernation
The Government will be introducing legislation to introduce a COVID-19 Business Debt Hibernation regime to the Companies Act 1993.
The proposed regime is intended to:
- encourage directors to talk to their creditors with a view to putting together a simple proposal for putting the business into hibernation;
- allow for the directors to retain control of the company, rather than passing control to an insolvency practitioner;
- provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in Business Debt Hibernation;
- be simple and flexible so that it can be enacted quickly, and businesses can readily apply it to their circumstances without having to obtain legal advice.
Key features of the proposal are that:
- directors will have to meet a threshold before being able to access the Business Debt Hibernation regime and putting a proposal to their creditors
- creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree
- there will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further 6 month moratorium if the proposal is passed.
Business Debt Hibernation would be binding on all creditors other than the entity’s employees and would be subject to any conditions agreed with creditors. If the creditors reject the proposal, the directors would still have the range of existing options available including trading on, entering voluntary administration and appointing a liquidator.
While a business is in Business Debt Hibernation it would be able to continue to trade, subject to any restrictions agreed with creditors as a condition of entering into it.
In order to encourage businesses to continue to transact with a company that has entered Business Debt Hibernation, it is proposed that any further payments, or dispositions of property, made by the company to third party creditors would be exempt from the voidable transactions regime. This exemption would not extend to related parties.
This means anyone continuing to trade with the company will not have to worry about a liquidator seeking to unwind transactions if the company is later placed into liquidation. This exemption would be subject to a condition that the transaction was entered into in good faith by both parties, on arm’s length terms and without the intent to deprive the existing creditors of the company.
Business Debt Hibernation will be available to all forms of entity with legal personality (not just companies) and entities that do not have legal personality (i.e. trusts and partnerships).
It will not, however, extend to licensed insurers, registered banks and non-bank deposit takers, and sole traders. Sole traders who become insolvent are instead subject to the Insolvency Act 2006 (which covers personal insolvency) because there is no separation between the trader’s business finances and their personal finances.
Additional changes to support business
In addition to the Companies Act changes on BDH and the safe harbour, the following corporate governance changes have also been proposed:
Other insolvency law changes
- Bring forward an insolvency-related reform under the voidable transactions regime to reduce the period of vulnerability from 2 years to 6 months where the debtor company and the creditor are unrelated parties.
- The Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 are scheduled to come into force on 17 June 2020. Although 17 June remains achievable, and is still being targeted, unpredictability associated with COVID-19 means that implementation may have to be deferred. To cater for unexpected COVID-19-related delays, Cabinet has agreed to allow the commencement of the Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 to be deferred for up to 12 months.
- Amend the Contract and Commercial Law Act 2017 so that the provisions in that Act relating to electronic signatures apply to security agreements containing powers of attorney.
Extending statutory deadlines
- Registrars will have temporary exemption powers to:
- relax the statutory deadlines in some corporate governance legislation (e.g. for holding AGMs, and filing annual returns for example) for companies, limited partnerships, incorporated societies, charitable trusts and other entities
- relax deadlines for Registrars under various Acts to carry out certain functions, such as processing applications to reserve company names.
Non-compliance with entity constitutions
- Temporary relief for entities (including incorporated societies, charitable trusts, unincorporated associations and other entities) that are unable to comply with obligations in their constitutions or rules because of the impacts of COVID-19 are absolved from doing so until such a time when it is reasonably able to perform it.
- In addition, these entities can use electronic communications (including electronic meetings) even if their constitutions or rules do not allow them to.
Access to insolvency support – next steps
How businesses will access the insolvency relief, and the requirements they’ll need to satisfy, will be finalised in the coming weeks.
We’re currently preparing the necessary information and documentation to help directors through the process. This will include forms that directors will be able to use to put proposals to their creditors.