Govt rushes in ‘safe harbour’ for directors from insolvency laws

Company directors will be able to use a “safe harbour” from insolvency responsibilities, and businesses may be able to put debts into hibernation, under urgent law changes designed to keep the economy running through the lockdown.

Finance Minister Grant Robertson and Commerce Minister Kris Faafoi announced changes to the Companies Act on Friday aimed at easing pressure on directors to declare businesses insolvent.

Speaking to reporters in the Beehive yesterday, Robertson urged directors not to make “rash decisions” as they endured a nationwide lockdown.

“We encourage all businesses to . . . hold on to your people. Give them the wage subsidy if you need to. Don’t make rash decisions during this time and have a plan for coming out the other side.”

The changes will allow directors of companies facing significant liquidity problems because of Covid-19 to take advantage of a “safe harbour” from insolvency duties.

Debts will be able to be placed in hibernation until companies resume trading normally, if the majority of creditors accept.

Deadlines for reporting annual results and annual returns to the Registrar of Companies will be extended. The changes will also allow greater use of electronic signatures.

Robertson said the changes, which will require a law change which will be retrospective to yesterday, were designed to protect jobs and cushion the economy from the impact of Covid-19.

“They must not be seen as a workaround for the obligations that businesses have to creditors, or the responsibilities of directors to act in good faith.”

A number of directors have privately warned of concerns that they feel they have to place businesses in insolvency for fear they could trigger personal liability under the law.

“We know that, whether real or perceived, the threat of a director being personally liable for a company’s solvency problems will likely make them inclined to advise closing down a business,” Robertson said.

“A safe harbour will encourage them to keep trading rather than prematurely closing up which will minimise disruption to the economy as much as possible.”

While some liquidations were “inevitable”, Robertson said the changes would help “some businesses to weather the storm in a way that does as little harm as possible to their creditors’ interests”.

Robertson would not say how many business collapses he expected.

“If this was a good, functioning, solvent business going into Covid-19, it should be able to be a good, functioning, solvent business coming out of it,” Robertson said.

Institute of Directors chief executive Kirsten Patterson said the organisation had lobbied the Prime Minister for changes on March 23 and had been involved in developing the changes.

“The new safe harbour provisions providing temporary relief for directors from potential personal liability, in relation to a company trading while insolvent, will be an extremely important . . . move,” Patterson said.

“Consequences of directors breaching the duties in the Companies Act can be significant, including sizeable compensation awards against them, which can put personal assets such as their home at risk.

“We are navigating extremely unusual times and extraordinary measures are needed as a result — to help protect New Zealand businesses and communities.

“There is a big risk that the weight of personal liability under the Companies Act 1993 will compel directors to place companies into administration or liquidation too soon.”