New Zealand’s COVID-19 laws on reckless trading and debt hibernation

The COVID-19 Response (Further Management Measures) Legislation Bill has been introduced into the New Zealand parliament is now before the Epidemic Response Committee. It is broadly equivalent to the Omnibus Act 2020 in Australia. RITANZ offers useful comments on the Bill.

Safe harbour

It provides a safe harbour for s 135 – reckless trading – providing for example that:

The actions of the director do not breach section 135 if, at the time of taking them, the director, in good faith, is of the opinion that—

(a) the company has, or in the next 6 months is likely to have, significant liquidity problems; and

(b) the liquidity problems are, or will be, a result of the effects of COVID-19 on the company, its debtors, or its creditors; and

(c) it is more likely than not that the company will be able to pay its due debts on and after the date in subclause (3).

(3) For the purposes of subclause (2)(c), the date is—

(a) 30 September 2021; or

(b) any later date prescribed by the regulations.

(4) For the purposes of the opinion required by subclause (2)(c), the director may have regard to—

(a) the likelihood of trading conditions improving:

(b) the likelihood of the company reaching a compromise or other arrangement with its creditors:

(c) any other matters the director considers to be relevant.

A similar provision applies to the duty of directors under s 136.


Debt Hibernation

The series of provisions in relation to ‘business debt hibernation’ [BDH] are explained by its stated purposes

(1) A purpose of this schedule is to provide for the business, property, and affairs of an entity that is facing significant liquidity problems, or an entity that may in the future face such problems, because of the effects of the outbreak of COVID-19 to operate in a way that—

(a) maximises the chances of the entity, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the entity or its business to continue in existence, results in a better return for the entity’s creditors and members than would result from an immediate liquidation of the entity.

(2) In addition, it is a purpose of this schedule to give an entity referred to in subclause (1) some temporary protections relating to its debts in order to give it an opportunity to develop, with its creditors, a longer-term approach to its liquidity problems.

(3) However, it is not a purpose of this schedule to—

(a) facilitate the ability of an entity that has no realistic prospect of continuing to trade or operate in the medium or long term to defer a decision to enter into liquidation to the detriment of its creditors; or

(b) allow any debts owing by an entity to be cancelled; or

(c) allow the rights of a creditor to be varied, in any significant way, after the end of the temporary period of protection.

RITANZ submission

A useful submission on the Bill of 8 May 2020 was lodged by RITANZ.

As to business debt hibernation, RITANZ says that

‘a process like BDH is an essential tool to allow owners to take stock, communicate with creditors and not have creditors taking action to recover their debts for up to seven months. In many cases it will also provide an opportunity to tailor a plan that compromises debts and reaches arrangements that will help businesses trade on. We acknowledge there will still be businesses that need to go into liquidation, but this legislation will help to increase the odds of survival’.

RITANZ asks that the proposed insolvency practitioner regulation laws not be deferred from their June commencement date, or only for a short time.

‘In the current economic circumstances, strong insolvency practitioner regulation is critical’.

RITANZ supports the safe harbour provisions.

‘The provisions strike a balance between giving directors confidence about entering into [financial] obligations, while still requiring them to have reasonable grounds to believe that the company will be able to pay its due debts on and after 30 September 2021’.

More generally, RITANZ recommends that a review of insolvency law take place once circumstances created by COVID-19 have run their course. That review should consider, in light of the current experience, whether any permanent changes to insolvency law are required.

Interestingly, RITANZ asks

‘whether an emergency set of insolvency law provisions ought to be in place if required in future’.

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published.