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COVID-19 Pandemic: New Zealand to Introduce Temporary Safe Harbour and Business Debt Hibernation Laws for Directors and Companies

In Short

The Situation: The economic impact of the COVID-19 pandemic has required governments around the world to provide temporary relief to companies and directors experiencing distress as a consequence of the pandemic.

The Result: Most recently, following in the footsteps of Australia, the New Zealand Government announced that it will be introducing legislation to suspend its insolvent trading laws and provide directors with a form of "safe harbour" from insolvency duties. In addition, laws will be introduced to allow businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again.

Looking AheadAustralia has yet to enact equivalent temporary legislation which will enable businesses to obtain a moratorium on debt recovery during the COVID-19 hibernation and in the period immediately following. We consider that further amendments to Australia's insolvency regime will likely be necessary to address the difficulties that will be faced by businesses during and post hibernation. 

Around the globe, we are seeing parliaments move at groundbreaking speed to enact temporary legislation to assist businesses to survive the economic impacts of the COVID-19 pandemic. Recently, we reported on Australia's temporary suspension of insolvent trading laws. Those measures temporarily relieve directors from personal liability for debts incurred by companies trading while insolvent.

On 3 April 2020, the New Zealand Government announced that it will be introducing legislation to similarly suspend its insolvent trading laws and provide directors with a form of "safe harbour" from insolvency duties. In addition, New Zealand announced that it would introduce business debt hibernation laws so as to allow businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again. Such relief has not yet formed part of the measures announced by the Australian Government.

How Will New Zealand's Safe Harbour Work?

As is the case in Australia, directors in New Zealand are personally liable for breaching their duties in an insolvency context. In New Zealand, those duties are expressed under the Companies Act 1993 as follows:

  • Section 135―Reckless trading: A director must not agree, 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.
  • Section 136: A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

If approved by Parliament, New Zealand's safe harbour will temporarily relieve directors from the section 135 and 136 duties. The relief will apply to companies:

  • facing significant liquidity problems in the next six months as a result of the impact of the COVID-19 pandemic;
  • that were otherwise solvent prior to 31 December 2019; and
  • whose 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.

As is the case in Australia, directors will not be relieved from liability in respect of their other general duties, such as the duty to act in good faith.

What Does "Business Debt Hibernation" Mean?

The Business Debt Hibernation regime announced by New Zealand (if approved) will effectively provide eligible New Zealand businesses with a seven-month moratorium on debt repayment obligations. Business Debt Hibernation will be available to all forms of entity with legal personality (not just companies) and entities that do not have legal personality (i.e., trusts and partnerships).

To enter into Business Debt Hibernation, directors must engage with creditors and prepare a proposal for putting the business into hibernation. Creditors will have one month to consider and vote on the proposal; in the meantime, the company will have a one-month moratorium on the enforcement of debts from the date the proposal is notified.

The proposal will be approved if 50% (by number and value) of creditors agree to it. If approved, it will be binding on all creditors (other than employees), and the company will have a further six-month moratorium on debt repayment obligations.

While a business is in Business Debt Hibernation, it will be able to continue to trade, subject to any restrictions agreed with creditors as a condition of entering into it. Further, in order to encourage providers and investors to continue to transact with companies in Business Debt Hibernation, any such transactions will be exempt from the voidable transactions regime.

The key benefits of the regime have been expressed as follows:

  • directors can retain control of the company, rather than passing control to an insolvency practitioner through a formal insolvency process, such as the traditional administration or liquidation process; and
  • new creditors will have certainty that they won't have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in hibernation.

These proposed laws lead the way for Australia. We consider that, in addition to the temporary suspension of insolvency laws under the Coronavirus Omnibus Act, further amendments to Australia's insolvency legislation will likely be necessary to provide a regime which can best address the difficulties corporations face during and post hibernation.

Three Key Takeaways

  1. New Zealand recently announced that it will be introducing legislation to suspend its insolvent trading laws and provide directors with a form of "safe harbour" from insolvency duties.
  2. New Zealand also seeks to introduce legislation that will allow businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again.
  3. Australia has yet to enact a business debt hibernation regime. Further amendments to Australia's insolvency laws will be necessary to put businesses in the best position to survive during and post hibernation.

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