The COVID-19 pandemic has affected many of us and business owners are some of those who are facing a particularly tough and worrying time. However, there is some good news. The Government has announced some changes which seek to ease the burden for business owners during COVID-19.
So here is a rundown of the changes and how they might affect you and your business.
A ‘Safe Harbour’ from Insolvency Duties:
The Government will be introducing legislation that makes changes to the Companies Act 1993 which will help companies facing insolvency due to COVID-19. Directors that are facing insolvency due to COVID-19 have a ‘safe harbour’ from the insolvency duties in the Companies Act 1993. This seeks to ensure that businesses can continue to trade and minimise disruption to the economy.
The directors’ duties under s 135 and 136 of the Companies Act 1993 are summarised below:
A director of a company should not agree or allow the business to be carried out in a manner that will create a substantial risk of serious loss to the company’s creditors; and
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
However, these recent changes mean that a director’s decision to keep trading or take on new obligations, over the next 6 months, will not breach the director’s duties above, if:
In the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months, as a result of the impact of the COVID-19 pandemic on them or their creditors;
The company was able to pay its debts as they fell due on 31 December 2019; and
The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months.
The Minister stated that “these changes will not mean that directors are free to disregard the consequences of their actions for the next six months. Other protections in the Companies Act, such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place."
Business Debt Hibernation (BDH):
The Government will also be creating legislation which introduces the COVID-19 Business Debt Hibernation (“BDH”) regime into the Companies Act 1993. This regime enables businesses effected by COVID-19 to place existing debts into ‘hibernation’ until they are able to start trading normally again.
Key Features of the BDH Regime:
Directors will have to meet a threshold before being able to access the BDH regime and putting a proposal to their creditors.
The creditors will have one month from the date of notification to vote on the proposal.
The proposal will only go ahead with agreement of 50% of a business’s creditors.
There will be a one month ‘freeze’ on the enforcement of debts from the date the proposal is notified, and a further 6 month ‘freeze’ if the proposal is passed.
“Going into a Business Debt Hibernation will give businesses the space to talk to their creditors about prioritising paying some debts, and deferring others for six months,” The Minister said.
The proposal should allow for directors to retain control of their company rather than an insolvency practitioner. Furthermore, it may allow some businesses to trade while in BDH, although this is subject to restrictions made by the creditors when entering into BBH.
Changes to Tax Requirements and Obligations :
The Government has announced changes to the tax requirements and obligations to provide further relief for business owners.
An estimated $3.1 billion tax loss carry-back scheme is to be implemented over the next two years which will allow businesses to access their previous tax payments as cash refunds.
There will also be a change to current tax loss continuity rules to make it easier for businesses to raise new capital without losing the benefit of their existing tax losses. It is estimated that this change will result in $60 million annual savings to businesses each year.
There will now be greater flexibility for affected businesses to meet their tax obligations. This flexibility will include extending deadlines for filing tax returns, paying for provisional and terminal tax, for up to 18 months
The Legislation enacting the changes will be introduced on April 27 2020. However, the good news for business owners is that the changes apply retrospectively following the passing of the bill (which means this all applies now).
Even though this is a stressful time for business owners they can be encouraged that the Government are taking action now. If you want to know more about how these changes might affect you or your business then get in touch with iCLAW.