As 2021 draws to a conclusion and businesses begin to consider what operations will look like in the new year, it will be necessary to reflect on the impact of Covid-19 and prepare for life under the Covid Protection Framework (CPF). At this time of year, it is common for employees to undergo an annual performance review. Directors should consider doing the same with respect to the solvency and financial health of their companies.
While 2020 saw brief economic decline following periods in Alert Levels 4 and 3, strong economic recovery followed. Nobody needs to be reminded of the much longer periods that Auckland (in particular) and the Waikato have spent in lockdown during 2021. Given the hardship endured during the extended periods of lockdown and a new operating environment under the CPF, the recovery is likely to look different.
As signaled by the Reserve Bank, the domestic economy is seeing ongoing supply shortfalls, increasing transport costs, labour shortages and we might expect an increase in inflation to around 4 percent over the near-term.
Directors have a number of challenges to navigate in the short term and over the medium to long term as the economy begins to open up. In this article we address the need for:
- Immediate planning, particularly around Covid-19 response, and vaccination policies;
- Short-term planning, particularly around operations under the CPF; and
- Medium-long term planning, particularly the sustainability of businesses, and actions that should be taken to address the significant hardship that many businesses have encountered.
Immediate priorities: Covid-19 Response plan, and Vaccination policy
One of the most challenging issues facing directors is managing the risk of Covid-19 infection and transmission in the workplace. Perhaps the most controversial part of managing this risk is Covid-19 vaccination policies and their legality. Vaccination policies are at the intersection of four complex legal issues: health and safety, human rights, privacy, and employment law.
While it is a complex and relatively novel area of law, it is important for all businesses, regardless of their size or customer interactions, to first consider whether the current Covid-19 Public Health Responses (Vaccinations) Order applies to any of its work, and whether a vaccination policy is required. A policy should address:
- The business’ assessment of the risk of Covid-19 infection and transmission, and the proposed ways of eliminating or minimising that risk (note that businesses must engage with workers in carrying out this risk assessment and proposing ways to control the risk);
- Any vaccination requirements for staff; and
- Vaccination requirements for customers and other third parties (such as contractors) visiting the business premise.
Minister Hipkins outlined that an amendment to the COVID-19 Public Health Response Act 2020 will be introduced to Parliament by the end of November. This amendment will cover the legality of vaccination certificates for some businesses, and provide more certainty for other businesses seeking to impose a vaccination policy. While no business will be able to require that an individual is vaccinated, following a risk assessment, they may be able to require certain work is done by vaccinated people.
The November amendment to the COVID-19 Public Health Response Act is likely to provide significant clarity for those businesses considering implementation of a vaccination policy, including a framework for risk assessments, and engagement with workers. In preparation for this amendment, directors should start considering a risk assessment for the business now. Indications from the Government are that risk assessments completed prior to the amended legislation will still be valid and applicable.
For anyone seeking advice on these complex issues, please contact our Employment team.
Short term priorities: Planning for the CPF
Government support schemes have been effective at cushioning the immediate effects of Covid-19 restrictions, however, as these restrictions are eased and government support dries up, some businesses may be placed under significant pressure.
For many directors, the initial approach after Covid-19 restrictions set in was one of survival. This consisted of a variety of factors including the wage subsidy, resurgence support payments, short-term absence payments, the leave support scheme, loan schemes, finance guarantees, debt hibernation, rent relief (by a “fair proportion”) and drawing on cash reserves.
As we move into the CPF a “survival” strategy is unlikely to be feasible. There are three key reasons for this:
- Government support: as vaccination rates increase and we enter the CPF less government support will be provided. Prior to Covid-19, government debt sat at around $60 billion. Debt now sits at over $100 billion. Treasury has warned that this is an unsustainable trajectory.
- Interest rates: while interest rates have been at a record low, increases are already being observed, and further increases are forecast in the near to medium term. In October 2021, due to inflationary pressure, the Reserve Bank increased the official cash rate (OCR) for the first time in 7 years. Economists are expecting a gradual increase in the OCR to roughly 2 percent. The resulting increase in interest rates will be a concern for businesses that have borrowed heavily.
- Inflationary pressure: as noted above, inflation is expected to increase to above 4 percent over the near term. Supply shortfalls (particularly building materials), rising transport costs, and labour shortages have all resulted in a sharp inflationary pulse.
It is important directors make a ‘post’ Covid-19 plan and consider how the business will operate in the CPF. One of the crucial considerations is whether the CPF places a vaccination certificate requirement on the business. If it does, and directors choose not to use vaccination certificates, the CPF is likely to place significant constraints on the business. Minister Robertson has outlined that where this is the case, it is unlikely any kind of support will be made available.
To help Auckland businesses transition into the CPF, the government is offering an advice support scheme. Auckland businesses will be able to apply for up to $3,000 worth of advice and planning support, and a further $4,000 to implement that advice through the Regional Business Partners programme.
Directors should consider whether their business is eligible for advice support as they come up with their plan.
Medium-long term priorities
Before New Zealand enters the CPF, it is an appropriate time for directors to reassess their existing and forecast solvency levels. If that forecast is concerning, action should be taken to address issues. It is important directors take these steps now to ensure that they remain compliant with their duties.
Due to the effects of Covid-19, the Companies Act 1993 was amended to provide directors with a safe harbour in relation to certain duties. Where the company experienced liquidity problems due to Covid-19, the director would not breach their duties by continuing to trade if the company was able to pay its debts by and after 30 September 2021. The safe harbour period has now expired. Directors continuing to trade and incur obligations must do so with the ability to pay their debts as they fall due.
As highlighted by the recent Mainzeal case, directors have stringent duties they must comply with. Directors should carefully consider the obligations the company has entered into and whether continuing to trade may result in liability for reckless trading. It is important that directors do not allow, or agree to, the company continuing to trade when there is substantial risk of serious loss to creditors.
Directors of companies that have been significantly affected by Covid-19 may find themselves in a concerning position in relation to their solvency. It is important to recognise this and seek advice as there are a variety of options. There may be the ability to raise capital, negotiate with creditors, or utilise other restructuring tools such as forgiving debt or converting it into equity.
Directors should consider which third parties they are reliant on, and whether terms of contracting adequately protect a company in the event of third-party insolvency. In doing so, they should consider what their alternative options are should one of these third parties fail, and whether they may be left exposed as an unsecured creditor.
As New Zealand prepares to live with Covid-19, it is an appropriate time for directors to evaluate their obligations and plans. Should you seek any advice in making these decisions, please get in touch with our Business Advice or Insolvency and Restructuring team at Hesketh Henry.
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.