On 3 April 2020, Finance Minister Grant Roberston, and Consumer Affairs Minister Kris Faafoi, announced changes to legislation that will support businesses through the COVID-19 pandemic.
For some businesses, the impact of COVID-19 will still lead to liquidation. However, with these changes, it is hoped that others may be able to weather the storm and still be able to continue to trade on the other side.
There are two main changes to the legislation that are aimed at businesses that are struggling financially as a direct result of COVID-19:
- A ‘safe harbour’ for directors, enabling them to trade on despite their company’s insolvency through the next six months; and,
- The Business Debt Hibernation (BDH) scheme aimed at encouraging directors to talk to their creditors, retain control of their company and to provide certainty to third parties accepting payments from companies, where in normal circumstances these payments could be voided if a liquidator was appointed.
Other changes include allowing the use of electronic signatures due to the lockdown and the need for working remotely; temporarily extending deadlines imposed under legislation; and providing relief for entities unable to comply with their constitutions due to restrictions in place because of COVID-19.
Parliament are currently working through these temporary changes, which are intended to be retrospective once passed.
Ordinarily, company directors are under a number of obligations to act in good faith and in the best interests of the company and its creditors. Under the current “reckless trading” provisions, a director must not:
- cause, allow or agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or,
- agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
The ‘safe harbour’ has been introduced to protect directors over the next 6 months, and their actions will not result in a breach of these duties if:
- in the good faith opinion of the directors, over the next 6 months, the company is likely to face significant liquidity problems as a result of the COVID-19 pandemic;
- the company was able to pay its debts as they fell due on 31 December 2019; and,
- the directors consider in good faith that the company will be able to pay the company’s debts as they fall due within 18 months.
Whether and how a director meets these requirements is yet to be seen. Claims for breaches of this duty typically only arise when a company becomes insolvent. If there has been reckless trading, then the liquidator is best placed to detect it and take a claim against the directors, if doing so is likely to benefit creditors as a whole. It is envisaged that if a director can respond to a claim that these duties have been breached, they will not be held personally liable for the company’s debts that cannot be met (as could be the case otherwise).
It is important to note that the recently enacted Practitioners Regulation Act 2019, which is still planned to be implemented in June 2020, is expected to lead to an increase in the number of reckless trading claims brought by liquidators. This is unlikely to change due to the impact of these new changes. However, it will allow directors a defence to such a claim where they have acted in good faith, the company was solvent up until the end of last year, and they envisaged that the debts will be able to be paid within 18 months (even though the company may ultimately fail).
All directors will be required to be actively involved in current decision making and to have evidence of their plans on how they intend to keep their business afloat during these challenging times. Of course, the duty to act in good faith will remain throughout.
Business Debt Hibernation
The idea behind the second business measure is to allow some reprieve from debts that are mounting now, by:
- encouraging directors to talk to their creditors regarding a simple BDH proposal. More information can be found in our article "Worried about your creditors?", which helps to identify who your creditors are
- allowing directors to retain control of their company
- providing certainty to third party creditors that they will be exempt from the voidable transaction regime if they accept payments from you at a time when your company is insolvent.
The BDH will not be available to Sole Traders. It will therefore be most useful for businesses run through a company. There will be a minimum threshold that will need to be met in order for the BDH to be an option and if you choose to make a proposal to your creditors through this scheme, there will need to be a 50% uptake (in value and in number) by those creditors.
Creditors will have one month to consider a proposal before voting and during that time there will be a moratorium on the enforcement of all debts. Once approved, the BDH will be binding on all creditors (excluding employees) and will be subject to any conditions imposed. There will also be a further six month moratorium.
If the creditors reject the proposal, directors will need to consider the next best way forward. This will be one of the current options:
- Continuing to trade;
- Entering into Voluntary Administration; or,
- Appointing a Liquidator
The decision to continue to trade should not be taken lightly, as directors will still be subject to ordinary duties to act in good faith. If a BDH proposal fails and the directors choose to trade on, it is unlikely that they will be able to meet the criteria to be protected by the safe harbour.
What the BDH will do is allow you the time you need to get back on your feet and then pay creditors when you are in a more stable financial position. It offers you an alternative to closing your doors because you cannot pay your debts now. It will not work for everyone, and it does rely on your creditors being accepting in the circumstances - strain on their own businesses may impact their decision on how to vote on your proposal.
If you believe that the BDH scheme may benefit you and you want to start the conversation with your creditors, get in touch with Nexia New Zealand. We can help you to develop a proposal and distribute it to your creditors. We can also provide you more information around how this will work, and can keep you up to date as further information is released by the government.