Changes to Companies Act to support businesses

Home Insights Changes to Companies Act to support businesses

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Contributed by: Kirsten Massey, Matt Kersey and Polly Pope

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Published on: April 03, 2020

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The Government has today announced temporary changes to the Companies Act 1993, in an effort to support businesses facing insolvency as a result of COVID-19. Consumer Affairs Minister Kris Faafoi described the changes as being intended to ease the threat of personal liability of directors for insolvency in order to keep companies trading, rather than prematurely closing down, and therefore minimising the disruption to the economy. The Government will be asking for some changes to operate retrospectively (which might mirror changes to director duties in the UK).
 
While the detail of the proposed legislation is not yet available, the temporary changes announced include:
 
  • Giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act;
  • Enabling businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again;
  • Allowing the use of electronic signatures where necessary due to COVID-19 restrictions;
  • Giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation, and
  • Giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.
Acknowledging potential concerns on the part of creditors, Finance Minister Grant Robertson was quick to stress that "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."
 
In relation to the safe harbour element of the proposal, it remains to be seen whether the legislation will reflect the draft Member's Bill introduced by Alastair Scott  in December last year. This provided an additional defence for directors to claims under section 135 and 136 of the Companies Act if, after suspecting the company is or may become insolvent, the directors start to develop one or more courses of action, or commence to take a course of action reasonably likely to lead to a better outcome for the company.
 
The changes announced follow similar moves around the world, including in Australia and the United Kingdom, to provide directors and companies with breathing room during this time of financial stress:
 
  • In Australia, the Federal Government has passed temporary amendments to provide directors relief from liability for insolvent trading for an initial period 6 months where debts are incurred in the ordinary course of business, as well as to increase the minimum threshold at which creditors can issue a statutory demand from $2,000 to $20,000 for a period of 6 months and to allow companies 6 months rather than the current 21 days.
  • In the UK, the government has announced plans to provide protection for directors (to apply retrospectively) from 1 March 2020 against liability for wrongful trading, as well as a new restructuring procedure providing a moratorium to allow companies time to explore options for rescue.
We will provide further analysis of the proposed changes once the draft legislation is available. In the meantime, the announcement of the temporary changes can be found here.
 
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