COVID-19: Amendments to Companies Legislation and Directors’ Duties

Company directors will be facing difficult decisions in the wake of the continuing Level 4 Covid-19 lockdown. While emergency measures are in place to ensure that everyone continues to receive some form of income during this period, it brings into focus a tension between the immediate cashflow needs of a business, its ongoing viability, and the duties of directors under the Companies Act, particularly in relation to reckless and insolvent trading. In particular, the Mainzeal decision (issued in 2019), where directors were found to be personally liable following the company’s collapse, is likely to be fresh in the minds of many directors.

We have recently seen steps taken by the Australian government to protect directors from Australia’s insolvent trading laws, and to prevent creditors from bankrupting individuals or winding up companies over unpaid debts. Measures in place for the next six months include a “moratorium” over personal (director’s) liability for insolvent trading, and extensions to the timeframes required to satisfy/respond to a statutory demand or bankruptcy notice.

The New Zealand government has now confirmed that it will take similar measures.

The New Zealand position – the “normal rules”

Under section 135 of the Companies Act, a director must not:

  • agree to the business of the company being carried out in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
  • cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Further, under section 136, a director must not agree to the company incurring an obligation (e.g. a debt) unless the director reasonably believes that the company will be able to perform the obligation.

Relaxation of the rules

The emergency measures in place to support the economy through this crisis must also ensure that business facing immediate struggles but which are likely to be viable in the long term do not succumb to premature liquidation.

The government has therefore announced the following intended amendments to the rules around insolvent trading:

  • giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act
  • enabling businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again
  • allowing the use of electronic signatures where necessary due to COVID-19 restrictions
  • giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation
  • giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.

These steps, when enacted, will assist companies and directors to trade through the current crisis.

To discuss the implications of this for your business, please contact one of our team.

Daniel Weatherley

Partner

021 220 0710

drw@younghunter.co.nz

Hamish Evans

Partner

027 293 6002

hae@younghunter.co.nz

Megan Gall

Associate

021 0230 0219

meg@younghunter.co.nz