Companies Act changes for insolvency relief

07 April 2020

On 3 April the Government announced a suite of measures to assist businesses (and other entities) that have been adversely affected by the COVID-19 pandemic.  Legislative amendments (primarily to the Companies Act 1993) are required so the details will not be known until the Bill is introduced.  But once enacted, it is expected that at least most of the amendments will have retrospective effect.  The proposals cover:

  • Director liability in relation to insolvent and/or reckless trading
  • A business debt hibernation scheme
  • Other insolvency law changes
  • Use of electronic signatures
  • Extension of legislative deadlines
  • Relief from constitution or rules requirements


Director liability in relation to insolvent trading

The proposal is to provide a ‘safe harbour’ for directors in relation to sections 135 (reckless trading) and 136 (trading while insolvent) of the Companies Act 1993.  In short, directors’ decisions to keep on trading, including taking on new obligations, over the next 6 months will not result in a breach of those sections if:

  • In the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors; and
  • The company was able to pay its debts as they fell due on 31 December 2019; and
  • The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).


Business Debt Hibernation Scheme

The scheme will be available to all forms of entity with legal personality (not just companies) and entities that do not have legal personality (i.e. trusts and partnerships).  So it will not be available to sole traders, nor will it be available to licensed insurers, registered banks, or non-bank deposit takers.  The proposed entry criteria for the scheme are:

  • Directors can only put forward a scheme proposal to creditors if a (yet to be disclosed) threshold is met.
  • Creditors will have a month from the date of notification of the proposal to vote on it.
  • The proposal will binding if 50% of creditors by both number and value vote in favour.
  • There will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further six month moratorium if the proposal is passed.

The scheme will bind all creditors, other than employees, and will be subject to any conditions agreed with creditors.  Crucially, the business will be able to continue to trade under the control of the directors, subject to any restrictions agreed with creditors.

New creditors (unless parties related to the scheme company) will not be subject to the voidable preference rules in respect of payments made to them, so they should not be discouraged from making supplies to companies that have entered into a scheme.  However, this will also be subject to a condition that the transaction was entered into in good faith by both parties, on arm’s length terms, and with no intent to deprive the existing creditors of the company.

Lastly, it is intended that the scheme be simple and flexible so it is able to be used as widely as possible.


Other insolvency law changes

The announcement included a statement that commencement of the insolvency practitioner licensing legislation will be deferred for up to 12 months.  It has since transpired that the statement is, at best, incomplete.  The legislation is still scheduled to come into effect on 17 June 2020 but provision has been made to defer its commencement for up to 12 months, if necessary to cater for any unexpected COVID-19-related delays that may arise between now and then.  


Use of electronic signatures

The Contract and Commercial Law Act 2017 will be amended to provide that its provisions relating to electronic signatures will apply to security agreements containing powers of attorney.


Extension of legislative deadlines

Registrars will be given temporary exemption powers to:

  • Relax some statutory deadlines (for holding AGMs, filing annual returns, and similar) for companies, limited partnerships, incorporated societies, charitable trusts and other entities.
  • Relax deadlines for Registrars to carry out certain functions, such as processing applications to reserve company names.


Relief from constitution or rules requirements

It is proposed that various entities (including incorporated societies, charitable trusts, and unincorporated associations) that are unable to comply with obligations in their constitutions or rules because of the impacts of COVID-19 be absolved from doing so until such a time when they are reasonably able to perform the obligation.

It is also proposed that such entities be allowed to use electronic communications (including electronic meetings) even if their constitutions or rules do not allow them to do so.

contact usInformation on this insight was last updated 07.04.2020