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Details of business support measures released in new Bill

Home Insights Details of business support measures released in new Bill

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Contributed by: Matt Kersey, Polly Pope and Kirsten Massey

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Published on: May 08, 2020


Earlier this week the Government introduced to Parliament the much-anticipated COVID-19 Response (Further Management Measures) Legislation Bill ("Bill"), progressing initiatives to support businesses in managing the impacts of COVID-19.
As explained in our previous alert the key changes that were announced in April and set out in the Bill:

  • give directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act;
  • enable businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again; and
  • fast-track changes to the voidable transactions regime to reduce the period of vulnerability to six months.

The Bill is being considered by the Epidemic Response Committee and is expected to be reported back to Parliament on Tuesday 12 May 2020. We are presenting a seminar to our clients on Wednesday 13 May to discuss the changes. If you are interested in attending, please contact [email protected].
In the meantime, we provide further detail on the two major aspects of the changes, the safe harbour and business debt hibernation scheme ("BDH"), below.

Safe Harbour

The purpose of the safe harbour provisions is to protect directors from liability during the prescribed period if they are acting in good faith while responding to challenges to their business posed by COVID-19. The proposed safe harbour applies to the Companies Act duties not to trade recklessly (section 135) and not to allow the company to incur obligations without a reasonable belief that they will be met when due (section 136).
The safe harbour provisions will apply retrospectively, from 3 April 2020, and end on 30 September 2020 (although this period may be extended, if required) and apply to companies:

  • able to pay their debts as they fell due as at 31 December 2019; or
  • incorporated between 1 January 2020 and 25 March 2020.

The provisions do not apply to directors of some companies, including registered banks, licensed insurers and non-bank deposit takers.
As currently drafted, a director of a company facing significant liquidity problems within the next six months will not breach their obligations under sections 135 and 136 if, at the time of the action:

  • the director in good faith is of the opinion that:
    • the company 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 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 (for example because trading conditions will improve or the company will reach a compromise with its creditors).

The assessment as to whether the company was able to pay its debts as they fell due as at 31 December 2019 will be a one off, objective assessment. However, the good faith opinions of the directors, in particular as to the ability of the company to pay its due debts after 30 September 2021, will require ongoing assessment of the company's financial condition.

Business Debt Hibernation

Again, the focus of this aspect of the proposed changes is otherwise viable companies that are facing liquidity issues as a result of Covid-19. Under the present wording of the Bill, companies are able to propose to their creditors that debts be put into hibernation if:

  • as at 31 December 2019, the entity was able to pay its debts as they became due; and
  • at least 80% of the directors of the entity agree; and
  • those directors each make a statutory declaration that in their good faith opinion:
    • the entity has, or is likely to have, significant liquidity problems as a result of the effects of COVID-19; and
    • the entity is more likely than not to be able to pay its due debts on and after 30 September 2021 (or a later date set by regulations).

The initial period of protection lasts for one month from the date notice is given to the Registrar of Companies (with a copy to all known creditors). During that period, there is a moratorium on the enforcement of debts, subject to exceptions for certain secured creditors. At least five working days before the end of the one month period, creditors must be given a final hibernation proposal and the opportunity to vote on it. The votes of related party creditors are not included, unless the Court orders otherwise.
If the hibernation proposal is not passed, the protections will cease to apply. If the proposal is passed by 50% of the company's creditors (by number and value), there will then be a further six month protection period during which creditors will not be able to take steps to enforce their debts which are covered by the proposal. 
There are restrictions on the effects that a hibernation proposal is able to have on the company's debts. In particular, the proposal is not able to cancel any part of the debt owing or otherwise vary the terms of the debt except to:

  • reduce the amount of any payment to made during the protection period (without a consequential change being made to an annual interest rate);
  • postpone, during the protection period the dates on which payments are to be made by the entity to a creditor (without a consequential change being made to an annual interest rate); and
  • prevent the exercise of any of the creditor's powers, or restricting any of the creditor’s rights, to enforce payment of the due debt during the protection period.

Given these restrictions, and the limited likelihood that a company will immediately be able to pay its debts (including those that have been hibernated) at the end of the six month period, BDH alone may not be a full solution for many companies. In such cases, directors will need to give consideration during the hibernation period to pursuing restructuring options, perhaps through a voluntary administration or a creditors' compromise.
Further points to be aware of as to the way the protection operates include:

  • The hibernation proposal will be binding on all the company's creditors other than its employees.
  • Transactions entered into after the proposal will be protected from clawback action by liquidators, provided that:
    • the transaction is carried out by the entity during the protection period, or is specifically authorised under the proposal; and
    • the transaction is entered into by all the parties in good faith and on arm’s length terms.
  • Secured creditors with a charge (or charges) over the whole, or substantially the whole, of the property of the company will not be prevented from enforcing their charge (for instance, GSA lenders holding General Security Agreements will not be prevented from appointing receivers).
  • Provision is made for owners and lessors of property to recover their property in certain circumstances (including where the Court gives permission or the written consent of the company is obtained).
  • Certain related party guarantees are also unable to be enforced during the protection period, unless the Court orders otherwise.
  • Importantly, the entry of a company into BDH may not be used as evidence that the company is unable to pay is debts or is otherwise insolvent, or entitles any person to require payment or performance not otherwise arising or exercise a right not otherwise becoming exercisable (preventing, amongst other things, the termination of a contract in reliance on the entry into BDH).

As noted above, Matt Kersey, Polly Pope and Kirsten Massey will provide more detail and insights on the Bill in an online seminar on 13 May. If you are interested in attending, please contact [email protected].  

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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