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The government has recently announced an intention to relieve company directors from the consequences of continuing to trade while insolvent [1]. It is proposed to enact a “safe harbour” provision, which will relieve company directors from the prospect of personal liability for company debt, provided the conditions of the safe harbour provision are met.

As of 6 April 2020, the proposed legislation has not been made publicly available, so it is not possible to make the assessment of whether a company does meet the criteria. We will be monitoring this issue closely, as we anticipate that many companies in New Zealand will already be insolvent, and company directors therefore already facing this problem.

The existing position is set out in the Companies Act 1993, sections 301 (personal liability for breach of duty to the company) [2] which links back principally to the duties in ss 135 (duty not to trade recklessly) [3], 136 (duty not to incur obligations when a company cannot perform them) [4] and 137 (duty of care for the affairs of the company) [5].

Recklessness is defined as continuing to carry on the business of the company while there is “a substantial risk of serious loss to the company’s creditors”. Many businesses will already be in that position and as the case law suggests this substantial risk of serious loss would likely apply when the company is insolvent or near insolvency (i.e. when the company is unable to pay its debts). 

Accordingly, the earlier the exact provisions are made available, the sooner a decision can be made as to the sustainability of the business.

Complicating matters further (although perhaps in a positive way), is the associated statement from the government that it intends to enact a new scheme that will allow for “debt hibernation” [6]. The concept of hibernation is that of a long rest while nature does it’s worst, with the intent of emerging again after the storms, into a new, fresh environment, ready to consume the new fresh business opportunities.

However, again, the detail is not available. The one criteria that has been spelt out is that 50% of the creditors must agree to the debt hibernation.

It is not clear whether this proposal only applies to companies, or whether other business entities such as sole traders, trusts and partnerships, can also benefit.  

The 50% threshold is a marked departure from the existing Companies Act section 230 [7] provision for compromises with creditors, which requires the approval of a minimum of 50% by number, who represent 75% by value of debt. But the devil is always in the detail. Will it still require both thresholds, but only 50% of both? Or only one threshold? And if only one, will it be the number of creditors, or the value of creditors? 

Time will tell.

This does mean that there is some justification in taking a “wait and see” attitude, where the business may already be insolvent, and the future prospects look dire. The indications made, may be available and may help solve the problems. We all must now wait and see.

[1] https://www.companiesoffice.govt.nz/news-and-notices/insolvency-relief-for-businesses-impacted-by-covid-19/

[2] http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM322323.html

[3] http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320666.html

[4] http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320667.html

[5] http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320668.html

[6] https://www.companiesoffice.govt.nz/about-us/what-we-do/insolvency-relief-for-businesses-impacted-by-covid-19/

[7] http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM321173.html