Proposed Relief from Director Duties - What does this mean for you?

7 April 2020

On 3 April 2020, in response to the evolving COVID-19 situation, the Minister of Finance announced that the Government will be introducing significant changes to the Companies Act 1993 (Act) to help ease the effects being felt by companies and enabling directors to manage their director duties when grappling with the impact of COVID-19.

Current position

All company directors are subject to director duties, as set out in the Act. These include:

  1. To act in good faith and in the best interests of the company (section 131);
  2. To exercise powers for proper purpose (section 133);
  3. To not trade the company recklessly (which means not agreeing to or allowing the company to trade in a manner likely to create substantial risk of serious loss to creditors) (section 135);
  4. To not agree to the company incurring obligations (eg debts and liabilities, trade credit from suppliers, etc) unless reasonable grounds exist that the company will be able to perform the obligation, pay its debts and liabilities (section 136); and
  5. To exercise the care, diligence and skill that a reasonable director would exercise in the circumstances that director is in (section 137).

If a director does not comply with their duties, they risk personal liability.

What are the proposed changes?

A “safe harbour” is created, meaning a director won’t breach director duties 3 and 4 above, if:

  • the company was able to pay its debts as they fell due on 31 December 2019; and
  • the directors of the company consider, acting in good faith, that:
    • the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of COVID-19; and
    • it is more likely than not that the company will be able to pay its debts as they fall due within 18 months.

All other duties above continue to apply.

How does this relate to you?

If the safe harbour applies, the company can take on obligations and continue to trade, without risk of a breach of the duties outlined above. We recommend all assessments regarding the factors above are documented and stored, and updated as things change. All directors of the company need to have agreed on these factors and that agreement should also be recorded

If the safe harbour does not apply, then all of the duties will continue to apply as usual. Directors in this situation should immediately implement a strategy to resolve the issues (ie requesting that shareholders introduce more capital so the company will be able to pay its debts in 18 months’ time) so the safe harbour does apply. If this is not possible, directors should consider winding the company up, or if that is not possible due to shareholders reluctance to take that step, resigning as a director. Note that if the company was insolvent at 31 December 2019, the safe harbour cannot apply, no matter what other measures are implemented now. If the company continues to trade without the safe harbour applying, then directors risk personal liability.

We will keep you updated as to the content once the detail has been released.

Where to go for help?

Each company’s circumstances will be different. If you are concerned about what this relief means for you as a director, we suggest you contact your lawyer, accountant, insolvency practitioner or mentor to discuss ASAP. If you don’t know who to call, please call NWM and we can assist.

Dan Moore is part of our Corporate & Commercial team at Norris Ward McKinnon.

Corporate & Commercial Team