Coronavirus – Companies Act changes

The government has announced today that they will introduce legislation to temporarily change the Companies Act. The key changes will safeguard directors at this time and allow businesses to “hibernate” any debt.

This announcement follows similar moves in Australia and the United Kingdom.

Directors’ responsibilities

Under existing law, director’s may be exposed if they are trading recklessly, particularly with regard the solvency of the company.

Given the shutdown, a large number of firms are likely to become insolvent. This is when a company’s liabilities exceed their assets in the short term and they cannot repay their creditors as debts fall due.

Ministers have announced a new safe harbour provision to protect directors for a period of six months. This will be extremely welcome news to anyone operating a company at this time.

It is our view that without this change, some companies may not have reopened after the shutdown.

Business Debt Hibernation

In addition to the new safe harbour provision, the changes to the Act will allow for firms to rearrange debts with creditors.

A new abbreviation is born – Business Debt Hibernation (BDH).

This mechanism will allow a business to place any existing debts in hibernation for up to six months with the agreement of at least 50% of creditors.

Other Changes

More minor changes will permit the following:

  • the use of electronic signatures where necessary as a result of the restrictions imposed around the COVID-19 lockdown;
  • giving companies some relief around their rules or constitutions at this time; and
  • giving the Registrar of Companies the ability to extend deadlines that would normally be imposed on companies, incorporated societies and charitable trusts.

The Minister of Finance has emphasised that all other parts of the Act will remain unchanged so directors will need to be careful around any breaches of their duty to act in good faith and not dishonestly incur debt.

Our View

No changes have been suggested for sole traders, partnerships or trading trusts. Whilst the Companies Act doesn’t govern these type of entities, it does seem to be quite an omission not to address problems for other types of entities.

For well run companies, this announcement will come as a relief.

We are also weary that some directors may just be “kicking the can down the road” in rescheduling debt. We hate to sound like a broken record, but now more than ever, directors need to know their cashflow and test their assumptions.

Details of the changes are still skant but this news should alleviate some anxiety for many businesspeople at this time.

We are informed that the legislation has yet to be drafted but we’ll update clients as more information comes to hand.

The government intends to ask Parliament to make the legislation retrospective to take effect from today.