By Mathew Martin and Bill Gambrill - 19 May 2020
On 15 May 2020 the COVID-19 Response (Further Management
Measures) Legislation Act 2020 became law. This means that two key
insolvency measures aimed at addressing the serious insolvency
risks arising from the COVID-19 crisis - the "safe harbour" regime
and the "debt hibernation scheme" - are now effective in New
Zealand.
We wrote about
these measures when they were announced, but before the details
had been finalised. We have also written a detailed analysis of
these new measures, to be found
here. In summary, the following key measures are now in
place.
Safe Harbours
Company directors of eligible companies are now temporarily
exempt from the director's duties contained in sections 135 and 136
of the Companies Act regarding reckless trading and incurring
obligations.
A director may be exempt from reckless trading requirements
if:
- The company has, or in the next 6 months is likely to have,
significant liquidity problems; and
- The liquidity problems are, or will be, a result of the effects
of COVID-19 on the company, its debtors, or its creditors; and
- It is more likely than not that the company will be able to pay
its due debts on and after 30 September 2021 (or such later date as
prescribed by regulations).
A director may be exempt from their duty relating to obligations
if:
- During the safe harbour period only, they agree to the company
incurring an obligation; and
- At the time of agreeing to the company incurring the
obligation, the director is, in good faith, of the opinion that the
company has, or in the next 6 months is likely to have, significant
liquidity problems.
The law now provides that, for the purposes of both of these
duties, a director has reasonable grounds to believe that the
company will be able to perform the obligation when it is required
to do so, if the director, in good faith, is of the opinion
that:
- The liquidity problems are, or will be, a result of the effects
of COVID-19 on the company, its debtors, or its creditors; and
- It is more likely than not that the company will be able to pay
its due debts on and after 30 September 2021 (or such later date as
prescribed by regulations).
The safe harbour period is deemed to have commenced on 4 April
2020 (after the lockdown began), and will end on 30 September 2020.
However, the Government can, by regulation, extend the "initial
safe harbour period" to 31 March 2021, and can also create a "new
safe harbour period" ending no later than 30 September 2021
Debt Hibernation Scheme
Certain entities can make use of the debt hibernation scheme, to
enter into business debt hibernation (BDH), for an initial period
of one month and up to 6 months.
If an entity is in BDH, it is temporarily protected from the
majority of creditors taking action to recover debts, including by
way of legal proceedings, enforcement of security and exercising
any right to recover property. Those protections are subject to
some rights being retained by creditors, including (but not limited
to) the rights of a creditor with security over the whole, or
substantially the whole, of the entity's property. In practical
terms this will mainly be financial lenders, mostly banks, who
usually have General Security Agreements in place to secure lending
provided to businesses.
The new Schedule 13, inserted into the Companies Act 1993, sets
out a prescriptive regime for entities to deliver a notice to the
Registrar of Companies of its intention to enter into BDH, to
notify creditors, to seek creditors' approval, and other similar
provisions.
Much with the safe harbour regime, access to BDH is time
limited. Entities may not enter into BDH after 24 December 2020 (or
such later date as prescribed by regulations). Finally, all of the
provisions relating to BDH will be deemed to be repealed on 31 May
2022.
Putting into Practice
What remains to be seen is how these measures will operate in
practice.
For example, the complexity of the debt hibernation scheme makes
it difficult to see how many businesses would be in a position to
take advantage of the scheme without incurring significant advisory
costs owing to the need to establish that the liquidity issues
arose as a direct result of the Covid-19 lockdown. In reality, it
will only be a small percentage of impaired companies who are able
to say this was the primary cause of liquidity issues.
The strength of the safe harbour measures will also only become
apparent during any subsequent litigation, by creditors and/or
liquidators, against company directors personally which will likely
take some years to determine.
However, it may well be the greatest impact of these amendments
is fact that they are available to debtor companies and their
directors, whether or not they are used. If facing short-term
problems, company directors have a far greater tool box available
to them to enable a longer term view of business viability; and
business debt hibernation provides an alternative against which
negotiations with creditors can take place.
Martelli McKegg's insolvency team are able to provide expert and
efficient advice about issues facing companies as a result of
Covid-19. Please contact Jacque Lethbridge, Bill Gambrill or
Mathew Martin
if you have any questions.