COVID-19 UPDATE – Proposed Changes To Companies Act 1993
On Friday 3rd of April at 3pm, The Finance Minister Grant Robertson announced some proposed changes to the Companies Act 1993 (“the Act”) including (according to the government press release):
a) Giving directors of companies facing significant liquidity problems because of COVID-19 a ‘Safe Harbour’ from insolvency duties under the Companies Act,
b) Enabling businesses affected by COVID-19 to place existing debts into Hibernation until they are able to start trading normally again,
c) Allowing the use of electronic signatures where necessary due to COVID-19 restrictions,
d) Giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation, and
e) Giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.
The rationale for the key changes is to allow directors greater level of freedom, discretion and protection as they make the difficult decisions to rescue what otherwise would have been considered a viable business. Protecting such businesses during these unprecedented times is important to ensure as many people remain employed through this difficult time and so that the economy has a strong chance of a speedy recovery once this pandemic is under control.
Safe Harbour
Under the draft bill, for the next 6 months, directors will be allowed a “Safe Harbour” from any potential claims under Section 135 and 136 of the Companies Act.
Section 135 disallows directors from “Reckless Trading” which is likely to cause substantial loss to company creditors and Section 136 places a Duty in relation to Obligations, which means directors are disallowed to incur an obligation unless they believe, on reasonable grounds, that they can perform that obligation.
The Safe Harbour provision would only apply if:
a) In their opinion and acting in good faith, the directors believe that the company is likely to face liquidity problems in the next 6 months due to the COVID-19 pandemic.
b) The company was able to pay its debt as it fell due at 31 December 2019
c) In their opinion and acting in good faith the directors believe that the company will be able to pay its debts as they fall due in the next 18 months, resulting from improved trading conditions.
Business Debt Hibernation (BDH)
According to Grant Robertson “Going into a Business Debt Hibernation will give businesses the space to talk to their creditors about prioritising paying some debts, and deferring others for six months,” said.
The intention of this proposed regime is to:
a) Encourage directors to actively initiate discussions with their creditors regarding debt repayment.
b) Enable directors to retain control of their companies if they fall behind in making payments to creditors.
c) Provide certainty to creditors that any payments they receive will not be subject to future “clawback” provisions should the company end up in liquidation later.
d) Outline a standard process for directors to enable them to engage with their creditors.
Main features of the proposed regime are:
a) A standard documentation from Companies Office to assist directors in making a compromise proposal with creditors.
b) Moratorium on the enforcement and recovery of debts for a period of 7 months once the proposal has been made to the creditors.
c) Creditors will have a month to vote on the proposal and will be binding on all creditors if 50% in number and value support the proposal.
d) Directors to determine next steps if the proposal is rejected by creditors.
e) The regime will also be applicable to trusts and partnerships, but won’t be available to licensed insurers, registered banks and non-bank deposit takers, and sole traders.
Please note that the proposed legislation is only in draft stage and the proposed timing of implementation is yet to be announced.
We will endeavour to keep you posted once the legislation gets through parliament.
If you would like to talk to us about any of the areas mentioned in the article, as always, feel free to contact us.
If your business is experiencing cash/liquidity challenges and would like to discuss your options, please feel free to send me an email on shakti.harduar@paradigm5partners.co.nz or call me on 021 679 849.
Stay safe!