Reckless Trading – The Expiry of Covid-19 Safe Harbour Provisions

03 November 2020

Paul Manning is a Partner of BDO Tauranga, and he joins me now. He is a chartered accountant an accredited insolvency practitioner and specialises in business turn around and recovery.

Paul is here to talk with us about Reckless Trading and to highlight the recent exemption expiry that may affect you and your business.

What is Reckless Trading?

So, under the companies act the reckless trading provisions state that a company Director must not carry on business in such a way that it is likely to create a significant risk or serious financial loss to creditors. And a Director is also not allowed to incur debt unless there is a reasonable expectation that that debt will be repaid in due course. So obviously in every business there are genuine, legitimate business risks, but with reckless trading we are looking at more the illegitimate side where the Directors haven’t conducted themselves in the best interest of the company.

Now, we have seen that the implications of been found guilty of reckless trading can be quite severe. So, the recent Mainzeal case the court ordered the Directors to pay $36m of their own funds back to the company as compensation.

But, we do have the Safe Harbour provisions which were bought in as a part of the CV19 response/recovery.

What are the Safe Harbour Provisions?

So, the provisions, in order for a director to be able to claim protection under these provisions there is three criteria that needs to be met, and all three must be met.

  1. The company must have been in a position to pay its debts as they fall due on the 31st December 2019 (pre-Covid)
  2. The directors must be of the opinion - acting in good faith, that the company is likely to face significant liquidity issues in the next 6 months as a result of Covid-19. Or, that it’s suppliers or customers may do so either.
  3. The directors must consider- in good faith, that the business will be able to return to normality and pay their debts as they fall due within a reasonable timeframe.

When do these provisions expire?

The bad news is the provisions have recently just expired as of 30 September 2020. So, the initial six- month period that the government wanted to cover off was from 3rd April – 30 sept 2020. However, if Covid comes back with a vengeance the Government are in a position to reintroduce those provisions to 31 March 2021 or even 30 September 2021.

What should Company Directors do now if their business is in trouble?

I think the key thing for any business owner to do is to seek specialist professional advice - on a timely basis. The sooner that you receive that advice the better the chances are of success.

So, engaging with an advisor you need to come up with a credible plan for how the business may actually be able to succeed going forward and as part of that plan you need to look at preparing some robust forecasts and budgets at least until 30 Sept 2021.

You will need to look at any cost savings available in the business and maybe talk to your bank about renegotiating the terms of some bank debts. That could be extending out the period of the loan, it could be looking for an interest only period. You might need to talk to IRD about an instalment arrangement - so paying off your IRD obligations over a period time. You may need to look at potential equity investment or, the business owner may need to put in some private funds to help cashflow the business in the short term. And it’s easier said than done but, you may need to try and talk to some of your suppliers about getting longer payment terms. But of course the difficulty with that is your suppliers may be in the same boat!

Indeed, Paul Manning from BDO Tauranga, Thank you for your time this morning and for providing some guidance on these provisions and what to do now if your business is in trouble. 

If you have any questions for Paul you can contact him at BDO Tauranga, BDO New Zealand has offices across the country and are experts in business turnaround and recovery, insolvency, accounting, tax and audit.