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Company Director Obligations in the current COVID-19 environment

The overall economic impact on businesses of COVID-19 and the Government’s ultimate response is uncertain.  What is certain is that a significant number of companies will struggle financially both during and after the lock down.  At the same time, directors of all companies will need to be aware of their statutory duties and obligations in the Companies Act 1993 (“the Act”). 

In order to assist companies with keeping their businesses trading, the Government has recently committed to temporarily changing the Act.  Two of the measures currently proposed are:

  • Giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under sections 135 (reckless trading) and 136 (insolvent trading) of the Act; and
  • Enabling businesses affected by COVID-19 to place existing debts into ‘hibernation’ until they are able to start trading normally again.

Under the proposed safe-harbour measure, a director will be protected from personal liability under sections 135 and 136 of the Act if, over the next 6 months, they decide to keep trading and take on new obligations, if they meet the following criteria:

  1. In the good faith opinion of the director, the company is facing or likely to face significant liquidity problems from Covid-19 over the next 6 months; and
  2. As at 31 December 2019 the company was able to pay its debts as they fell due; and
  3. In good faith the director considers that the company is more likely than not to be able to pay its debts as they fall due within 18 months. 


In our view, a director will need to be able to point to sound reasoning when considering the above criteria – and ideally that reasoning should be documented in some way. 

The Business Debt Hibernation measure is intended to encourage directors to talk to their creditors and to provide certainty to new third party creditors that they won’t be at risk of the voidable transaction provisions that would apply on liquidation of the company.  Key features include: 

  1. A company will need to meet a threshold before it can access the Business Debt Hibernation regime.
  2. Creditors will have a month from the date of notification of the proposal to vote on it. A proposal will only go ahead if 50% (by number and value) agree.
  3. There will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further 6 month moratorium if the proposal is passed.
  4. If a proposal is passed, the Business Debt Hibernation will be binding on all creditors (except employees) and will be subject to any conditions agreed with creditors. 

It is important to note that the above proposed changes are yet to be passed into law and may be subject to change before coming into effect.  Furthermore, while the law is intended to be retrospective, the proposed measures do not provide directors with a “free pass” to disregard their obligations under the Act, to trade recklessly, or to dishonestly incur debts without a belief they will be paid.  At all times directors must continue to act in good faith and otherwise comply with their obligations and duties under the Act.

Further information about the proposed measures can be found at:
https://www.companiesoffice.govt.nz/about-us/what-we-do/insolvency-relief-for-businesses-impacted-by-covid-19/

The above article was written by Mikayla Hughes, Mary Crimp and Graeme Riach.

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