COVID-19: Summary on insolvency and distressed businesses

Tuesday, April 28, 2020

Dealing with creditors generally

Talk to your creditors early:

  • You need to show your creditors that their best outcome is to work with you.

Make sure that you have a detailed understanding of your own business including:

  • Your accounts through to 31 December 2019
  • When you expect to start trading and at what level?
  • What you can realistically offer creditors?
  • What are your alternatives to reaching a deal with your creditors?

If your taxes are overdue you should speak with your accountant or contact the IRD directly.

Dealing with your landlord

Review the terms of your lease.

Many ADLS leases have provision for rental abatements where access is restricted (including a government lockdown). If your lease has that provision:

  • You are entitled to a rental abatement
  • You will need to reach an agreement with your landlord on what is fair and reasonable
  • The New Zealand Law Society reports reductions of around 50% – 80% in most industries including retail, office and warehousing (no figures were provided for hospitality)
  • If you cannot agree with your landlord then pay what you consider is fair and reasonable, but there could be an argument about this later

Property Council leases and older ADLS leases do not provide for abatements where access is restricted.

Even if your lease does not expressly allow for rental abatements, you can still seek an abatement from your landlord:

  • Try to get the landlord to see the ‘big picture’ rather than focusing on contractual rights
  • Many landlords would prefer a temporary reduction than risk losing a long-term tenant
  • It will be difficult to find alternate tenants in the current climate

If your landlord is trying to remove you for non-payment of rent, you can seek assistance from the Court.

Government packages

The Government has announced three packages – details of which will be clarified when parliament meets (expected to meet on 28 April 2020):

Safe Harbour Regime

  • Protects directors against subsequent claims for reckless trading
  • Available to companies that:
    • Were solvent on 31 December 2019
    • Are likely to face liquidity problems due to COVID-19 in the next 6 months
    • Are likely to be able to pay their debts in 18 months

Business Debt Hibernation

  • Scheme to place existing debt into ‘hibernation’ for 6 months
  • Requires 50% of creditors (by number and value) to agree
  • Not available to sole traders or individuals
  • Further details around criteria and process for seeking creditor approval to be released

Business Finance Guarantee

  • Financial support/bridging loans to assist with business debt
  • Loans of up to $500,000 for small to medium sized businesses
  • To qualify companies must be:
    • Solvent
    • New Zealand based
    • Have an annual turnover of more than $250,000
    • Not engage in various excluded activities (should not affect HNZ members)
  • Speak to your bank or accountant for further details

Insolvency

The Courts are not currently hearing creditor applications for liquidation due to difficulties with serving documents and instructing lawyers.

COVID-19 presents a number of practical difficulties for liquidators and receivers:

  • Difficulty accessing premises and securing assets
  • Lack of a market in which to sell assets
  • Risks of carrying liabilities

If you are contemplating winding up your company, you should speak with your accountant about timing and desired outcomes before you appoint a liquidator.

Risk of limited return for creditors as a result of COVID-19 points creditors towards accepting the Business Debt Hibernation scheme (above).

Personal Insolvency

Check whether you are a guarantor for your company’s obligations (leases/finance).

If possible try to negotiate a release or limit to your personal liability.

 

For more information, 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.

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