Should directors of companies be protected to enable a company to be able to trade while insolvent during the COVID-19 outbreak?
Section 4 of the Companies Act is clear in that a company unable to pay its debts as they become due in the ordinary course of business; and where the value of their assets is greater than the value of its liabilities, including contingent liabilities, is deemed insolvent.
Currently, a director can be held personally liability for allowing a company to continue to trade whilst it is insolvent. With the country now in Alert Level 4 of our COVID-19 response, for many businesses, the above is inevitable. But, is it fair to hold someone personally liable for a business failure during these uncertain times?
In Australia, the Federal Government has introduced legislation to release company directors from liability if they allow their company to trade insolvent. If the Australian Coronavirus Economic Response Package Omnibus Bill 2020 is passed into law it will provide a temporary safe harbour for directors in the following situations:
- the debt incurred in the ordinary course of the company’s business;
- the debt incurred during the six months starting on the day the legislation commences, or a more extended period as described in regulations; and
- the debt is incurred before any appointment of an administrator or liquidator of the company.
An amendment to the legislation like this here, would protect all directors and in turn businesses in New Zealand, small to large, and allow them to avoid being shut down as a result of COVID-19.