COVID-19 - Changes to Insolvency Laws
COVID-19 – Changes to Insolvency Laws
Changes to Insolvency laws are proposed to hold back the tide of unexpected and unwarranted insolvency of companies due to COVID-19 impacts.
Along with the many measures the Government have been implementing to help manage the economic impact of the “COVID crisis”, are temporary changes to insolvency laws under the Companies Act to assist businesses that may be facing insolvency as a result of COVID-19. The intention is to keep the economy ticking and keep people in employment, helping struggling businesses stay viable by:
The changes are still a work in progress, but here is what we know so far.
Safe Harbour Provisions
The temporary safe harbour provisions address concerns of companies being voluntarily liquidated prematurely due to directors being personally liable for breaches under section 135 (“Reckless trading”) and 136 (“Duty in relation to obligations”) of the Companies Act which relate to trading while insolvent.
While it would usually be a breach of those sections to keep trading while likely insolvent, directors will not be breaching those sections if:
It is important to note, the overarching requirement is still for directors to act in good faith and the information released on 3rd April 2020 highlighted that “Other protections in the Companies Act, such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place.”
The safe harbour provisional would not apply to licensed insurers, registered banks and non-bank deposit takers as these are regulated by the Reserve Bank of New Zealand.
Business Debt Hibernation (BDH)
The Business Debt Hibernation Scheme will allow affected entities to effectively place business debt in hibernation by:
The purpose of this scheme is to enable businesses to enter into conversation with their creditors, allowing time to reach agreement on possible payment arrangements.
The Business Debt Hibernation Scheme would not be available to sole traders (as they are subject to the Insolvency Act 2006 which relates to personal insolvency). It would also not apply to licensed insurers, registered banks or non-bank deposit takers, as these are regulated by the Reserve Bank of New Zealand.
It is hoped that these proposals in combination will allow businesses who are struggling with the impact of COVID-19 to trade through, where the existing rules could have forced them into “premature” liquidation.
Other changes to insolvency laws including:
A timeframe has not yet been locked in for the enactment of this proposed legislation, but it is understood when it is enacted, it will be retrospective to 21st March 2020. What this space…
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Posted: Friday 24 April 2020