14.04.2020

COVID-19: Temporary ‘safe harbour’ from directors’ insolvency duties

As mentioned in Hesketh Henry’s article “COVID-19: Insolvency law changes” (https://www.heskethhenry.co.nz/insights-opinion/covid-19-insolvency-law-changes/), Grant Robertson has announced that the Government will soon be introducing legislation to make temporary changes to the Companies Act 1993 (“Act”) to help companies facing insolvency due to the COVID-19 pandemic.  The proposed changes include providing directors of companies facing significant liquidity problems because of COVID-19 a six-month ‘safe harbour’ from their duties under the reckless trading (section 135) and the duty in relation to obligations (section 136) sections of the Act.

Under sections 135 and 136 of the Act, a director of a company must not:

  • agree to, cause or allow the business of the company, to be carried on in a manner likely to create substantial risk of serious loss to the company’s creditors; or
  • agree to the company incurring an obligation unless the director believes at the time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.                                       

These duties will be front of mind for directors of companies temporarily unable to pay their debts due to COVID-19 and will impact on how directors make decisions in relation to the future of those companies.  A safe harbour around these duties will mean that directors’ decisions to continue trading, as well as decisions to take on new obligations, over the next six months will not result in a breach of section 135 or 136 if:

  1. 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;
  2. the company was able to pay its debts as they fell due on 31 December 2019; and
  3. 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 able to reach an accommodation with their creditors).

The purpose of the proposed safe harbour is to effectively reduce the number of unnecessary liquidations of companies which, but for the COVID-19 pandemic, are otherwise viable.  At this stage, the proposed safe harbour period is six months.  The safe harbour is still subject to the agreement of Parliament.  Government has indicated that it will seek Parliament’s agreement for the safe harbour to apply retrospectively from the date of the Government announcement (being 3 April 2020). 

The Australian Government has announced a similar temporary safe harbour around directors’ insolvent trading liability, which will apply for six months (from 25 March 2020) in relation to debts incurred in the ordinary course of business.

Directors of New Zealand companies should be aware that other directors’ duties and obligations in the Act continue to apply.  These include the duty to act in good faith and in the best interests of the company and the associated offence for a serious breach of this duty, as well as the offence for the dishonest incurrence of debts by a director.

For more information on how the temporary safe harbour may apply in your particular circumstances, please contact our business advice team.

The latest government information for businesses in relation to COVID-19 can be found on the business.govt.nz website: https://www.business.govt.nz/news/coronavirus-information-for-businesses/.  We suggest that this is reviewed on a regular basis to ensure that you have the most up to date information.

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.

 

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