On 3 April 2020, the Government announced that it would be making changes to the Companies Act 1993 to provide insolvency relief for businesses affected by COVID-19.
Yesterday, 5 May 2020, the first reading of the COVID-19 Response (Further Management Measures) Legislation Bill) took place. That bill introduces, amongst other measures:
- Reducing the voidable transaction and voidable charge period for non-related parties to six months (Schedule 2)
- The safe harbour provisions for directors (Schedule 3)
- The COVID-19 business debt hibernation (Schedule 4)
- Extensions to the periods mortgages and rent can be in arrears before default notices can be issued and enforcement action can be taken under the Property Law Act 2007 (Schedule 14)
Both the Safe Harbour provisions and the Business Debt Hibernation scheme are intended to be used by companies who, but for COVID-19 would not be facing cash flow issues.
Safe Harbour Provisions
The safe harbour provisions allow directors to trade during the safe harbour period (initially 3 April 2020 to 30 September 2020) without breaching section 135 (reckless trading) and/or section 136 of the Companies Act 1993 if:
- The company “was able to pay its debts as they became due in the normal course of business” as at 31 December 2019 (Pre-COVID-19 Solvent); and
- In good faith, the directors are of the opinion that the company:
- has or will have short term, COVID-19 related liquidity problems over the next six months; and
- will (more likely than not) be able to pay its due debts on and after 30 September 2021.
(Post-COVID-19 Solvency Opinion)
The bill puts the onus on the directors to show that they are entitled to the protection afforded safe harbour provisions. The bill also contemplates that the safe harbour period could be extended beyond 30 September 2020.
Business Debt Hibernation
The Business Debt Hibernation(BDH) scheme will allow entities (including companies, partnerships, body corporates, and unincorporated bodies) to delay payment of their debts, whether in full or in part, for a period of up to seven months.
Entities will be able to enter into BDH if:
- The entity was Pre-COVID-19 Solvent;
- At least 80% of the entity’s directors vote in favour of a resolution to enter into BDH; and
- Each director who votes in favour of the BDH:
- Makes a statutory declaration that:
- The entity was Pre-COVID-19 Solvent
- The director holds a Post-COVID-19 Solvency Opinion
- Sets out the grounds for his or her Post-COVID-19 Solvency Opinion
- Makes a statutory declaration that:
(Post-COVID-19 Solvency Declaration)
- Is acting in good faith
The entity will enter into the BDH when it delivers notice of the BDH to the Registrar (as drafted, all entities will deliver the BDH notice to the Registrar of Companies, not just companies registered on the Companies Register). Entities entering into BDH will have an initial one-month protection period during which creditors will be prevented from starting or continuing enforcement action against the entity and its assets while the entity puts forward its proposed arrangement with its creditors. If the proposed arrangement is supported by 50% of the entity’s creditors (in number and value) who vote on the proposed arrangement, the protection period will be extended for a further six months and all creditors who were sent notice of the proposed arrangement will be bound by the proposed arrangement.
During the protection period (including the extended protection period), unless the approved arrangement provides otherwise or only with the court’s permission:
- Creditors will not be able to enforce their charges over the entity’s property;
- Lessors will not be entitled to take possession of the property used or occupied by the entity;
- Creditors will not be able to begin or continue proceedings for a debt or the recovery of property from the entity;
- Creditors cannot start or continue enforcement action against the entity;
- Creditors cannot call on guarantors of BDH debts, if the guarantor is related party of the entity.
The extended protection period will come to an end if at least 80% of the entity’s directors are not prepared to make new Post-COVID-19 Solvency Declarations, if requested to do so by a creditor. Once given, each Solvency Declaration can be supplied to creditors requesting a new Solvency Declaration for a period of up to two months from the date it is given.
The following debts are excluded from BDHs:
- Employees’ remuneration (including PAYE and other deductions)
- Amounts owed to secured creditors with security over all or substantially all of the entity’s assets (after the initial one-month protection period)
- Debts incurred after the company enters BDH
- Excluded debts (the term “excluded debts” is not defined in the bill)
A BDH does not compromise any of the entity’s debts but an entity in BDH can advance a creditor compromise or be placed into voluntary administration during the protection period.
Progressing the Bill
The bill has been referred to the Epidemic Response Committee, who are due to report back to the house on 12 May 2020.
A date for the second reading of the bill has not yet been announced.
You can find a copy of the bill here:
How We Can Help
Directors wanting to take advantage of the Safe Harbour provisions or entities considering the BDH will need to satisfy themselves that the entity was Pre-COVID-19 Solvent and that they have a good faith basis for their Post-COVID-19 Solvency Opinion. Because of these requirements, if you have any hesitation about your entity’s financial position, we strongly recommend that you take advice.
For entities that cannot meet the solvency requirements of the Safe Harbour provisions or the BDH scheme, there are a number of business restructuring options available that could help directors and shareholders navigate their way through the financial challenges brought about by COVID-19.