COVID-19 – Changes to Insolvency Laws

Changes to Insolvency laws are proposed to hold back the tide of unexpected and unwarranted insolvency of companies due to COVID-19 impacts. 

Along with the many measures the Government have been implementing to help manage the economic impact of the “COVID crisis”, are temporary changes to insolvency laws under the Companies Act to assist businesses that may be facing insolvency as a result of COVID-19.  The intention is to keep the economy ticking and keep people in employment, helping struggling businesses stay viable by:

• Providing directors of companies that are struggling with liquidity due to COVID-19 a “safe harbour” from insolvency duties under the Companies Act; and
• Enabling businesses affected by COVID-19 to place existing debts into hibernation until the business can start trading as normal again.

The changes are still a work in progress, but here is what we know so far.

Safe Harbour Provisions

The temporary safe harbour provisions address concerns of companies being voluntarily liquidated prematurely due to directors being personally liable for breaches under section 135 (“Reckless trading”) and 136 (“Duty in relation to obligations”) of the Companies Act which relate to trading while insolvent.

While it would usually be a breach of those sections to keep trading while likely insolvent, directors will not be breaching those sections if:

• In the good faith opinion of the directors, the company is facing or likely to face significant liquidity problems in the next six months as a result of COVID-19;
• The company was able to pay its debts as they fell due on 31 December 2019; and
• The company directors consider in good faith that it is more than likely the company will be able to pay its debts as they fall due within 18 months.

It is important to note, the overarching requirement is still for directors to act in good faith and the information released on 3^rd April 2020 highlighted that “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.”

The safe harbour provisional would not apply to licensed insurers, registered banks and non-bank deposit takers as these are regulated by the Reserve Bank of New Zealand.

Business Debt Hibernation (BDH)

The Business Debt Hibernation Scheme will allow affected entities to effectively place business debt in hibernation by:

• Notifying creditors of a proposal to have a six-month moratorium on debts;
• Creditors would be given one month from the date of notification of the proposal to vote on it, during which time pre-existing debts would be unenforceable.
• If 50% of creditors agree to the proposal, the six-month moratorium on debts will be implemented.

The purpose of this scheme is to enable businesses to enter into conversation with their creditors, allowing time to reach agreement on possible payment arrangements.

The Business Debt Hibernation Scheme would not be available to sole traders (as they are subject to the Insolvency Act 2006 which relates to personal insolvency).  It would also not apply to licensed insurers, registered banks or non-bank deposit takers, as these are regulated by the Reserve Bank of New Zealand.

It is hoped that these proposals in combination will allow businesses who are struggling with the impact of COVID-19 to trade through, where the existing rules could have forced them into “premature” liquidation.

Other changes to insolvency laws including:

• Changes to the “voidable transactions regime”, where a liquidator can claw back payments made to creditors prior to commencement of liquidation.  The period was being reduced from two years to six months where the debtor and creditor are unrelated parties. This was a change that had been proposed prior to COVID-19.
• Deferral of the new insolvency practitioner licensing legislation by up to 12 months due to COVID-19 related delays (currently schedule to start on 17^th June 2020);
• Ability for registrars to extend a range of legislative deadlines, such as AGMs, filing annual returns, auditing financial statements, requirements to appoint auditors and processing company name reservation applications;
• Relief from constitutional requirements where entities are unable to comply due to impacts of COVID-19; and
• Allowing the use of electronic signatures (subject to certain conditions);

A timeframe has not yet been locked in for the enactment of this proposed legislation, but it is understood when it is enacted, it will be retrospective to 21^st March 2020.  What this space…

If you have any questions please contact us – we’re here to unlock your business potential.

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