The Government is introducing legislation to change the Companies Act to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.
The temporary changes are outlined here
A safe harbour is granted to directors of solvent companies, who in good faith consider they will more than likely be able to pay its debts that fall due within 18 months. This would rely on trading conditions improving and/or an agreed compromise with creditors. It essentially provides certainty to third parties of an exemption from the Insolvent transaction regime.
The changes allow directors to retain control and encourage directors to talk to their creditors and will if needed enable businesses which satisfy some minimum criteria to enter into a debt hibernation scheme with the consent of creditors.
The following article on the Company Law changes released by Martelli McKegg provides more detail read here
In summary:
- Debt hibernation is binding on all creditors (we are uncertain about whether related party creditors can vote, or whether their votes are challengeable) providing that a vote of 50% by number and value is obtained
- Creditors will have 1 month from the date of proposal to vote during which time there is a moratorium on the enforcement of debts
- If passed, a further 6 months moratorium will be available
- To access debt hibernation a threshold will need to be met
- It will not apply to Sole Traders
Warning for insolvent companies and directors
Directors considering trading on their company need to be careful and cautious and should have their decisions supported by accounts as at 31 December 2019 (as a minimum), and reliable cashflow projections. Companies that cannot satisfy the solvency test at 31 December 2019 or pre Covid-19 impacts should not be advancing a debt hibernation scheme and directors of those companies will not have protection from S135 and S136 claims.
Insolvent companies that are now facing further financial harm as a result of the lockdown should be seriously considering ceasing to trade and entering into either a formal company compromise under Part XIV of the Companies Act 1993, liquidation, or in some cases voluntary administration. The options depend on the viability of the business.
We consider directors of companies on the brink of insolvency should seek independent advice on whether the company meets the debt hibernation criteria and as a minimum we would recommend that financial accounts are being prepared now to 31 December 2019 along with forward looking cashflow projections to support the decision to trade. We expect creditors being asked to vote will require that sort of information to be available. We urge directors to get their Chartered Accountants involved.
Directors need to be aware that the safe harbour provisions may not protect you. For example, if your company has not been able to meet a statutory demand immediately pre-covid, then your company may be deemed insolvent.
McDonald Vague Consulting Support Services
The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.
- Independent Assessment of solvency to satisfy the Debt Hibernation scheme (requires financials to 31 December 2019)
- Assistance with Debt Hibernation arrangements, offers and documentation.
- Company Compromise (for insolvent companies)
- Liquidation
- Voluntary Administration (recommended for larger companies seeking to compromise with creditors).