Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

New Zealand’s COVID-19 insolvency measures – safe harbour; debt hibernation

The New Zealand Government has announced it will be introducing legislation to make changes to the Companies Act to help companies facing insolvency due to COVID-19 to remain viable and retain employment.

In addition, the government is deferring commencement of NZ’s new insolvency practitioner licensing legislation, which was to commence in July 2020, for up to 12 months.

The temporary changes include:

  • giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act,
  • enabling businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again,
  • allowing the use of electronic signatures where necessary due to COVID-19 restrictions,
  • giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation, and
  • giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.

It is proposed to make some of these changes retrospective.

Other protections in the Companies Act 1993, such as those addressing serious breaches of the duty to act in good faith and holding liable those who dishonestly incur debts, will remain.

The reasons given for this are the same as those expressed in Australia, that ‘the threat of a director being held personally liable for a company’s solvency problems will likely make them inclined to advise closing down a business. … A ‘safe harbour’ will help them keep trading, rather than prematurely closing up, which will minimise disruption to the economy’.

The process of Business Debt Hibernation (BDH) will only apply with the agreement of 50 per cent of a business’s creditors. It is meant to allow ‘businesses the space to talk to their creditors about prioritising paying some debts, and deferring others for six months’.

The government says that while it is inevitable that some NZ businesses will have to go into liquidation, ‘these measures provide an accessible and pragmatic means of helping some businesses to weather the storm in a way that does as little harm as possible to creditors’ interests’.

Safe harbour

Subject to it being agreed to by Parliament, there will be safe harbour protection from sections 135 and 136 of the Companies Act 1993 on the following terms:

  • directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties if:
  • in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors;
  • the company was able to pay its debts as they fell due on 31 December 2019; and
  • 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).

COVID-19 Business Debt Hibernation

The Government will be introducing legislation to introduce a COVID-19 Business Debt Hibernation regime to the Companies Act 1993.

The proposed regime is intended to:

  • encourage directors to talk to their creditors with a view to putting together a simple proposal for putting the business into hibernation;
  • allow for the directors to retain control of the company, rather than passing control to an insolvency practitioner;
  • provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in Business Debt Hibernation;
  • be simple and flexible so that it can be enacted quickly, and businesses can readily apply it to their circumstances without having to obtain legal advice.

Key features of the proposal are that:

  • directors will have to meet a threshold before being able to access the Business Debt Hibernation regime and putting a proposal to their creditors
  • creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree
  • there will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further six month moratorium if the proposal is passed.

Business Debt Hibernation would be binding on all creditors other than the entity’s employees and would be subject to any conditions agreed with creditors. If the creditors reject the proposal, the directors would still have the range of existing options available including trading on, entering voluntary administration and appointing a liquidator.

During the period a business is in Business Debt Hibernation, it would be able to continue to trade, subject to any restrictions agreed with creditors as a condition of entering into it.

Protection in any liquidation

In order to encourage businesses to continue to transact with a company that has entered Business Debt Hibernation, it is proposed that any further payments, or dispositions of property, made by the company to third party creditors would be exempt from the voidable transactions regime. This exemption would not extend to related parties.

This means anyone continuing to trade with the company will not have to worry about a liquidator seeking to unwind transactions if the company is later placed into liquidation. This exemption would be subject to a condition that the transaction was entered into in good faith by both parties, on arm’s length terms and without the intent to deprive the existing creditors of the company.

Business Debt Hibernation will be available to all forms of entity, not just companies, and entities that do not have legal personality such as trusts and partnerships.

It will not, however, extend to licensed insurers, registered banks and non-bank deposit takers, and sole traders.

Personal bankruptcy

Sole traders who become insolvent are instead subject to the Insolvency Act 2006 (which covers personal insolvency) because there is no separation between the trader’s business finances and their personal finances.

 Other insolvency law changes

The government will bring forward an insolvency-related reform under the voidable transactions regime to reduce the period of vulnerability from two years to six months where the debtor company and the creditor are unrelated parties; as mentioned, defer commencement of insolvency practitioner licensing legislation for up to 12 months; and amend the Contract and Commercial Law Act 2017 so that the provisions in that Act relating to electronic signatures apply to security agreements containing powers of attorney.

 Access to insolvency support – next steps

How NZ businesses will access the insolvency relief, and the requirements they’ll need to satisfy, will be finalised in the coming weeks.

This will include forms that directors will be able to use to put proposals to their creditors.

The Companies Office and Business.govt.nz websites will also provide further advice and guidance to both directors and creditors.

 

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