General
August 17, 2020

Temporary changes to the Companies Act | Safe harbour & Business Debt Hibernation

The NZ Government has implemented measures relating to NZ businesses in light of the COVID-19 pandemic. Temporary changes have been made to the Companies Act 1993 (the Act) to help companies facing financial difficulty as a result of the pandemic. The most significant of these changes are to provide company directors with a “safe harbour” from their “insolvency duties” and giving companies the opportunity to place their existing debts into “hibernation” for up to seven months.

Safe harbours

The Act places a number of general duties on directors of companies, and these duties generally apply throughout a company’s lifecycle. What are often referred to as “insolvency duties” are the duties that a director must not:

(a) agree to, cause or allow the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to that company’s creditors (section 135); or

(b) agree to the company incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform the obligation when it is required to do so (section 136).

The COVID-19 Response (Further Management Measures) Legislation Act 2020 modifies the long-established insolvency duties by providing a “safe harbour” regime. This regime allows directors of businesses facing insolvency due to COVID-19 to make decisions to keep on trading, as well as decisions to take on new obligations, without being in breach of these duties. The “safe harbour” regime has conditions that must be met before directors can rely on it.

These are:

  1. In the good faith opinion of the directors, that the company is facing or likely to face significant liquidity problems in the next six months as a result of the impact of COVID-19 on them or their creditors;
  2. If the company was incorporated before 31 December 2019, then it must have been able to pay its debts as they fell due as at 31 December 2019 (note that if the company was incorporated between 1 January 2020 and 2 April 2020, then this requirement does not apply); 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 safe harbour regime has been retrospectively applied since Friday, 3 April 2020 and while it is set to expire on Wednesday, 30 September 2020, due to the current climate and the resurgence of COVID-19 in the community, it seems likely that the regime may be extended beyond this. Indeed,the legislation does allow for the safe harbour regime to be extended out to 31 March 2021 and provides for the possibility of a new safe harbor period that would expire no later than 30 September 2021. Having the ability to extend the safe harbour regime may give businesses a little comfort as New Zealand exits and re-enters different COVID-19 related restrictions.

In the meantime, directors should keep in mind:

  1. The safe harbour regime will only apply if liquidity issues have arisen due to the COVID-19 pandemic (for example, significantly reduced or no revenue due to no longer being able to trade) – if a company has liquidity issues due to other factors or has doubtful solvency (for example, value of assets is close to the value of liabilities) then the safe harbour may not be available. The regime is not designed to support an entity that has no realistic prospect of continuing to trade by deferring a decision about liquidation to the detriment of its creditors;
  2. Currently the regime does not apply to directors of companies that were incorporated on or after 3 April 2020;
  3. Other director duties will still continue to apply, particularly, obligations to act in good faith and in the best interests of a company, a duty which extends to a company’s creditors if the company is insolvent or of doubtful solvency (section 131). Directors are also still required to exercise reasonable care, diligence and skill in managing the company’s affairs (section 137);
  4. There is no difference in the duties of directors who live in New Zealand (or Australia as an enforcement country) compared with directors who live overseas (but are directors of NZ companies), nor is there any difference in the duties of those directors who are considered to be executive, non-executive or independent directors; and
  5. “Insolvency duties” as they currently stand (i.e. without the proposed amendments) do not prohibit directors from taking reasonable business risks. So, when a company is in financial difficulty, the duties do not necessarily require directors to stop trading or take steps to liquidate that company. Directors of companies should always be considering and assessing a matrix of financial factors, including company’s cashflow, outstanding debtors (especially for doubtful or bad debts), reliance on key customers and suppliers’ and their solvency, and the ability to pay employees, creditors and other debts owed. This may be useful for directors to keep in mind if they are unable to come without the conditions of the safe harbour.

We are pleased that NZ is taking steps to suspend laws relating to directors’ duties, similar to what has already been done in Australia and the UK.  We hope the changes are striking the right balance between the interests of directors and creditors and provide some certainty for all in these uncertain times.

Business Debt Hibernation regime

Another temporary change to the Act is the new"business debt hibernation" (BDH) regime. Also implemented under the COVID-19 Response (Further Management Measures) Legislation Act 2020, BDH allows businesses affected by COVID-19 related liquidity issues to manage existing debts by allowing arrangements to be made with creditors to delay certain repayments.

The BDH regime looks like this:

  1. To be eligible, a business needs to be:

a) A company, trust, society, partnership, charitable trust etc. (but not a sole trader, registered bank or licensed insurer); and

b) formed or established before 3 April 2020.

  1. The board (or equivalent) can agree to an entity entering into BDH if:

a) the entity is not already in liquidation, voluntary administration or other similar process;

b) at least 80% of the directors (or their equivalents) (acting in good faith) agree to BDH;

c) at least 80% of the directors (or their equivalents) certify that:

  • as at 31 December 2019, the entity was able to pay its debts as they fell due in the normal course of business;
  • the entity has or in the next six months is likely to have, significant liquidity problems which are a result of COVID-19; and
  • it is more likely than not that the entity will be able to pay its due debts on and after 30 September 2021.
  1. Once the requirements are met, a notice must be filed with the Companies Office. This notice will give the entity an initial month of protection from debt enforcement in order to arrange and submit a BDH proposal to its creditors.  
  2. As soon as reasonably practicable afterwards, the board (or equivalent) must also send a copy of the notice to each known creditor. The notice should state the date it was delivered to the Companies Office and be accompanied by copies of each certificate signed by the directors (or equivalent) and a high-level description of a proposed arrangement between the entity and the creditors.
  3. The entity must then develop a final BDH proposal and send this as a notice to each creditor. This notice must be sent and received not less than five working days before the intended date for voting on the proposal. At a minimum, the BDH proposal notice must include:

a) instructions for creditors to vote;

b) a detailed description of the arrangement proposed and the reasons for proposing it in sufficient detail to enable the creditors to form a reasoned judgment in relation to it;

c) the exact wording of the vote;

d) who will receive and count the votes; and

e) a reminder that all creditors must accept the arrangement if it is approved.

There are template forms and letters available on the Companies Office website which may be used for the proposal.  

  1. At least 50% of creditors will need to agree to the company being placed into BDH. The 50% creditor threshold will be based on both the value and the number of creditors.   Employees will not be considered in the 50%threshold on the basis that any accepted proposal will not be binding on employees).  
  2. The creditors may be able to negotiate conditions into the BDH proposal.
  3. If agreed to, the proposal will be binding on all creditors(not just those who agreed). Employees are exempt.
  4. While a business is in BDH it would be able to continue to trade, subject to any restrictions agreed with creditors.
  5. Creditors will not be able to enforce debts during the month-long period they are considering the proposal and if the proposal is agreed to, for a further six months as well, so the “BDH” regime may apply to a company for seven months.
  6. The voidable transaction regime (where transactions can be unwound by a liquidator if the company ends up in liquidation) will not apply,so unrelated third-party creditors who receive payments from a company in“hibernation” cannot be required to repay monies received (subject to certain conditions being met).  

The Government’s intention for the BDH regime is for it to be a straight-forward, flexible and relatively quick way for businesses and creditors to agree about non-payment of debts and hopefully, “buy”directors some time to formulate debt repayment plans.

Interestingly, within the first three months of implementing the regime, five businesses have been successful placed into BDH. Currently, the BDH regime is only available until Thursday, 24 December 2020.

Hopefully, this temporary addition to the Act will gain more traction to better assist COVID-19 affected businesses as we face further Government restrictions.

Measures have also been implemented (via temporary changes to the Overseas Investment Act 2005 (the OIO Act)) to gain oversight of any overseas investment in New Zealand entities, including by requiring that overseas investors notify the Overseas Investment Office before certain acquisition transactions can go ahead. For more on the changes to OIO click here.

We will be keeping a close eye on the implementation of further regimes to assist businesses during these unprecedented times as well as the extension of the “safe harbor” and “business hibernation” regimes mentioned. We will provide further updates if any changes are made or if new measures are introduced. In the interim, please get in touch with us for a chat if you want to discuss these changes or anything else affecting your business.  

Stay home and stay safe – we are all in this together. Kia kaha New Zealand.

This update was co-authored together with Ainsleigh Stone and Andrew Nicoll.

       

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