Posted on April 6 2020
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:
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:
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.
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027 293 6002
021 0230 0219