In the wake of the COVID-19, the Government has announced temporary changes to Insolvency Law and the Companies Act 1993 which are aimed at assisting businesses facing financial hardship during the pandemic.  

Summary of proposal:

  • Implementing a scheme to allow businesses to enter into agreements with creditors and place their debts into ‘hibernation’ until business conditions return to normal;

  • Providing a ‘safe harbour’ for directors from any claims under sections 135 and 136 of the Companies Act 1993;

  • Allow the use of electronic signatures; and

  • Temporarily extending deadlines and relaxing requirements imposed on companies and other entities by legislation or constitutions.

Note: These changes would apply retrospectively to 21 March 2020. The new provisions of the Companies Act 1993 will be automatically repealed after a period of two years.

Business Debt Hibernation Scheme

The Business Debt Hibernation (BDH) scheme allows businesses to place their existing debts in ‘hibernation’ until they are able to resume trading at normal levels. The BHD scheme is available to companies, charitable trusts, incorporated societies, partnerships and other entities. It is not available for sole traders.

  • Note: This scheme is to allow viable businesses to continue. These provisions do not protect businesses who were suffering insolvency problems before COVID-19.

A company cannot enter into the BDH scheme more than once, unless the Court orders otherwise, or the regulations permit a subsequent notice to be delivered.

To be eligible for this scheme, directors must meet a threshold and gain 50% approval from their creditors with their proposal.

A business will be required to:

  • Put a proposal to its creditors which seeks a six month moratorium on the enforcement of existing debts. Notification to the creditors and the Registrar of Companies triggers an immediate one month moratorium on the enforcement of debts.

  • Obtain a 50% agreement (by number and value) from its creditors. If obtained, a further six month moratorium comes into force and is binding on all creditors to this company.

Note: Businesses are able to continue trading during the moratorium period.

The directors should ensure that the company can meet any terms of their proposal as well as ongoing obligations.

A proposal to creditors may include a short term and long term cash flow forecast, the impact this may have on trading, and steps taken to mitigate pandemic impacts on the business such as applying for the Government wage subsidy or business finance guarantee scheme.

  • The proposal cannot cancel debt, vary the rights of any creditor, or prevent creditors from exercising their rights after the end of the protection period.

  • If creditors reject a proposal, other mechanisms remain available including voluntary administration or appointing a liquidator.       

If your business enters the BDH scheme, to encourage continued trading, the scheme proposes that any payments or transactions entered into are exempt from the voidable transaction regime if the company subsequently enters liquidation. This means that creditors need not worry about payments being clawed back if the company is later placed into liquidation. The exemption is conditional upon:

  • The transaction being entered into in good faith by both parties;

  • On ‘arm’s length’ terms; and

  • Without the intent to deprive the existing creditors.

‘Safe Harbour’ Regime for Directors

The ‘Safe Harbour’ regime provides directors who continue trading over the next six months relief from claims of breaches of certain duties under the Companies Act 1993, namely under sections 135 and 136 of the Companies Act.

Section 135 provides that a director of a company must not agree, cause, or allow the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

  • Directors do not have to have acted knowingly to fall within this provision and be liable for reckless trading.

  • Under the Safe Harbour regime, a director will not be liable for reckless trading if at the time of taking actions that amount to this, the director is of the good faith opinion that the company is likely to have significant liquidity problems which are a result of the effects of COVID-19, and that the company will be able to pay its debts due on 30 September 2021.

Section 136 provides that a director of a company must not agree to a company incurring an obligation unless they believe at the time on reasonable grounds that the company will be able to perform the obligation when required.

  • Under this provision, a director’s duty is owed to the company itself and not the shareholders.

  • The Safe Harbour regime protects directors who allow the company to incur obligations when at the time of agreement they are in the good fait opinion that the company is likely to have significant liquidity problems which are as a result of the effects of COVID-19, and that the company will be able to pay its debts on 30 September 2021.

Other director’s duties remain in force including the requirements to:

  • Act in good faith; and

  • Exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances.

For a director to meet the ‘safe harbour’ criteria, they must be satisfied:

  • In good faith, that the company is facing, or is likely to face, liquidity problems in the next six months as a result of this pandemic;

  • That the company was solvent as of 31 December 2019; and

  • In good faith, that the company will be solvent within 18 months.

These provisions do not apply to a company that is –

  • a registered bank;

  • a licensed insurer;

  • an NBDT;

  • a qualifying counterparty within the meaning of the Reserve Bank of New Zealand Act 1989; or

  • a company incorporated on or after 3 April 2020.

We understand that 2020 has been full of unprecedented and uncertain times. The Government’s response to implementing changes in Insolvency Law will allow businesses to stay afloat during this period, where in normal circumstances, they would become insolvent.

If you have any queries on how the BDH scheme may assist your business, or if you require advice in relation to the Safe Harbour provisions, please get in touch with us and we would be happy to provide advice and assistance.