The New Zealand government is introducing legislation, similar to that recently introduced in Australia, with regard to companies who are struggling to maintain solvency as a result of the coronavirus outbreak.
The intent is to allow companies to place their current debt into a form of hibernation and to provide directors with a “safe harbour” that will protect them against action by creditors.
Under New Zealand’s Companies Act, directors have a duty to keep abreast of the company’s balance sheet and immediately stop trading when they are not in a position to meet their debts in a timely manner.
The “limited liability” protection, one of the main reasons for many companies being incorporated, can be lifted and directors face personal accountability if the company was trading while insolvent.
This new legislative changes will allow directors to be protected against claims made against them personally when the liquidity issues stem from the coronavirus impact providing certain conditions are met.
The legislation is not there to provide companies with a reason to simply stop paying their debts. Nor is it a unilateral decision to be made by the company. The hibernation period, to be known as “Business Debt Hibernation” needs to have the agreement of at least 50% of a business’ creditors.
The legislation still expects directors to act in good faith and the legislation should not be used to justify imprudent behaviour on the part of directors.
That means directors must be having discussions with creditors about the company’s situation, and the consent of the creditors to enter into the “Business Debt Hibernation” needs to be provided in writing.
It is hoped that the legislation may change the minds of directors, particularly of smaller companies, who may be considering closing the business down rather than face the risk of trading while insolvent.
It is expected that creditors may agree to some debts being prioritised over others, with hibernated debts perhaps being deferred for 6 months.
Therefore, if your company is struggling to stay afloat it is imperative that you start talking with your suppliers and bank to advise them of the situation. Your bank may be able to provide a loan of up to $500,000 of which 80% of that loan will be guaranteed by the New Zealand government.
For more information on the Business Finance Guarantee Scheme, which allows loans to be paid back over a period of 3 years with a repayment Holiday of 6 months, refer to our blog post.
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.