Covid Changes to Insolvency Rules

Caity Peacock, Aaron Crampton

COVID-19 (novel coronavirus) has had a significant impact on the global economy, and the effects of this will be felt for weeks to come. New Zealand’s economy has not escaped this impact; fortunately we live in a country where legislative action is being taken to soften the blow of COVID-19. The Government is taking recommendations from industry groups and putting in place frameworks to support New Zealanders during this time.

Many businesses will be under immense pressure and will be putting continuity plans into action in order to weather the current storm. Unfortunately however, this will not be possible for all businesses and it is something all directors need to keep in the back of their minds. Why? Because directors, as the ‘mouthpiece’ of their company, act on its behalf and as such, have certain duties under the Companies Act 1993 (“the Act”) they must comply with. If these are breached, the protection of limited liability falls away and directors can become personally liable.

In our current situation, several duties become particularly relevant. These include (but aren’t necessarily limited to):

Continuing to trade when, in reality, it is likely the company cannot perform the obligations it has entered into or it is insolvent may constitute a breach of a number of such duties.

To support New Zealand businesses over this difficult time, the Government intends to introduce several temporary changes to the New Zealand insolvency regime. These changes will include:

We explore these changes in more detail below:

Safe Harbour

Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties under sections 135 and 136 of the Act if:

It is intended that the safe harbour provisions be backdated to the date of the announcement.

Business Debt Hibernation Scheme

The Government will introduce a COVID-19 Business Debt Hibernation regime to the Act.

The proposed regime is intended to:

Key features of the Business Debt Hibernation regime are that:

Some other key legislative changes to support businesses are:

One further point to note – the Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 are scheduled to come into force on 17 June 2020. Although 17 June remains achievable, and is still being targeted, unpredictability associated with COVID-19 means that implementation may have to be deferred. To cater for unexpected COVID-19-related delays, Cabinet has agreed to allow the commencement of the Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 to be deferred for up to 12 months.

These are difficult and uncertain times and it is imperative that directors fully comprehend their obligations, and how these are affected by the most recent changes.

Please do not hesitate to get in touch with us with any concerns you may have, we’re here to help.

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