Covid 19 Special Update

Covid-19 Special

The true financial impact on businesses in light of the Covid-19 virus and the subsequent lockdown is about to be felt in the near future.

We recommend that if your business or someone you advise is experiencing cashflow and solvency issues to seek advice as soon as possible. Too often as members of the Restructuring, Insolvency &  Turnaround Association of New Zealand (RITANZ) we see directors of insolvent company’s too late and there is no option but to liquidate. There can be more options if we are involved sooner.

Assistance Available

There is assistance available right now for business owners which includes:

1. Government Wage subsidy
2. Regional Business Partners Network, which is  government funding of up to $5,000 for Covid-19 related advice.
3. Specialised advice from your local RITANZ Members (CS Insolvency)

Legislation Change Proposed

The Government is proposing new Legislation which includes debt hibernation and a ”safe harbour” from insolvency duties under the Companies Act.

Safe Harbour

Subject to it being agreed to by Parliament, the proposal is to provide a safe harbour from sections 135 and 136 of the Companies Act 1993 on the following terms:

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 if:

1. in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors;
2. the company was able to pay its debts as they fell due on 31 December 2019; and
3. the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).

Debt Hibernation

The proposed regime is intended to:

• encourage directors to talk to their creditors with a view to putting together a  simple proposal for putting the business debts into hibernation;
• allow for the directors to retain control of the company, rather than passing control to an insolvency practitioner;
• provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in Business Debt Hibernation;
• be simple and flexible so that it can be enacted quickly, and businesses can readily apply it to their circumstances without having to obtain legal advice.
• provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in Business Debt Hibernation; 
• be simple and flexible so that it can be enacted quickly, and businesses can readily apply it to their circumstances without having to obtain legal advice.

In Summary:

1. Debt hibernation is binding on all creditors providing that a vote of 50% by number and value is obtained
2. Creditors will have 1 month from the date of proposal to vote during which time there is a moratorium on the enforcement of debts
3. If passed, a further 6 months moratorium will be available
4. To access debt hibernation a threshold will need to be met 
5. 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.