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.
The Government is introducing legislation to change the Companies Act to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.
The temporary changes are outlined here
A safe harbour is granted to directors of solvent companies, who in good faith consider they will more than likely be able to pay its debts that fall due within 18 months. This would rely on trading conditions improving and/or an agreed compromise with creditors. It essentially provides certainty to third parties of an exemption from the Insolvent transaction regime.
The changes allow directors to retain control and encourage directors to talk to their creditors and will if needed enable businesses which satisfy some minimum criteria to enter into a debt hibernation scheme with the consent of creditors.
The following article on the Company Law changes released by Martelli McKegg provides more detail read here
Directors considering trading on their company need to be careful and cautious and should have their decisions supported by accounts as at 31 December 2019 (as a minimum), and reliable cashflow projections. Companies that cannot satisfy the solvency test at 31 December 2019 or pre Covid-19 impacts should not be advancing a debt hibernation scheme and directors of those companies will not have protection from S135 and S136 claims.
Insolvent companies that are now facing further financial harm as a result of the lockdown should be seriously considering ceasing to trade and entering into either a formal company compromise under Part XIV of the Companies Act 1993, liquidation, or in some cases voluntary administration. The options depend on the viability of the business.
We consider directors of companies on the brink of insolvency should seek independent advice on whether the company meets the debt hibernation criteria and as a minimum we would recommend that financial accounts are being prepared now to 31 December 2019 along with forward looking cashflow projections to support the decision to trade. We expect creditors being asked to vote will require that sort of information to be available. We urge directors to get their Chartered Accountants involved.
Directors need to be aware that the safe harbour provisions may not protect you. For example, if your company has not been able to meet a statutory demand immediately pre-covid, then your company may be deemed insolvent.
The McDonald Vague team offer the following services as a cost-effective and efficient form of employer assistance in these challenging times.
McDonald Vague provides a specialist service conducting solvent liquidations. Companies are often put into liquidation this way when a business has been either sold, closed down or reorganised for tax and/or management purposes.
Capital gains on company sales
Under current New Zealand law, companies that have sold their business at a capital profit can then, on liquidation, distribute that profit to their shareholders tax free (arm's length transactions only) under Section CD26 of the Income Tax Act 2007.
There is often debate as to whether a formal liquidation process is necessary to distribute tax free capital profits, or whether it is sufficient to simply have the company struck off the Companies Register. When large sums of money are involved, we believe it is prudent to carry out a formal liquidation that cannot subsequently be challenged by potential creditors. Even though the company may have been removed from the register in a strike off, this will not prevent acrimonious third parties from having the company reinstated at a later date. A formal liquidation ensures peace of mind.
Reorganisation of company affairs
McDonald Vague is particularly experienced in reorganisation of companies, especially those with a foreign parent. Amalgamations are commonplace and old entities no longer required are absorbed.
For a variety of reasons, a company will often reach the end of its useful life. Whilst shareholders may do nothing (annual returns not filed) and wait for the Registrar of Companies to remove the company from the register, shareholders in some circumstances will want some finality to the process. Although the company may have paid all known debts, the shareholders can rest assured that once the formal liquidation process has been completed they are highly unlikely to be called upon for anything that may arise in the future.
The directors of a company must first make and file resolutions as to solvency before the liquidation can commence. The shareholders then pass a resolution to appoint a liquidator. The liquidator deals with any liabilities of the company and distributes surplus assets to the shareholders in accordance with their rights.
With an insolvent company the liquidator realises the assets and distributes the cash in accordance with the various priorities. With a solvent company it is possible to make an "in specie" distribution. That is, the assets themselves can be distributed to the shareholders in proportion to their shareholding.
Solvent liquidations we have undertaken
McDonald Vague has performed numerous solvent liquidations. Some of the many assignments we have undertaken have included:-
Please contact Peri Finnigan on 09 303 9519 for confidential, no obligation advice on this area.
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.