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safe harbour from insolvency duties to expire on 30 September 2020

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MBIE has issued a reminder that the covid-19 safe harbour for directors will expire on 30 September 2020.  If you are a director of a company having financial difficulties, the expiry of the safe harbour is a good time to take stock of the company’s prospects, and your own appetite for risk.

A reminder of what the safe harbour is

As a director of a company that is unable, or at risk of becoming unable, to pay its debts as they fall due, you are faced with two options – investigate insolvency options (liquidation, administration, etc.), or continue trading in the hopes that the company’s prospects continue.  For directors, the choice to continue trading comes with the risk of being found personally liable for the debts incurred while the company was trading while insolvent, if the company ultimately fails.

NZ put safe harbour legislation in place earlier this year, allowing directors a shield against personal liability for those debts in specific circumstances.  The safe harbour applies where the actions or decisions incurring the debt were taken between 3 April 2020 and 30 September 2020.  We’ve discussed that safe harbour in detail in an earlier blog.

That safe harbour is now about to expire.  While there is scope in the legislation for the timeline to be extended beyond 30 September 2020, and/or for another safe harbour period to be put in place, we haven’t seen any sign of that happening yet.

what does the safe harbour expiring mean?

Directors will not be able to use the safe harbour defence against claims that they breached either of the two directors’ duties set out below, in relation to debts incurred on or after 1 October 2020.

  • Directors must not allow the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
  • Directors must not agree to the company incurring an obligation unless, at the time the transaction is entered into, the director believes on reasonable grounds that the company will be able to perform the obligation when required to do so.

If directors are sued, and found to have breached either of those two duties, they can be held personally liable for some or all of the company’s debts.

what next?

If you’re a director, consider your company’s financial position and trading and/or capital raising prospects.  Ask yourself – “is this company viable?”   (A question never far from a director’s mind).  Then ask yourself – “am I comfortable with the risk of being found personally liable for the debts incurred by the Company if it fails?”

If the answer to either of those questions is no, it may be time to consider resigning as a director and/or getting started on a formal insolvency option.

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