Updates to measures to support business affected by COVID-19
April 5, 2020
While we are still in lockdown under Alert Level 4 the Government made additional announcements on Friday April 3rd that we’re providing information on. The announcements were designed to provide some comfort and assurance, principally to companies facing the on-going uncertainty for the future and for satisfying their current obligations.
The announcement contained three key elements:
- Providing a “safe harbour” for Directors of companies from insolvency provisions in the Companies Act
- Enabling all businesses (not just companies) affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again
- Reiterating the importance of the Business Finance Guarantee Scheme, which can offer loans up to $500,000 over three years.
Some additional detail about these elements is below.
Safe Harbour for Directors
The Companies Act contains provisions among other things requiring Directors "not agreeing to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so (sec 136)"
A director convicted of acting against that manner is liable to imprisonment not exceeding five years or to a fine not exceeding $200,000. In the current situation, especially for those companies that have been forced to close, this has been a significant personal risk to any director. As a result there was a heightened concern that companies would choose to liquidate, with a resultant loss of jobs, rather than trying to ride out the COVID-19 shutdown.
The Government announcement provides a window of six months as a ‘safe harbour’ for directors facing insolvency questions from the impact of COVID-19. This is intended to defer decisions about liquidation, reduce stress and anxiety levels on directors and protect the roles of staff of the company. Legislation will be enacted retroactive to April 3rd. The safe harbour removes their potential personal liability.
The safe harbour is not an unlimited protection. Other provisions in the Companies Act, such as the duty to act in good faith and in the best interest of the company and not engaging in reckless trading will remain in place. Directors must still exercise reasonable care and skill.
For the safe harbour to apply, Directors may need to demonstrate the company was solvent beforehand. Solvency refers to the company able to pay its debts as they become due in the normal course of business and value of the company’s assets is greater than its liabilities, including contingent liabilities.
Feel free to contact us if you have questions about your company’s situation.
Existing Debts in Hibernation
Complementary to the safe harbour for directors is the announcement that a business (not just a company) can defer payment of their existing debt for six months until they are able to start trading normally again. This will require agreement between the business and at least 50% of its creditors. It will require the business to make contact with its creditors for this purpose and to facilitate the hibernation period. It is known as a Business Debt Hibernation (BDH).
In the discussion with creditors, some debts will be prioritised and some debts deferred. Since only being announced yesterday, details as to how to document and communicate the hibernation agreement, what 50% means (i.e. value, number of creditors) effect on creditors who don’t agree and on businesses that fail to reach the 50% threshold are still to be worked through. Updates will be provided to assist in implementing this announcement. In hibernation, businesses will be relieved from making payment while their business recovers and begins trading again.
Business Finance Guarantee Scheme
The announcement reiterated the availability of the scheme. Under the scheme, businesses with annual revenue between $250,000 and $80 million can apply to their banks for loans up to $500,000, for up to 3 years. The Government will guarantee 80% of the risk of the loan leaving banks exposed to only 20% loss in lending. Normal lending processes of the banks apply, such as requiring financial statements, forecasts and other financial and personal information. If you think this may be useful or required and need help applying or compiling information required by your bank, again, contact us
These links to the major banks participating in the scheme, may be useful (valid April 4th):
Recap of previous relief measures
As a summary, the key relief measures announced previously and provided to businesses include
- Wages subsidy (if you haven’t applied or received payment, make contact with us)
- Scope for Inland Revenue to remit penalties and now interest for late payment of taxation amounts owing if caused by COVID-19 effects
- Increasing the provisional tax threshold from $2,500 to $5,000 from 2020/2021
- Increasing the small asset depreciation threshold from $500 to to $5,000 for the 2020/2021 tax year
Some of the measures for individuals and families include
- The mortgage repayment holiday scheme
- A 6-month freeze on residential rent increases and increased protection from having tenancies terminated. This does not apply to commercial tenancies!
- Redundancy support at Work and Income
The Big Four measures for all businesses remain during this time
- Determine eligibility, and apply for and make payments from the wages subsidy scheme
- Contact your bank and determine your lending capacity and access to funding limits (including the Business Finance Guarantee Scheme)
- Review your lease and communicate with your landlord to discuss rent relief options that you both can agree on
- Review your financial position, and ensure you’re fully up to date with your situation, your debt capacity, your plans to continue the business when the restrictions are lifted and your opportunities in the “new normal”
If we haven’t made contact with you already, and you would like to discuss your situation, please don’t hesitate to give us a call or arrange for a video conference.
Contact us today for your no-obligation consultation.