On 3 April, the Minister of Finance, Hon Grant Robertson, announced several changes to the New Zealand insolvency regime. You can read them here.
These changes came following concerns that a number of well-governed, viable firms had become vulnerable as a result of COVID-19, along with the need to provide directors with certainty that they would not be in breach of their duties in an environment where significant uncertainty exists, thereby avoiding companies being placed into liquidation prematurely.
Deloitte welcomes the introduction of this legislation, which follows the lead taken by other countries such as the UK and Australia. During the six months of the ‘Safe Harbour’, directors can confidently seek to rescue the company without the risk of personal liability, if acting in good faith.
The major changes include the introduction of:
- a ‘Safe Harbour’ for directors against claims made under s135 and s136 of the Companies Act 1993 (Act); and
- a Business Debt Hibernation Scheme (BDHS) providing most entities with the option of proposing a moratorium on creditors taking action to recover their debts for a period of six months.
These changes (and others announced) require legislation to be passed in Parliament and the Government intends to introduce the legislation as soon as possible. It has confirmed that, when passed, the legislation will be back dated to 3 April 2020.
Under the Act, directors can be pursued by creditors for compensation for reckless trading (s135) and/or for incurring an obligation when the directors did not believe the company would be able to meet that obligation (s136). The Safe Harbour legislation will enable directors to continue trading and incur new obligations during the next six months without breaching s135 and s136.
The Safe Harbour is available to directors, if:
- in the good faith opinion of the directors, the company is facing, or is likely to face, significant liquidity problems in the next six 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 the next 18 months (for example, because trading conditions are likely to improve or they are likely to be able to reach an accommodation with their creditors).
It is aimed at businesses that were viable and solvent prior to the impacts of COVID-19 and is designed to provide directors a reasonable period of time to seek professional advice, formulate a credible plan, and monitor how the impacts of COVID-19 are likely to impact on the company. If there is no credible prospect that the company can be rescued after a reasonable period of time, the directors should consider putting the company into liquidation or voluntary administration.
Business Debt Hibernation Scheme
The BDHS is intended to provide a simple way for a business to come to a short term arrangement with its creditors. Its key features are that:
- Once creditors are notified that a business intends to put forward a proposal, creditors will have one month to vote on the proposal;
- During that month, a moratorium prevents creditors taking action against the business to recover their debt;
- If 50 percent (by number and value) of creditors agree to the proposal put forward, the proposal will be binding on all creditors (other than employees) and the moratorium will continue for another six months;
- Control remains with the directors, rather than being passed over to an insolvency practitioner; and
- The Government has advised that directors will need to meet a threshold before being able to access the BDHS. No further details are currently available of what this threshold relates to.
In order to gain the support from creditors, it will be important that businesses are transparent about their current position and why a BDHS is required. Talking to your creditors early, putting in place a robust plan, and communicating this plan effectively to creditors will be essential to get a majority to vote in favour of your proposal.
Ahead of this legislation being available, we recommend that directors considering a BDHS prepare a short, medium and long term forecast to demonstrate that the business is viable and how a BDHS would assist in securing long-term viability. In addition, directors should pursue the other forms of government support that have already been announced, including the Business Finance Guarantee Scheme.
We have prepared a more comprehensive analysis of the BDHS scheme here, which also contains details of an existing business rescue mechanism under the Act known as a Creditor Compromise. This is a significantly more flexible scheme (albeit more complex than a BDHS) that we expect to be relevant to a number of businesses.
For further guidance, please contact one of our Restructuring Services experts. We will continue to provide further guidance once the legislation is introduced and more information is made available.
The content of this article is accurate as at 6 April 2020, the time of publication. This article does not constitute advice; if you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.