COVID-19: Insolvency law changes

On Friday afternoon the government announced temporary changes it intends to make to the Companies Act 1993 (the Act) to assist companies facing financial stress during the COVID-19 pandemic.

Summary of proposals

The proposed changes include:

• providing directors with a ‘safe harbour’ from adverse claims under sections 135 and 136 of the Act;
• enabling businesses which have been affected by COVID-19 to place existing debts into “hibernation” for six months until they are able to start trading normally;
• allowing the use of electronic signatures to sign documents or swear affidavits;
• giving the Registrar of Companies the power to temporarily extend deadlines, such as the deadline to submit annual returns, imposed on companies under legislation; and
• giving temporary relief for companies that are unable to comply with requirements in their constitutions, such as the requirement to hold an annual general meeting, because of COVID-19.

The proposals follow recent amendments in Australia and the United Kingdom designed to provide assistance to business owners and directors as they navigate the challenges associated with Covid-19.

What does this mean for companies and directors?

Directors’ Duties:

Directors will need to remain cognisant of their duties and have up to date information to satisfy themselves:

• the company was solvent as at 31 December 2019;
• there are reasonable grounds to consider the company will be solvent again within 18 months.

Accurate and current information on a company’s financial information will be critical; as will budgets and forecasts looking forward for the next 18 months.

Finance Minister Grant Robertson has cautioned that the changes “must not be seen as a workaround for obligations to creditors and the responsibility of directors to act in good faith”. Directors’ duties otherwise remain in force, including the requirements under the Act to:

• act in good faith; and
• exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances.

Business Debt Hibernation:

The Business Debt Hibernation (BDH) scheme is designed to freeze existing debts, to provide businesses with room to return to adequate cashflow levels, without the fear or consequences of existing debts being enforced.

There will be a process companies will have to follow to put a BDH scheme in place – it is not automatic. Directors will need to satisfy themselves that the requisite threshold has been met (the details of what that threshold will be is still to come) and obtain the agreement of 50% of the company’s creditors.

A company will be required to:

• notify its creditors of a proposal seeking a six month moratorium on existing debts. This notification will trigger a moratorium of one month for existing debts.
• obtain agreement to the proposal from 50% of its creditors by number and value. If agreement is obtained, a moratorium on existing debts may remain in place for six months and would be binding on all creditors.

Companies will be able to continue trading through the moratorium, subject to any conditions that may be imposed by the creditors in agreeing to the proposal.

It will be important for directors to put forward a well thought out proposal to creditors. This may include the steps that the directors have taken to mitigate the impacts of COVID-19 such as negotiating rent abatements, or pursuing the government wage subsidy or business finance guarantee scheme; identifying a clear path forward to maintain cashflow; and considering the impacts if the BDH proposal is not accepted by creditors.

BDH will be available to companies, as well as trusts, partnerships, and incorporated societies. However it will not be available to sole traders.

Directors will need to carefully consider notifying a proposal to its creditors under the BDH scheme and the implications of such notification. Many contracts contain “event of default” clauses which can give rise to termination of the contract. Specific consideration will need to be given whether notification of a BDH would amount to an event of default.

Existing mechanisms under the Act such as voluntary administration and creditor compromises remain. Directors should consider the relative merits all options available to the company in their planning.

Other changes

There have been a number of other changes which have been announced including:

• bringing forward proposed changes to the voidable transaction regime to reduce the period for voiding a transaction from two years to six months (for unrelated party transactions);
• deferring the new licensing regime for insolvency practitioners;
• allowing the Registrar of Companies to extend statutory deadlines for company reporting and meetings obligations;
• providing temporary relief from constitutional requirements where an entity is unable to comply with obligations due to the impacts of Covid-19;
• permitting the use of electronic communications (including electronic meetings) even if constitutions or rules do not permit their use.

Further detail on the proposed changes can be expected shortly.

If you have any questions about the proposed amendments, please get in touch with Glen Holm-Hansen, Rob McStay, Simon Cartwright, or your usual contact at Hesketh Henry.

Our commercial team has also prepared further information for directors which can be accessed here.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.