Debt hibernation scheme and 'safe harbour' for directors has a trade off, expert says
Friday, 3 April 2020
Struggling businesses should find it easier to trade through the coronavirus crisis as a result of two law changes proposed by the Government, insolvency expert Peri Finnigan says.
But Finnigan, a director of Auckland insolvency practitioner McDonald Vague, said there was a risk on the flipside that some 'bad businesses' might try to take advantage of the new rules, at a cost to businesses that were otherwise financially sound.
One change announced by Finance Minister Grant Robertson on Friday would allow businesses to hold off paying some debts for six months – or to put their debts into 'hibernation' as Robertson termed it – if half of their creditors, both by number and the value of their debts, agreed to that.
It was inevitable that some businesses would go broke, but the Business Debt Hibernation scheme would help others weather the storm 'in a way that does as little harm as possible to creditors' interests', he said.
**READ MORE:
* Business owners under pressure to keep workers employed**
Another change would make it less likely that company directors could be held personally liable for allowing the companies that they controlled to trade while insolvent, so long as they did not act dishonestly or in bad faith.
Company directors can currently be held personally liable under the Companies Act for debts if they allow businesses they control to enter into any transaction that could create substantial risk of serious loss to creditors.
But the law change announced by Robertson would provide some 'safe harbour' for directors from their solvency obligations for six months if they were facing 'significant liquidity problems because of Cov-19.
'These changes will not mean that directors are free to disregard the consequences of their actions for the next six months,' Robertson said.
'Other protections in the Companies Act, such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place.'
But he said the change would make it less likely directors would shut down businesses 'prematurely', out of concern for their own liability.
'We know that, whether real or perceived, the threat of a director being held personally liable for a company's solvency problems will likely make them inclined to advise closing down a business,' he said.
Finnigan said the impact of the changes would depend on how the legislation – which has not yet been drafted – was worded.
'We haven't got all the details yet, but I think it will improve the chances of good businesses surviving, she said.
'It probably will stop some premature liquidations and reduce redundancies and the 'domino' effect.
'But I also think it may encourage bad businesses which are already insolvent to keep trading, which will harm the good businesses – so there is some 'good and bad' in that, in my view.
It would be a lot harder for insolvency practitioners to consider 'reckless trading' that may have occurred, she said.
The debt hibernation scheme might be the bigger of the two changes in terms of its impact – depending on how the legislation was worded – and was likely to be supported by businesses as a way to allow companies to spread debt over time, she said.
'I think that is going to be thought of favourably.'