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COVID-19 Hibernation and Safe Harbours – temporary relief from debts for companies but only if you can tick the right boxes

By Alexandra Morrissey, Nigel Moody

COVID-19 Hibernation and Safe Harbours – temporary relief from debts for companies but only if you can tick the right boxes

9 April 2020

Changes to the law are often a sleeping remedy for most readers, so, in what has become a time honoured tradition, meaningful soundbite phrases or words are used to make law changes more memorable. But the latest use of the evocative words ‘hibernation’ and ‘safe harbour’ will stick with anyone who is a company director in these challenging times.
The anticipated disruption to business has the potential to cause solvency, not just liquidity, issues for global and local enterprises. The test for company insolvency in New Zealand   has two limbs, a balance sheet test and a cash flow test (the ability to pay its debts as they fall due).  Directors will become concerned when cash flow is tight. 
Directors of New Zealand companies have a clear obligation to ensure a company does not incur debts while insolvent. If they breach this duty, the director can be personally liable to pay the debts the company incurs under s301 of the Companies Act 1993.

The Government will be introducing temporary and extraordinary changes to the Companies Act 1993.  The key take outs are:

  • Directors facing significant liquidity problems due to COVID-19 will have a ‘safe harbour’ from their insolvency obligations under the Companies Act. The safe harbour defence is aimed at encouraging directors to keep control of their company during times of financial distress and allow them to focus on the needs of the company rather than their potential personal liability; and

  • Businesses (apart from sole traders) affected by COVID-19 will be able to place all existing debts into ‘hibernation’ until they are able to start trading normally. While the debt is in hibernation the business is still able to operate. The scheme appears to make no distinction between preferential and/or secured debt and unsecured debt, all debt is apparently to be treated the same. Critically, this hibernation will only be permitted if there is agreement by at least 50% of the business’ creditors (in number and value), so there will inevitably be some hard work to get over this hurdle. This is not a simple ring around or quick email exercise. A proposal will be put forward to the creditors and they will have one month to vote on it. There is no prescription for what this proposal must include, but it needs to be forthcoming and well rationalised in order for 50% of creditors to agree to the proposal. If the proposal is passed, the proposal will bind all creditors (other than employees) and would be subject to any conditions agreed with creditors. There will be a one-month moratorium on enforcement of debts from the date when the proposal is put to creditors, and a further six months if the proposal is passed.

The safe harbour for directors will be welcome news for many directors. It’s a given that many companies will be trading in an insolvent position over the next few months, which in ordinary times would mean that directors would have to give serious thoughts to ceasing trading altogether, if that were  likely to create a substantial risk of serious loss to the company's creditors . As a result of the ‘safe harbour,’ directors may be able to avoid what would otherwise be a potential personal liability for their company’s debts if they allow a company with cash flow or other solvency issues to continue trading. To be able to retreat to the protection of a ‘safe harbour’ there are a number of prerequisite ‘musts’. Not only does the company need to be facing liquidity issues due to COVID-19, the company must have been able to pay its debts as they fell due on 31 December 2019. Further, the directors must 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 the next 18 months.

The Minister of Finance, Grant Robertson, has made it clear that these changes are intended to provide practical assistance in an unprecedented time and should not be seen as a reason to stop acting in good faith, as the core obligations of directors still remain. That means where you can, the patriotic thing to do, and the right thing to do, is to pay your bills and help keep the economy in the best shape it can be so it has the best chance of a quicker recovery.

The assistance provided by these changes along with the Wage Subsidy and Business Finance Guarantee Scheme (continued and future bank lending backed by the Government)should provide valuable assistance to New Zealand businesses during this difficult time.

As these changes have not come into force yet, if your business is having solvency issues please contact one of our commercial partners for specific advice.

Nigel Moody | email Nigel | P: 04 916 7465
John Steel | email John | P: 04 916 7495
Nigel Stirling | email Nigel | P: 04 916 7472
Claire Byrne  | email Claire | P: 04 916 7483
Dave Robinson | email Dave | P: 04 916 6307
Mike Gould | email Mike | P: 04 916 6302
Brett Gould | email Brett  | P: 06 370 6475
Rhys Williams | email Rhys | P: 04 916 6452
Edward Cox | email Edward | P: 04 916 6309

 

All information in this article is, to the best of the authors’ knowledge, true and accurate. No liability is assumed for any losses suffered by any person relying directly or indirectly on this information.

Before acting on any information in this newsletter, it is recommended that you seek our advice.