Legal Insights

Covid-19 and Insolvency

Given the Covid-19 lockdown it is, unfortunately likely several businesses will be considering insolvency.  Insolvency has a number of legal implications.

As a result, the Government is considering making changes to insolvency and company law.

These include:

  • A ‘Safe Harbour’ for Directors from some of their duties
  • Placing business debts in Hibernation until the start of normal trading

SAFE HARBOUR

The Companies Act places several obligations on Directors.  One of these duties is the decision to keep trading when a company is facing insolvency.

The Government is proposing that a decision to keep trading will not result in a breach of this duty if:

  • In the good faith opinion of the Directors, the company is facing significant liquidity problems as a result of Covid on them or their creditors
  • The company was able to pay its debts as they fell due on 31 December 2019
  • The Directors consider in good faith that it is more likely than not that the company will be able to pay it debts as they fall due within 18 months

DEBT HIBERNATION

The implications of Covid-19 will make it more difficult than normal for a company to pay its debts.  However, as is perhaps obvious, there would be significant implications for all, if companies simply stop paying their debts.

Given this the Government is proposing Debt Hibernation.  The key features are:

  • A threshold (details yet to be provided)
  • 50% of Creditors (by number and value) agree
  • A one month moratorium on debts from notification (of the proposal), with a further 6 months if the proposal is agreed

Voidable Preference

One important principle of liquidation/insolvency law is that all creditors should be treated evenly. This equal treatment is to ensure that creditors do not spend all their time monitoring the financial position of their debtors. Equal treatment requires that in certain circumstances where one creditor is better off than another creditor, the better off or preferred creditor should return some of his bounty to the liquidator.

Part of the Governments Hibernation proposal is to reduce the circumstances where a creditor will be required to return this bounty to a liquidator.

CAN I HELP?

The Official Assignee is often appointed by the Court to liquidate companies. I worked for the Official Assignee’s office between 1996 to 1999 and have practiced as a lawyer for over 22 years.

This experience enables me to very quickly guide you through insolvency issues including those referred to above.

Call me if you have any questions or require further details.

Mobile:  021 944 001

Email: corton@corbanrevell.co.nz

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