The Government has announced that it will be introducing temporary changes to the Companies Act in an effort to see as many businesses survive the economic downturn resulting from COVID-19 as possible.
Two of the most significant changes being made are the introduction of a “safe harbour” for directors against trading insolvently for a period of six months and the introduction of a mechanism to enable companies to place debts into “Business Debt Hibernation” for a period of up to seven months (on the basis at least 50% of creditors agree).
A summary of the temporary changes being introduced can be found on the Companies Office website here
The changes will be welcome news to debtors facing interruptions to their revenue streams as a result of COVID-19. However, the news may not be so rosy for creditors, many of whom will also be feeling the pinch of the COVID-19 crisis.
This is because the proposed changes only partially address the effect that the voidable transaction regime will have on creditors when, despite the Government’s best efforts to save them, financially stretched businesses ultimately fail anyway.
As the law currently stands, any payments received by unsecured creditors in the two years leading up to a company’s liquidation are subject to the voidable transaction regime and are at risk of being clawed back by liquidators.
The policy behind the voidable transaction regime is to ensure no unsecured creditor is preferred over others. In order to defend a claw back claim a creditor must prove, amongst other criteria, that it had no reason to suspect the company was, or would become, insolvent at the time it received the payment in question.
Recognising that creditors will be hard pressed to rely on the defence when dealing with companies in Business Debt Hibernation (BDH
), the Government has announced that payments to creditors (other than related parties) made by businesses in BDH will be exempt from the voidable transaction regime (subject to certain good faith conditions being satisfied). This will give creditors the confidence to continue to trade with companies in BDH who, by their very definition, will clearly be facing liquidity issues.
But what about those companies that do not enter BDH, but are still facing solvency issues during these uncertain times? Where those companies ultimately fail (many of which inevitably will) creditors will be at real risk of having payments clawed back as few in the current environment will be able to argue that they did not suspect insolvency.
Given many of those creditors will be facing liquidity issues of their own, a domino effect of companies being pushed into liquidation may well result (this being exactly what the Government is seeking to avoid).
Although the Government intends to reduce the period in which payments can be clawed back (from two years to six months prior to the date of liquidation) this will not be enough to protect creditors from the full extent of the voidable transaction regime.
It is unclear why the Government has only made a carve out for creditors dealing with companies in BDH, as opposed to simply making a blanket exemption for the voidable transaction regime over the period that the temporary changes are in place. Certainly, if it had, this would bring the voidable transaction regime into line with the temporary changes being made to the insolvent trading laws.
As stated by the Finance Minister when the changes were announced, the measures were being taken to “support the Government’s work to cushion the economic impact [of Covid 19] for New Zealand and to support businesses and protect jobs and incomes
”. A temporary suspension of the voidable transaction regime, in relation to all companies, would seemingly align with this objective and would give creditors (as well as debtors) the confidence to continue to trade throughout these uncertain times without later being exposed to claw back claims against them.
If you require further information or assistance on the above issues, contact Jeremy Johnson
or Cecil Hanafin
in the first instance.
Wynn Williams is a member of SCG Legal, a global network of more than 110 independent law firms with both legal and public policy practices serving businesses in all 50 U.S. state capital cities and the District of Columbia, as well as capital cities and major commercial centers in more than 50 countries. SCG Legal has developed a COVID-19 Global Resource Center, which is focused on up-to-date legal and public policy developments from more than 25 different countries and most U.S. States. To access it, visit scglegal.com/coronavirus-resources.