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Safe harbour for directors – Relief for businesses or storm brewing?

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Dan Hughes

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Dan Hughes

Parliament is introducing legislation to amend the Companies Act to assist companies facing solvency issues as a result of COVID-19.

The hope is that this will assist companies to trade through and keep employees on board during this time of crisis.

The proposed changes

The proposed changes are temporary and will include the following:

  • Giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act.
  • Businesses affected by COVID-19 will be able to put a hold on existing debts until they can return to normal trade. At present, it appears this will only be accessible if 50% of the body of creditors agree to debts being ‘hibernated’.
  • Amendments to give the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation.
  • Provisions which provide temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.
  • Changes to allow the use of e-signatures so that business can continue despite COVID-19 restrictions.

The specific details around the proposals have not yet been released. New Zealand does however have a commitment with Australia under the ‘Closer Economic Relations’ arrangement (CER). Under the CER, New Zealand is required to cooperate with Australia on its policies, laws and regulatory regime to ensure that there is consistency across the two markets. It is therefore likely that in drafting, we will be looking at the Australian regime for inspiration.

Australia – Safe harbour and COVID-19 protections

‘Safe harbour’ was implemented in Australia under the Corporations Act 2001 (Cth) in September 2017. Under that regime, directors are protected from personal liability for insolvent trading in certain circumstances. The ‘safe harbour’ provision at section 588GA(a) of the Corporations Act is a form of defence which relieves directors from liability if:

  • At a particular time after a director starts to suspect a company may become or already is insolvent, he or she starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company; and
  • The debt is incurred directly or indirectly in connection with that course of action and during a specified time period.

As of 25 March 2020, Australia also implemented special measures to supplement the above and give temporary relief for directors from personal liability for debts incurred when trading while insolvent where the debt is incurred:

  • In the ordinary course of the company’s business;
  • During the six month period starting on the Effective Date (25 March 2020) (or any longer period prescribed by regulations); and
  • Before any appointment during this period of an administrator or liquidator.

A holding company may rely on the temporary safe harbour for insolvent trading by its subsidiary if:

  • It takes reasonable steps to ensure the temporary safe harbour applies to each director of the subsidiary and to the debt(s) incurred; and
  • The temporary safe harbour does actually apply in relation to each of the directors and to the debt.

Anthony Harper comment

The Australian safe harbour regime is relatively new which means there is little judicial consideration in terms of the operation of the sections. However, it is likely that it will be highly relevant given New Zealand’s commitment to CER. Like New Zealand, the temporary safe harbour provisions in Australia are brand new, so there is no way of knowing how this will play out.

Another change that has been implemented in Australia is the temporary amendments to the statutory demand regime, which increase the minimum monetary limits and timeframe for compliance. While this was not specifically discussed today, it is likely that this will form part of the review.

The amendments will be of significant interest and Minster Grant Robertson has said that Parliament will be moving to draft the amendments in the immediate future. It is expected that the changes will be retrospective to today (3 April 2020).

Although safe harbour will be welcomed by many directors, there is always the danger that there will be conduct which increases the risk of loss to the body of creditors rather than reducing it. The devil is in the detail and if these changes are implemented, it will be critical that there are mechanisms built in to deter directors from relying on safe harbour provisions to justify acting recklessly and trading-on with impunity.

Similarly, it is unclear based on the Australia experience whether tests such as ‘reasonableness’ and ‘honesty’ are reliable pillars against which plans can be measured, given some practitioners have noted that the rate of success with ‘safe harbour’ plans is about 50%.

It is important that the New Zealand legislature does not lose sight of the fact that Australia’s temporary measures were designed to supplement an existing safe harbour regime.

Watch this space.

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