By Jacque Lethbridge and Bill Gambrill - 5 Apr 2020
On Friday, 3 April 2020, the Government announced
significant insolvency law changes in response to the likely
economic impact of COVID-19 and the current lockdown (https://www.beehive.govt.nz/release/further-measures-support-businesses
). The Government will amend the Companies Act 1993 to
provide additional comfort to directors of companies during the
next six months, and will also introduce "Covid-19 Business Debt
Hibernation" as an option to help businesses survive the
deterioration in the business environment (https://www.companiesoffice.govt.nz/about-us/what-we-do/insolvency-relief-for-businesses-impacted-by-covid-19/
). Parliament will have to pass legislation to give effect to
the proposed changes, although the proposed legislation has not
been made public.
Business Debt Hibernation
The business debt hibernation scheme is the most novel element
of the proposed changes. Debt hibernation will be an additional
insolvency mechanism, and not a variation of procedures currently
available under the law. The announced intention is to allow,
"businesses affected by COVID-19 to place existing debts into
hibernation until [the businesses] are able to start trading
normally again". Business Debt Hibernation would be available
to companies, and a range of other entities - but not to sole
traders; it will also not be available to insurance companies,
banks and non-bank deposit takers.
The scheme is intended to be simple and flexible, with a view to
a scheme being put into effect quickly. Hibernation is expected to
be a step which businesses can take for themselves, without needing
any external appointee to operate the business. Directors of
companies seeking to "hibernate" their debts will have to meet a
minimum (unannounced) threshold before a company is eligible to put
a proposal to creditors. It could be expected that minimum
requirements would be that a business was solvent and would have
been solvent, aside from COVID-19, and that it would be in the best
interests of the business, including its ability to pay creditors,
for the business to enter debt hibernation.
If a business proposes debt hibernation, there will be a
moratorium period of one month on the enforcement of debts from the
date a proposal is notified to creditors. If 50% of a business's
creditors by number and value agree to the proposal, the scheme
will be binding on all creditors (except for employees). If the
creditors agree to the proposal, there would be a further six-month
moratorium on enforcement of debts. If creditors do not agree,
businesses can still use any other available procedure, such as
administration.
If a Business Debt Hibernation proposal is accepted by
creditors, a business could continue to trade. Furthermore, any
transactions at arm's length with unrelated parties which takes
place during the hibernation period would not be a "voidable
transaction" in the event of a subsequent liquidation of the
company. If a company is subsequently liquidated, the liquidator
could not seek to reverse transactions occurring in the hibernation
period. A business's counter-parties should thereby have confidence
that they would not be increasing their risk to any business by
trading with that business while it is in debt hibernation. (A
proposed substantive change to the law of voidable transactions
will also be brought forward.)
One can foresee some degree of uncertainty as to the scope of
contractual obligations which could be characterised as "debts",
and which would be temporarily unenforceable. It is also not
apparent whether debts owed to secured creditors could be subject
to hibernation - a business under financial stress might, at the
same time, be increasing its exposure to its secured creditors
(particularly if it is using the Business Finance Guarantee Scheme,
which is to be accessed through banks in the first instance (https://www.business.govt.nz/covid-19/business-finance-support-and-mortgage-holidays/);
nor has it been announced how any moratorium would affect rights
against guarantors of business debts. Hopefully, these matters will
become clearer when more details are announced.
Protection for Company Directors against Claims of
Reckless Trading
The second main element of the proposed changes is the creation
of what is sometimes called a "safe harbour" for company directors.
The Government plans to amend sections 135 and 136 of the Companies
Act 1993. Under section 135 a company director is potentially
exposed to personal liability for allowing a company to trade in a
way which could create a substantial risk of serious loss to
creditors. Under section 136, a director is potentially exposed if
the director agrees to the company incurring an obligation which
the director does not reasonably believe that the company will be
able to perform.
It is proposed that the law be amended to provide that a
decision by a director to keep trading and incurring new
obligations over the next six months would not be a breach of duty
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 be able to reach an
accommodation with their creditors).
It is intended that the legislation be given effect from 3 April
2020. There are no other proposed changes to a director's
duties.
While it could be debated whether a change to the law was
strictly necessary, the proposed amendment gives the strongest
possible signal to company directors that they would not be
personally exposed for deciding to continue the business of the
company in the short term.
Other Changes
Many of the other measures announced are administrative - albeit
important - such as extending deadlines for some filings with the
Companies Office, or temporarily relieving companies from
constitutional requirements which might be impossible to perform
currently (such as shareholder meetings).
Conclusion
Many other countries have made changes to their laws which a few
weeks ago would not have appeared even remotely likely. Many,
including Australia and the United Kingdom, have made changes
similar to those proposed in relation to directors' duties.
However, there appear to be many unique features of the Business
Debt Hibernation scheme: it is as if struggling businesses will be
allowed to create a facsimile of themselves to keep functioning,
while the original is put into isolation, and an assessment can be
made of the likelihood of recovery; like all quarantines, only time
will let us assess how effective the proposed measures will be.
Contacts
Jacque
Lethbridge
Bill
Gambrill