There has been a lot of commentary around what the COVID-19 global pandemic is doing to countries’ economies. Some economists are predicting a global economic downturn to be the worst recession since the Great Depression and most are expecting this downturn to be worse than the GFC.
Today, 14 May 2020, New Zealand is moving from Level 3 to Level 2 and a lot of businesses are re-opening for the first time since the Level 4 lockdown came into effect seven weeks ago. In the weeks and months ahead, we will find out what effect the lockdown has had, so now would be a good time to look at the NZ insolvency figures to April 2020 and how those figures compare to the last couple of years.
Today is also budget day and Jacinda Ardern has signalled that the government will be spending to support businesses and keep people connected to their jobs.
Between 1 January 2020 and 31 March 2020, there were 421 formal insolvency appointments. Appointments were down over this period when compared to the same periods in 2019 (454 appointments) and 2018 (559 appointments).
In April 2020, there were 94 appointments, which was just over half the number of appointments in April 2019 (159) and April 2018 (160).
When the April 2020 figures are added to the previous months, insolvency appointments in the year to date are down by roughly 16%+ when compared to April 2019 and April 2018.
As at 30 April 2020, there were 652,033 companies registered on the Companies Register.
Many people will be feeling the financial impact of COVID-19. Many have lost their businesses and/or their jobs. The number of people on a benefit has increased, as has the number of people receiving food parcels.
The number of bankruptcies between January 2020 and March 2020 are similar to the same period in 2019 (268 and 281 respectively). The number of bankruptcies in 2018 was roughly 33% higher over this period.
The number of bankruptcies in April 2020 dropped to 50, of which 80% were debtor applications, which is a significant decrease in the number of bankruptcies when compared to March 2020 as well as April 2019 and April 2018. The decrease in creditor applications was probably because the Courts were operating at reduced capacity so creditor's applications were held off. In April 2019 and 2018, roughly 73% of the 109 bankruptcies were debtor applications.
We expect to see both company and personal insolvency numbers start to increase, especially in the second half of 2020.
The Government’s 12 week Wage Subsidy scheme is approaching its end, and many are now looking at whether they can access the next stage of support via the Small Business Cashflow (Loan) Scheme (SBCS) available from 12 May 2020 Link Here
The announcements made in today’s budget are likely to provide further targeted stimulus probably for infrastructure and tourism, as the country's balance sheet is not limitless. We will need to wait and see what those announcements and the timing of further spending are...
We hope that for the many business owners and employees returning to work today their day is productive and safe. Day by day we will all need to deal with the effects the lockdown has had on our businesses and the ability to restart, especially those who have not been trading at all, and will now need to look at how to deal with seven weeks of expenses and no income over that period.
As a firm we have been working through these situations with a range of clients for the last few weeks. There are many ways to address those issues.
The directors of a company have all the powers to decide what will be done, when it will be done and how – but with that power goes the responsibility to the company and its shareholders, to the company’s creditors and last, but not least, to themselves.
As a director, whether that be as the sole director of a small company or one of many in a large company, you have duties imposed on you under legislation, such as the Companies Act 1993 (“the Act”), and the company’s constitution.
In any circumstances, you must firstly comply with the duties imposed by legislation, which are set out in sections 131 to 138A of the Act. Your first duty is to act in good faith and in what you believe to be the best interests of the company – not your own.
In tough times, if the company is insolvent, then the focus changes and you must act in the best interests of the company’s creditors by ensuring the company doesn’t incur debts and liabilities that it cannot pay.
If you do not fulfil your duties as a director, you could be held personally liable for those breaches and face monetary penalties or imprisonment and you could be ordered to contribute funds to the company to pay creditors.
Where you are the sole director, the thought process is simple.
Where you are not the sole director, and your company is insolvent, then the thought process is the same but (and it’s a big but) being able to put into effect any actions you think are the correct and proper thing to do is dependent on the majority of directors agreeing with you.
If you do not get that agreement, you need to start making decisions about what is best for you personally.
"Should I Stay or Should I Go" is a song by English punk rock band the Clash and one of the verses is as follows -
Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know
The 3rd and 4th lines of the verse highlight the issue for you, as the director holding the minority view, of what you should do.
Do you remain as a director to try and bring about the changes you think are required to get the best results for the creditors of the company or do you accept the other directors will not change their point of view.
That is a decision for you to make, based on the circumstances of your company and on any professional advice you may take but, if you do not see any way that you can stop the company failing because the other directors won’t take the course you are proposing, there is no obligation on you to “go down with the ship”.
To protect yourself, you should keep good records of the events that occurred, the proposals you put to the Board and responses you received and seek independent professional advice.
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:
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.
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:
(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.
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:
(Post-COVID-19 Solvency Declaration)
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:
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:
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.
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:
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.