Changes to the Companies Act

In response to the Covid-19 crisis the Government yesterday announced changes to the Companies Act 1993 (“the Act”) to allow company directors a “safe harbour” from potential adverse claims under sections 135 and 136 of the Act, the introduction of a Business Debt Hibernation regime to allow directors to manage any creditors which arise as a result of the crisis and several other related changes.

PwC supports the thrust of these changes as it is essential in the period of unprecedented uncertainty that directors of otherwise viable companies have the freedom and protection to make the difficult decisions. It is vital that we support good businesses at this time and moving into the future as they will be essential to New Zealand’s regrowth once we are through this restrictive period.

Safe Harbour

For the next six months directors who continue to trade their companies, which includes taking on new obligations, will have a “safe harbour” from potential claims under sections 135 (“Reckless Trading”) and 136 (“Duty in Relation to Obligations”) of the Act provided

  • in their opinion, acting in good faith, the company is likely to face significant liquidity problems in the next six months as a result of Covid-19;
  • the company was able to pay its debts as they fell due at 31 December 2019; and
  • in their opinion, acting in good faith, it is more likely than not that the company will be able to pay its debts as they fall due within 18 months. This may be as a result of improved trading conditions or their genuine belief that they will be able to reach an accommodation with their creditors.

Questions

  1. Does this safe harbour mean that directors are exempt from the other directors’ duties under the Companies Act 1993? No, the safe harbour has been put in place to ensure that directors are able to make decisions regarding future obligations of the company based on it being solvent in the future. This amendment does not exempt directors from acting in good faith and behaving responsibly.
  2. What is meant by reaching an accommodation with creditors? As will be detailed in the documentation provided by the Companies Office, reaching accommodation with creditors will involve agreeing repayment terms and amounts to be repaid, that are reasonable given the ongoing circumstances. Given the current levels of uncertainty regarding cashflows and the ongoing viability of businesses around the country, directors should be preparing short- and long-term cash flow forecasts to determine whether they will be able to pay debts as they become due in the next 18 months. 
  3. Who does this Safe Harbour apply to? The proposed Safe Harbour applies to all Company Directors in New Zealand.  

Example:

Tall Trees Limited is facing significant liquidity problems as a result of Covid-19, the Company is not able to pay debts as they become due and the Directors are considering the solvency of the Company and whether they need to take steps to protect the position of creditors, such as voluntary administration, receivership or liquidation. Under the revised legislation in the Companies Act 1993, The Directors of Tall Tree Limited now have the ability to trade while insolvent over the next six months, provided that they are acting in good faith and that it is more likely than not that the company will be able to pay its debts as they fall due within the next 18 months. The Directors also need to ensure that they were able to pay debts as they fell due as at 31 December 2019.

Business Debt Hibernation

The proposed regime is intended to:

  • encourage directors to actively speak to their creditors to resolve any debts;
  • be quick, simple and flexible, so that directors can commence the process themselves.
  • allow directors to remain in control of their companies;
  • provide certainty to ongoing suppliers that payments they receive will not be subject to later challenge;

Example

Blue Sky Limited has a significant amount of debt and the Directors are considering options available to them in managing their cashflow through the current COVID-19 crisis. Under the Debt Hibernation Regime, the Directors of Blue Sky Limited decide to use the standard documentation provided by the Companies Office to assist in making a compromise with creditors going forward. The creditors will then have one month to vote on the compromise proposal, which will bind all creditors if 50% in number or value support it. Should the creditors support the proposal, then regardless of whether the company goes into liquidation or not in the coming months, creditors who continue to trade with the company will be protected from payments being overturned as voidable transactions provided that that they were made in good faith.             

A compromise proposal can look to reach an arrangement with creditors to pay them less than the full amount owing and / or to pay the amount owing over an extended period of time.

Features of the proposed regime include:

  • the provision of standard documentation by the Companies Office to assist in making a compromise proposal;
  • the regime will not be available to licensed insurers, registered banks and non-bank deposit takers, and sole traders.
  • creditors having a month to vote on the proposal and it will bind all creditors if 50% in number and value support it;
  • a moratorium on the enforcement of debts once a proposal is notified to creditors for up to seven months;
  • if creditors do not support the proposal then directors will need to determine what the appropriate next steps for the company are;
  • creditors who continue to trade with the company will be protected from having payments for those new supplies overturned if the company is subsequently placed into liquidation, unless those transactions occurred in bad faith;
  • the regime will also be available to trusts and partnerships;

Other changes:

  • reducing the period of vulnerability for voidable transactions from two years to six months;
  • allowing entities to use electronic forms of communication, including holding of meetings, even if their rules prohibit them from doing so.
  • deferring the introduction of licensing of insolvency practitioners for up to 12 months;
  • allowing the use of electronic signatures, where previously original signatures were required;
  • giving Registrars the power to loosen the time frames around certain corporate governance matters. Eg. The holding of AGMS and the filing of annual returns;
  • giving entities freedom to temporarily not comply with obligations in their constitutions or rules if Covid-19 prevents them doing so until they are reasonably able to comply;

Legislation is still to be drafted to reflect the above changes and the timing of implementation is uncertain at present. In our view, there will be some work to do to refine what is proposed and, as with all these things, the devil will be in the detail. However, we are pleased the Government has listened to the concern expressed by many businesses and is responding quickly.

The above “Other Changes” have been set out as a means of giving directors of companies facing significant liquidity problems, flexibility in operating their companies during the ongoing Covid-19 pandemic. Changes such as the reduced period of vulnerability from 2 years to 6 months will provide directors and creditors a higher degree of comfort around historic payments and the ongoing viability of new transactions over this period. The allowance of electronic communication (specifically signatures), will allow some companies to overcome the restrictions that have been put into place around physical distancing within New Zealand.

Andrew Ricketts
Director – Deals
Waikato

About our guest contributor

Andrew is a Chartered Accountant with 17 years experience predominately in public practice accounting firms, the last 6 with PwC’s Waikato office.

Andrew worked in business restructuring through the GFC and more recently in providing Corporate Finance services such as valuation, financial modelling, business case development and advising both buyers and sellers in transacting businesses. He is experienced in working across a wide range of industries and entities including Corporates, SMEs, Local Government and Iwi.