COVID-19: NZ directors offered safe harbour protection

It has been interesting being a New Zealander living in Australia during the COVID-19 pandemic. There have been comments, cartoons and discussions that Australia should become the West Island of New Zealand, or that Australians wish that Jacinda Ardern could become the Australian Prime Minister (how quickly they forgot the 2018 dual citizen debacle!). There have even been comments that all Australia is doing is following the actions of the New Zealand government a few days later.

However, one thing that New Zealand has ‘followed’ Australia with, in response to the pandemic, is the introduction of safe harbour protections for directors – though like other countries, it has its own ‘flavour’.

Note: the proposed changes to the Companies Act discussed below are based on drafts of the legislation. The legislation will not go to Parliament until 28^th April 2020. However, if it is passed, it will be backdated to 3^rd April 2020.

The safe harbour rules provide directors with certainty that they would not be in breach of their duties in an environment where significant uncertainty exists, which avoids companies being placed into liquidation prematurely.

New Zealand does however have a commitment with Australia under the ‘Closer Economic Relations’ arrangement (CER). The CER requires New Zealand to cooperate with Australia on its policies, laws and regulatory regime to ensure consistency across the two markets. Therefore, in drafting the safe harbour provisions, New Zealand looked at the Australian regime for inspiration.

The proposed changes are temporary and will include:

• Giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act.
• Businesses affected by COVID-19 will be able to put a hold on existing debts until they can return to normal trade. It is likely this will only be accessible if 50% of the body of creditors agree to debts being ‘hibernated’.

Under the safe harbour provision, directors’ decisions to keep on trading, and decisions to take on new obligations over the next six months will not result in a breach of duties if:

• in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six months because of the impact of the COVID-19 pandemic on them or their creditors.
• the company could pay its debts as they fell due on 31 December 2019; and
• 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 (e.g. they can resume trading or they can negotiate with banks and creditors and put in place payment arrangements).

Like the Australian safe harbour provisions, directors will still need to comply with other legislated director duties e.g. to act in good faith and in the best interests of the company, and also NZX continuous disclosures requirements.

Under the debt hibernation provisions

• Directors will have to meet a threshold before being able to access the Business Debt Hibernation regime and putting a proposal to their creditors.
• Creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if there is a 50% agreement (by number and value).
• There will be a one-month moratorium on the enforcement of debts from the date the proposal is notified, and a further six-month moratorium if the proposal is passed.
• 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 debt hibernation provisions will also be available to trusts and partnerships.

Grant Robertson, the New Zealand Finance Minister, said “While they will help increase certainty and provide practical assistance to business owners and directors, the changes must not be seen as a workaround for obligations to creditors and the responsibility of directors to act in good faith.”

“The changes would help keep jobs and support the New Zealand economy to recover as quickly as possible,” said Consumer Affairs Minister Kris Faafoi.

“We know that, whether real or perceived, the threat of a director being held personally liable for a company’s solvency problems will likely make them inclined to advise closing a business.”

He added that a ‘safe harbour’ will help them keep trading rather than prematurely closing up to minimise disruption to the economy as much as possible.