On 23 March 2020 the Institute of Directors (IoD) wrote to the Prime Minister and Minister of Commerce urging the government, as part of its support package, to provide emergency interim relief for directors and other governors from personal liability for trading while insolvent.
The economic shock from COVID-19 is likely to mean many businesses will be facing liquidation, without intervention. The IoD acknowledges the government’s initial response to support organisations in responding to COVID-19.
These are extraordinary times that call for extraordinary measures. Regulatory relief is needed to manage through the short term, including for directors facing increased personal liability risks.
The IoD has urged the government to provide interim relief (eg, for six months) from personal liability under the Companies Act 1993, where an organisation is trading while insolvent due to the impact of COVID-19.
This suggested interim relief from director personal liability would be similar to that announced in Australia on 22 March 2020, and subject to reasonable limitations, for example, organisations ought not to be inappropriately using creditors’ funds.
The IoD is now working with officials on potential relief for directors. This is vitally important for all businesses, especially small to medium enterprises.
Businesses and companies are closing and it is not certain they will re-open. Many people are losing their jobs and incomes and facing uncertain futures.
A temporary safety net will help directors and companies manage the impacts of COVID-19 on their businesses.
The risk that directors will feel compelled to place a business into administration, let employees go and close down because of their own duties and personal liabilities under the Act, is a real likelihood.
Stopping trade too early will impact staff and their families, other key stakeholders and communities. It can damage unnecessarily organisational value and exacerbates risks for communities and shareholders, when potentially directors might see a way forward through this crisis.
Now, more than ever, New Zealand needs to empower directors to govern organisations to ultimately benefit New Zealand’s wellbeing and prosperity.
We will keep you updated on any developments.