COVID-19 – Further government proposals to support businesses
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Last week the Government announced a number of proposals to
temporarily assist businesses during the COVID-19 crisis by
amending the Companies Act 1993 (the Act).
The changes, announced by Finance Minister Grant Robertson, have
been designed to increase certainty, provide practical assistance
to company directors, and to cushion to economic impact to
businesses to further protect jobs, incomes, and the economy in
The proposals include the following:
Safe Harbour for Directors
This proposal provides a ‘safe harbour’ for directors in
relation to decisions made under section 135 (reckless trading) and
section 136 (duty in relation to obligations) of the Act. Over the
next six (6) months, decisions under these sections will not result
in a breach where:
- Acting in good faith, and in the opinion of the directors,
COVID-19 will cause significant liquidity problems for the
- As at 31 December 2019, the company was able to pay its debts
as they fell due; and
- Acting in good faith, the directors consider that circumstances
are such that the company will be able to pay its debts as they
fall due within the next 18 months (for example, this belief may be
as a result of positive forecasted trading conditions).
Business Debt Hibernation
When enacted, this proposal will provide businesses with a
simple, quick and flexible process to place their existing debts on
hold while COVID-19 continues to affect their ability to pay debts.
The intention is to allow directors to retain control of their
businesses and encourage directors to speak with their creditors to
discuss their ability to pay their debts. The scheme also caters
for new creditors and will provide certainty that if a business
does in fact become insolvent, then the payments made to the new
creditors during the debt hibernation period will not be able to be
clawed back by a later challenge.
The key features of the proposal include:
- Most entity types (including companies, trusts, and
partnerships) will be able to take advantage of the proposal
(registered banks, licensed insurers, non-bank deposit takers, and
sole traders are not covered under this proposal).
- Directors of the company will need to decide that their company
meets a threshold to be eligible under the proposal. The Government
is yet to release further details around what the likely threshold
- When the directors consider the threshold is met, they will
notify their creditors that they are seeking a six-month
moratorium. Once notified, there is an initial one-month moratorium
while creditors consider the proposal put forward by the
- During the one-month moratorium, creditors will be able to vote
on whether they accept the proposal by the company or not. If 50%
or more creditors (by number and value) agree to the proposal, then
all creditors will be bound by the agreed terms (except employees)
and the six-month moratorium and any other conditions will take
- If a proposal is declined by the creditors, there are still
options available to the company directors, such as voluntary
administration and liquidation, or a creditors’
- Companies can continue to trade and provide goods and services
during the moratorium period (subject to any conditions imposed by
the current creditors). Where the company makes payments to
creditors during the moratorium period, provided the payments were
entered into in good faith, at arm’s length, and were not
intended to deprive existing creditors, then they are unlikely to
be clawed back under the voidable transaction regime.
Other proposed changes
The Government also announced a number of other changes, they
- Voidable transactions clawback period reduced
– The clawback period will be reduced from two years to six
months (where parties are not related).
- Elctronic signatures to be accepted –
the proposal includes amendments to legislation to allow for
electronic signatures in security agreements where original
signatures are currently required.
- Giving the Registrar of Companies the power to extend
timeframes – This proposal would give the Registrar
the power to loosen timeframes around filing for certain governance
matters such as the filing of annual returns or AGMS.
- Relaxing requirements to comply with constitutions or
rules – the proposal also includes temporary relief
where an entity is not able to comply with its constitution or
rules due to COVID-19. There has been limited detail around what
this may entail but is likely to include provisions such as
allowance for electronic meetings in circumstances where rules may
only provide for in person meetings.
Where to from here?
At this stage, no timeframe has been released. The relevant
changes to legislation are still to be drafted to reflect the
announcements made by the Finance Minister, however the Minister
has stated that he will be asking Parliament to apply the
amendments retrospectively, meaning that once enacted, the
legislation is likely to apply from the date of the
To what extent these proposals will be borne out in the final
legislation remains to be seen, and the finer details will need
close consideration. We will provide further updates once the text
of the legislation is released.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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