By Bill Gambrill - 16 Sep 2020
As readers might recall, in early April 2020, at the
height (and as part of) the initial response to COVID-19, the
Government announced a number of temporary changes to the Companies
Act 1993. The changes sought to address the position of companies
facing liquidity issues.
The principal changes were to create a temporary 'safe harbour'
regime, relieving directors from some director's duties should they
decide to allow a company to continue to trade, and also the
enactment of the Business Debt Hibernation Scheme. (We discussed these changes at the time the
proposed legislation was announced and when it became law.)
The changes were only ever temporary; the legislation provided
that the changes would be in effect for only limited periods of
time (albeit that those periods could be extended by regulation).
The first such period, namely the 'safe harbour' period, will end
on 30 September 2020.
The initial indications are that very few businesses have entered Business Debt
Hibernation. Furthermore, as the proper application of the safe
harbour tests will only be determined in any cases brought against
directors for breach of duty, it will be some time before we can
assess what the effect of the changes has been.
The Ministry of Business, Innovation and Employment - which is
the ministry responsible for administering the Companies Act - has
recently issued a 'reminder' that the safe harbour provisions will expire
on 30 September 2020. While the changes in COVID-19 response levels
during August might have caused the Government to extend the 'safe
harbour' period (and it could yet do so), as matters stand, there
will be no extension; from 1 October 2020, directors' duties will
be as they were before COVID-19.
One potential consequence is that the efficacy of the Business
Debt Hibernation Scheme might prove to be more limited than
envisaged: Business Debt Hibernation took effect alongside the
temporary change to directors' duties; as was noted in submissions
to the Parliamentary Select Committee, the reversion to more
onerous directors' duties might discourage directors from
attempting to salvage struggling companies if they face personal
exposure should they be unable to do so.
Furthermore, while businesses might have been able to 'muddle
through' the initial response to COVID-19 (during which government
support has been available), the reversion to more onerous
directors' duties will occur just as that government support is
likely to diminish. While we do not know if the storm has passed
(or if it has even arrived with full force yet), directors will
have to be keenly aware of their obligations to the company
(including any potential exposure to creditors) as their companies
set sail on the open ocean.
Contact
Bill
Gambrill