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Mitigating insolvency risks during COVID-19 lockdown

Contributed by:

Harriet Quinlan
Senior Assc

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Harriet Quinlan

The COVID-19 pandemic will have a significant financial impact on all businesses across New Zealand, particularly as a result of the Government-directed lockdown. The nationwide financial impact may give rise to insolvency risks for some businesses.

Now is the time for businesses to review all of their commercial arrangements to mitigate the financial impact as much as possible.

Directors also need to be alert to their ongoing duties under the Companies Act 1993, including the duties not to engage in reckless trading and not to incur obligations that they do not reasonably believe the business can perform.

New Zealand does not currently have a “safe harbour” regime that allows directors to trade a business through financial distress in order to lead the business to a better outcome. Whilst this was true at the time of writing, Parliament is now proposing changes to the Companies Act to give company directors a ‘safe harbour’. These measures are likely to be temporary but will give assistance to companies facing liquidity issues as a result of the pandemic. For more information see our article “Safe Harbour for directors – relief for businesses or storm brewing?”

During this time of economic uncertainty, and particularly if faced with solvency issues, directors need to be extra vigilant with any potential risks to the business, and any solvency issues, and take proactive steps to discharge their directors’ duties.

Some steps that directors and businesses should take

  • Assessing the business’s cashflow needs in the short- and long-term;
  • Reviewing obligations under any facility agreements, including potential breaches of financial covenants, and the effect of cessation of business;
  • Reviewing commercial contracts to consider any force majeure or material adverse change/event clauses that may apply (see further detail here);
  • Considering any potential supply chain disruption and alternatives as a result of the lockdown;
  • Considering whether the business’s capital or structure ought to be restructured, and whether any facility agreements can be renegotiated if required;
  • Considering options for assisted restructuring if required, including voluntary administration or a creditors’ compromise;
  • Reviewing (and possibly implementing) the business’ continuity plan.

In addition to the above steps, in times of financial pressure it is vital to maintain open dialogue with creditors. Businesses should seek advice and contact lenders and creditors to discuss options.

Please get in touch with our specialist lawyers if you would like assistance with the matters in this article.

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