Law changes bring relief to directors and debt

This information is current as of the publish date, however due to the evolving response to the crisis, please refer to the latest articles here and/or the FAQs page for up-to-date information.

As part of the Government’s response to COVID-19, temporary law changes to the New Zealand Companies Act will enable businesses affected by COVID-19 to place existing debts into hibernation for six months.

Directors of companies facing significant liquidity problems because of COVID-19 will also have a six-month relief from any personal liability for trading while insolvent. Under the temporary safe harbour changes, directors can continue to trade without the pressure to enter their organisation into administration if there’s a chance it might be insolvent.

The changes announced 3 April are designed to assist financially stressed businesses weather the storm with as little harm as possible to creditors’ interests and to keep workers in jobs.

Business debt hibernation – is this an option?

Businesses affected by COVID-19 will be able to put existing debts into hibernation for six months and keep trading.

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).

Before a company can be placed in business debt hibernation:

  • A new threshold test (the details have yet to be announced) will need to be passed before directors can seek creditor approval to hibernate their debt
  • 50% of creditors must agree to deferring debt repayment through a vote
  • Creditors will have a month to decide if they agree to put a business’ debt into hibernation. During this time, creditors will not be able to enforce debt repayment
  • If approved, a business’ debt repayments will be frozen for six months.

The month between notifying creditors of the intention to seek debt hibernation and the vote gives the business time to talk to its creditors about prioritising paying some debts and holding off paying others for six months.

Safe harbour for directors – it doesn’t mean a free pass

The temporary law change in relation to sections 135 (reckless trading) and 136 (trading while insolvent) of the Companies Act will mean directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next six 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 six months as a result of the impact of COVID-19 on them or their creditors
  • The company was able to pay its debts that were due on 31 December 2019, and
  • The directors consider in good faith that it is more likely than not the company will be able to pay its debts as they fall due within 18 months.

However, this does 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.

Other corporate governance changes

The Contract and Commercial Law Act will be amended to allow for electronic signatures on security agreements containing powers of attorney.

Registrars will have temporary exemption powers to extend statutory deadlines (e.g. for holding AGMs and filing annual returns) imposed on companies, limited partnerships, incorporated societies, charitable trusts and other entities under legislation.

Temporary relief will be given to 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 COVID-19.

Staying the course

While debt hibernation may be a viable option for some, and a safe harbour will provide relief for directors facing difficult decisions in the coming months, it’s important that business leaders and directors continue to oversee the solvency of their organisation.

  • Have a plan in place to pay debts incurred and mitigate business risks to remain viable during and beyond the six months.
  • Conduct ongoing assessments on the impact of incurring further debts and liabilities.
  • Make decisions in the best interests of the business (including the interests of creditors when approaching insolvency).
  • Consider talking to your creditors and bank before heading down the hibernation path as getting your creditors to agree to a freeze on debt payments for six months may not be an easy task.
  • Getting good professional advice early in the process with assessing your financials, cashflow and debt situation can help in preparing viable business debt hibernation proposals and to show your creditors that you are committed to making this debt repayment arrangement work.

 

We’re here for you

We continue to support our clients through this challenging period with key business and tax advice to answer your business-related questions and guide you through the COVID-19 financial support measures. For the latest COVID-19 updates, visit our Resource Page.

Should you need any additional support, please contact your local William Buck advisor – we’re here to help.