Sheltering In “Safe Harbours” ...what directors should know
About the Authors:
Andrew Matthews
Partner at Simpson Grierson
Andrew is a partner in Simpson Grierson’s corporate group, advising on all aspects of corporate law and governance in New Zealand – including takeovers, schemes of arrangement, M&A, and overseas investment.
Josh Cairns
Partner at Simpson Grierson
Josh is a partner in Simpson Grierson’s banking and finance group, with particular expertise in corporate finance and corporate restructuring and insolvency.
Directors of NZ companies now have temporary protection from liability under the two insolvency-related directors’ duties required under NZ law. In this article we discuss these “safe harbours” and offer our thoughts on what directors should be doing now to help get the protection offered.
Key details on “safe harbours”
The new safe harbours will boost the confidence of directors seeking to navigate their companies during the next 12 - 18 months.
Directors must nonetheless proceed with their eyes open, and in clear knowledge of the intended purpose of the protection.
The safe harbours are only available in respect of companies that are able to show that they would otherwise be viable, but for the Covid-19 crisis. Also, the protection is only available to companies that have, or will have, significant liquidity problems that are a result of the Covid-19 crisis.
Directors of companies that were challenged before the Covid-19 crisis hit, or which have balance sheet issues (ie those that are undercapitalised), but which may not have immediate liquidity problems, should tread carefully and seek appropriate advice.
Safe harbours for insolvency related director duties
The Companies Act provides temporary relief for company directors from two duties particularly relevant when a company is financially distressed:
not trade recklessly (s135 of the Act); and
not allow the company to incur an obligation unless the director reasonably believes that the company will be able to perform it (s136 of the Act).
These “safe harbours” are intended to enable directors to continue normal trading despite the existing turbulence and liquidity problems caused by the Covid-19 crisis.
Criteria for safe harbours
The relief is intended only to apply to companies that are suffering temporary liquidity issues as a result of the Covid-19 crisis, but are otherwise financially viable. It is available to companies that were able to pay their debts as at 31 December 2019, and new companies incorporated between 1 January 2020 and 24 March 2020. It is not available to companies incorporated after 24 March 2020
Directors must be able to prove that, at the time of the relevant action, they believed in good faith that:
Liquidity problems: the company had, or in the following 6 months was likely to have, significant liquidity problems;
Covid-19 as the cause: the liquidity problems were a result of the effects of the Covid-19 crisis on the company, its debtors, or its creditors; and
Able to pay debts by 30 September 2021: it was more likely than not that the company would be able to pay its due debts on and after 30 September 2021 (for example, because the trading conditions improve, or the company reaches a compromise (or another arrangement) with its creditors).
The safe harbours provide temporary relief only. The relief applies retrospectively from 3 April 2020 and until 30 September 2020, unless extended further.
What directors should do to protect themselves?
Directors will need to put themselves in a position to rely on the safe harbour now, in case the need arises in the future. These 6 things may help directors to get that protection:
Check 31 December 2019 cashflow: Make sure there is a record of meeting the cashflow solvency ‘gateway criteria’. On what basis does the director believe the company was cashflow solvent at the end of last year? What evidence can be retained?
Assess current liquidity problems: Continually assess whether the company is, or will within 6 months, be facing “significant liquidity problems” as a result of Covid-19. There is no bright-line test on what is “significant”, but signals will include missed payments, delayed payment terms, and renegotiation of supply terms. Keep a record of all of such matters.
Assess ability pay debts in September 2021: Undertake cashflow forecasting to check whether the company will be able to pay due debts in September 2021 (even if that’s a longer forecast than businesses are used to). Directors should be looking short term and long term, with a base case and sensitivity analysis.
Test the capital structure: Does it support a view that the company can meet obligations in September 2021? While the focus in the legislation is primarily on cashflow, given the long term nature of the assessment date, we think a review of the balance sheet will also be needed to show, in good faith, a belief the company will be trading at the time - particularly if trading losses are anticipated on the way through.
Information: Get the information you, as a director, need. Seek financial and legal advice, and seek appropriate information from management, which the Companies Act allows directors to rely on, already providing a “mini safe harbour”. Directors cannot delegate to others the assessment of whether the safe harbour preconditions are met, but all that information or advice is likely to be taken into account by courts - and particularly in the context of whether a director’s opinion was formed “in good faith” or not.
Proactive governance - back to basics: Ensure there is a culture and practice of proactive governance and management of the future. From a purely challenging trading point of view, it’s back to basics:
❱ forecasting and stress testing - upside, downside, and Armageddon;
❱ monitoring frequently;
❱ pro-active creditor and debtor engagement;
❱ limit delegations;
❱ increase oversight; and
❱ considering key contracts - payment terms, termination triggers, term, etc.
Other duties not affected
All directors must remember that their remaining directors’ duties still apply. In particular, the safe harbours do not give directors ‘carte blanche’ to act without regard to the interests of a companies’ stakeholders (which include shareholders and creditors). Directors must also continue to act in good faith.
Partner
09 977 5402
Partner
04 924 3409
Simpson Grierson
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