Welcome liability relief for directors as liquidations loom

Government’s move to provide support and temporary relief for directors’ potential liabilities related to insolvent trading is welcome, the Institute of Directors’ chief executive Kirsten Patterson says.

Referring to the risk that many New Zealand companies may be on the verge of closure and liquidations due to the COVID-19 lockdown, Patterson says in a media release that the latest government support was “critical and welcome”.

“The new safe harbour provisions providing temporary relief for directors from potential personal liability, in relation to a company trading while insolvent, will be an extremely important and positive move. They’ll be a very welcome safety net at this critical time.”

The Institute of Directors has been working with government on a package to support directors facing trading challenges due to COVID-19. It petitioned the government, writing to the Prime Minister and Commerce Minister on March 23, 2020.

The IoD called for interim relief for directors from the risk of personal liability when an organisation might be trading insolvent because of COVID-19 – subject to reasonable limitations and ensuring creditor interests are taken into account.

“The Companies Act 1993 puts various responsibilities on directors, including in relation to trading while insolvent,” Patterson said.

“Consequences of directors breaching the duties in the Companies Act can be significant, including sizeable compensation awards against them, which can put personal assets such as their home at risk.

“We are navigating extremely unusual times and extraordinary measures are needed as a result – to help protect New Zealand businesses and communities. There is a big risk that the weight of personal liability under the Companies Act 1993 will compel directors to place companies into administration or liquidation too soon.”

“Our members are deeply worried about the impacts of this pandemic on businesses and communities. We asked for emergency temporary support to help directors and companies manage the impacts of COVID-19, to retain staff, get through this cash flow constrained period and be viable after this crisis ends.

“Directors will still be expected to be cautious, and will need to meet certain obligations under the temporary arrangements including demonstrating that they were solvent at December 31, 2019. This is not a free pass. Directors still need to act in good faith and in the best interests of the company (including taking into account creditors around insolvency) and exercise reasonable care, diligence and skill.

“This relief should help directors to lead organisations through these challenges – find new ways to do business, innovate and work towards remaining viable.

 IoD says the Government has also announced it will bring in a temporary regime to enable businesses affected by COVID-19 to place existing debts into hibernation (by gaining approval of 50 percent of creditors) until they are able to start trading normally again. 

The Government has also signalled intended relief for other organisations including not-for-profits, for example in relation to current statutory deadlines for AGMs and filing annual returns. There will also be relief around non-compliance with entity constitutions because of the impacts of COVID-19, eg so they can use electronic communications and meetings.

“We are encouraged by the government’s temporary relief package as an aid to enabling businesses to continue operating and bounce back. This should help bolster confidence and provide a level of certainty in relation to directors’ and organisations in these uncertain times,” IoD says.