Insolvency Relief for Businesses in the Face of COVID-19
The national and international response to the COVID-19 pandemic will affect businesses in New Zealand. How those effects are managed and mitigated may impact on a business’s ability to survive in this developing and changing environment.
The current novel coronavirus pandemic has changed and will continue to change the way that we live our lives. It is impossible to predict how long the changes to travel and social interaction will last. What is clear is that New Zealand is facing a severe economic downturn. The government has announced a relief package, aimed primarily at small businesses. Its moves are admirable. However, they will not be enough to prevent numerous businesses going to the wall.
Many businesses facing pressure will be historically profitable and have sound fundamentals. They are simply in the wrong place at the wrong time. Those in the travel, transport, and entertainment sectors are cases in point. They could very well return to profitability if they can make it through the next few months. Accordingly, they will have a greater chance of survival if creditors can be kept at bay.
The voluntary administration regime was introduced into New Zealand in 2007. The appointment of a voluntary administrator puts a freeze on creditors’ claims. This freeze allows an administrator to put a proposal to creditors, which if approved, would allow the company to trade out. The regime has been criticised, largely as it is dependent on the co-operation of secured creditors, such as banks. They still have a statutory period in which they have the option to appoint a receiver. In the past, a receivership may have been a preferable option for them. However, with a large number of businesses facing problems, a string of receiverships is unlikely to be in anyone’s interests.
Another option is a creditor compromise under the Companies Act 1993. A compromise is essentially the agreement of creditors to a company paying a reduced amount or the full amount of debt over an extended period of time.
Both options require approval by a majority of creditors holding at least 75% of the monetary value of the company’s debt. Hopefully, creditors will be sympathetic to the plight facing many small businesses.
Historically, corporate failures have usually been dealt with final measures such as receivership and liquidation. However, given the peculiar nature of this crisis, an opportunity to trade out could be the lifeline that saves a number of affected businesses and gives them a chance to prosper once we are through this pandemic.
Mark Hopkinson and Mike Roberton, partners in our Corporate and Commercial Law Team, have experience in advising restructuring, refinancing, voluntary administration and creditor’s compromise arrangements. In their experience, early planning to understand what a business’s options are can be critical to the continuation of a business in difficult economic conditions. Mark and Mike would love to talk to you about insolvency relief for your business.