The Technical Series: Directors & Officers (D&O) Liability
An introduction to Directors and Officers liability insurance with Carien Ahdar, Marsh NZ.
The government has announced a temporary insolvency package to assist directors and organisations in responding to challenges created by COVID-19. We provide an overview of the relief below.
When a company is insolvent or approaching insolvency, directors need to consider the interests of creditors as part of their duties under the Companies Act 1993. The risk of personal liability for directors is heightened at this time.
Sections 135 and 136 of the Companies Act provide respectively:
A key issue at present is the significant uncertainty with events surrounding COVID-19. To help provide more certainty for directors in complying with their duties, the government has announced that it will introduce a ‘safe harbour’ for directors.
The essence of the safe harbour will be that that directors’ decisions over the next six months to keep on trading (and decisions to take on new obligations) will not result in a breach of the above duties if:
Subject to Parliament’s approval, the safe harbour will be backdated to the date of the government’s announcement (3 April 2020).
Directors will still be expected to exercise reasonable care, diligence and skill and act in good faith and in the best interests of the company (which includes taking into account creditors’ interests around insolvency). See also Directors’ Duties section 4.2 in The Four Pillars of Governance Best Practice
A new temporary regime will be introduced into the Companies Act to enable businesses affected by COVID-19 to place existing debts into hibernation (ie a moratorium on the payment of debts). A key purpose of the regime is to encourage directors to talk with their creditors with a view to concluding an agreement that would enable the business to continue to trade. The regime would also allow for directors to retain control of the company rather than passing control to an insolvency practitioner. The regime is expected to include the following features:
It is proposed that any further payments (or dispositions of property) made by the company to third party creditors would be exempt from the voidable transactions regime, subject to the following conditions:
The regime is expected to be available to all forms of entities (including incorporated societies and partnerships) but not for licensed insurers, registered banks, non-bank deposit takers, and sole traders (which have other options).
Voidable transactions: The period of vulnerability under the voidable transactions regime will be reduced from two years to six months (where the debtor company and the creditor are unrelated parties).
Extending statutory deadlines: Some statutory deadlines (eg for holding AGMs, and filing annual returns) will be relaxed, including for companies, limited partnerships, incorporated societies, charitable trusts and other entities.
Non-compliance with entity constitutions: There will also be temporary relief for entities that are unable to comply with obligations in their constitutions or rules because of the impacts of COVID-19. And entities will be able to use electronic communications (including electronic meetings) even if their constitutions or rules do not cover this.
The government will be providing more details on the above package in the next few weeks and we will keep members updated.
*The threshold for the Business Debt Hibernation regime is yet to be finalised.
See our media release and an article on the relief package by MinterEllisonRuddWatts Government issues relief for directors and companies from insolvency provisions in the Companies Act 1993
Also see an IoD interview with Sean Gollin, partner at MinterEllisonRuddWatts about the Government's insolvency package.