COVID-19: Details of proposed insolvency law changes are now available
The Government has introduced the legislation to bring into force a variety of initiatives that have been announced in recent weeks, including the two insolvency law changes, the safe harbour regime and the business debt hibernation scheme. More detail is now available about how these arrangements will operate.
The legislation has already been referred to select committee for review, and is due to be reported back to Parliament on Tuesday 12 May. It is intended to move through the remaining stages as quickly as possible, and will come into the force the day after it is passed.
When announcing the legislation, Minister of Commerce and Consumer Affairs Kris Faafoi noted that this package is not intended to give companies a “free pass” to ignore their usual obligations, but rather to “provide business owners and directors who are in legitimate financial difficulty as a result of COVID-19 with practical assistance for weathering the storm”.
The safe harbour provisions cover both accusations of reckless trading (under section 135 of the Companies Act 1993) and of incurring an obligation the directors did not believe the company would be able to meet (under section 136).
If a director is accused of:
- reckless trading, either by agreeing to the business of the company being carried on in any manner, or causing or allowing the business of the company to be carried on in any manner, which is likely to create a substantial risk of serious loss to the company's creditors; or
- incurring an obligation while being of the opinion that the company has, or in the next six months is likely to have, significant liquidity problems;
she or he will be able to invoke the safe harbour by showing that she or he is of the opinion that:
- any significant liquidity problems over the next six months are, or will be, a result of the effects of COVID-19 on the company, its debtors, or its creditors; and
- it is more likely than not that the company will be able to pay its due debts on and after 30 September 2021.
In determining whether the company is likely to be able to pay its due debts by 30 September 2021, the director may consider the likelihood of trading conditions improving, the likelihood of the company reaching a compromise or other arrangement with its creditors, and any other matters the director considers to be relevant.
The initial safe harbour period runs from 3 April 2020 to 30 September 2020. The Government may choose to extend this.
The safe harbour provisions will only apply to a company which was able to pay its debts as they became due in the normal course of business on 31 December 2019, or was incorporated between 1 January 2020 and 24 March 2020.
Business debt hibernation
The business debt hibernation (BDH) scheme aims to allow an entity that is, or may in the future be, facing significant liquidity problems because of the effects of the outbreak of COVID-19 to continue to operate by providing some temporary protections. Any type of entity can apply for BDH, including a company, partnership, overseas company, other body corporate, or an unincorporated body of persons.
To enter into BDH:
- the entity must have been able to pay its debts as they became due in the normal course of business on 31 December 2019;
- at least 80% of directors (or, if not a company, those in a similar role) must vote in favour;
- each director who votes in favour of BDH must make a statutory declaration that:
- as at 31 December 2019, the entity was able to pay its debts as they became due in the normal course of business;
- the director is of the opinion that
- the entity has, or in the next six months is likely to have, significant liquidity problems; and
- the liquidity problems are, or will be, a result of the effects of COVID-19 on the entity, its debtors, or its creditors; and
- it is more likely than not that the entity will be able to pay its due debts on and after 30 September 2021; and
- each director who votes in favour of BDH must be acting in good faith.
A business will also need to put together a list of all creditors known to the company, which must set out the total number of creditors, the amount owing to each creditor, and the overall amount owing to all creditors.
Upon deciding to enter into BDH, the business must deliver a notice to the Companies Registrar and to each known creditor.
The notice to creditors will be required to:
- contain, or be accompanied by, a copy of each statutory declaration made by the directors when placing the entity into BDH;
- set out the business’s proposed arrangement with its creditors that is intended to address the entity’s significant liquidity problems;
- provide the total number of creditors known to the business, and the total amount owed to those creditors;
- provide an address or email address and a telephone number to which inquiries may be directed;
- state when the BDH notice was delivered to the Registrar.
The business’s proposed arrangement will then be voted on by its creditors. If the creditors do not approve the arrangement, the BDH will end after one month.
A second notice must be sent to creditors with details of the procedure and timing of the vote, and it must describe the proposed arrangement in sufficient detail to enable a creditor to form a reasoned judgment in relation to it (including the terms of the proposed arrangement and the reasons for it). The full text of the resolution to be voted on must be included in that notice.
A majority in both number and value (based on the debts owed by the entity to the creditor immediately before the BDH notice was delivered to the Registrar) is required to adopt the arrangement. Related creditors are excluded from voting. If the creditors vote in favour, BDH will be in place for six months from the date of the creditor approval, and will be binding on all creditors.
The types of arrangements that can be put in place using BDH include:
- reducing the amount of any payment to be made by the entity to a creditor;
- postponing the dates on which payments are to be made by the entity to a creditor; or
- preventing the exercise of any of the creditor’s powers, or restricting any of the creditor’s rights, to enforce payment of the due debt.
These arrangements will only last for the time that the business in in BDH.
BDH cannot be used to cancel all or part of a debt, vary the other rights of a creditor, or prevent the exercise of any of the creditor’s powers, or restrict any of the creditor’s rights, after the end of the protection period. If a business is under BDH, except with permission of the court:
- a person may not enforce a charge over the property of the entity;
- the owner or lessor of property that is used or occupied by, or is in the possession of, the entity must not take possession of the property or otherwise recover it;
- a proceeding in a court, a tribunal, or an arbitral tribunal against the entity in connection with a debt or in relation to any of its property must not be begun or continued;
- an enforcement process in relation to the entity’s property must not be begun or continued
During the period in which an entity is in BDH, except with the court’s permission, a guarantee of a liability of the entity must not be enforced against a director, shareholder or other member of the entity, or against any spouse or relative of a director, a shareholder, or any other member of the entity. This is likely to cover the vast majority of guarantees,
A secured creditor with security over the whole, or substantially the whole, of the property of an entity in BDH will still be able to enforce that charge. This means that a business that holds a General Security Agreement, which is typically secured against all present and after acquired property, would fall outside of the BDH regime.
A business will be able to enter BDH at any point until 24 December 2020.
The next steps
This legislation is likely to come into effect in the next two weeks. If you are considering using either of these arrangements, you should use this time to prepare the information that you will need, particularly for the BDH scheme.
If you have any questions about the safe harbour regime and the business debt hibernation scheme, or need advice about using these arrangements, please contact a member of our insolvency and restructuring team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. While we make every effort to ensure the accuracy of the information contained in this article, this is a rapidly changing environment and the information will be subject to change