During COVID-19 crisis, many businesses do not have access to their premises. For some businesses, there is no access only during Alert Level 4, but for others, it could also be during other Alert Levels.
At present time, we get asked daily by the businesses who lease premises, if they must continue paying rent for the time when there is no access. COVID-19 crisis has significantly impacted many businesses’ solvency, and for some, the ability to avoid paying rent until they are able to start trading again is something that could save the business from shutting its doors permanently.
In our earlier article , we analysed how to temporarily stop/reduce payments of rent where the lease is on a standard deed of lease from the Auckland District Law Society. That deed of lease contains express provisions addressing emergencies and the treatment of rent during emergencies. We concluded that it is highly probable that COVID-19 crisis is ‘an emergency’ that the Auckland District Law Society deed of lease would cover.
In cases where a different lease agreement is used and that agreement does not contain similar emergency provisions, there could be a possibility to run an argument that the lease should be terminated as a result of the doctrine of frustration. The doctrine of frustration and its application to lease agreements during COVID-19 crisis is the topic of this article.
We note that both solutions analysed in our earlier and this articles, would be relevant where there is no collaboration between the tenant and the landlord. We highly recommend that the tenants and landlords work together during this period to ensure both parties come out commercially viable. This could be in a way of the landlord providing a temporary discount to rent payments. The reality for most landlords is that they are likely to experience difficulty in finding replacement tenants for some time.
Doctrine of frustration The doctrine of frustration of contract allows parties to be relieved from their legal obligations where contracts have become impossible to perform. Frustration occurs where neither party has been the ‘defaulting party’ regarding their contractual obligations, but it has become incapable of performing the contract due to circumstances that are outside of the parties’ control.
In National Carriers Ltd v Panalpina (Northern) Ltd, Lord Simon explained the doctrine in the following manner:
Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.
The threshold to satisfy that the contract has been frustrated is high and the doctrine would not generally be applicable where the compliance with the contract is temporarily delayed, or the contract has become more expensive.
National Carriers Ltd v Panalpina (Northern) Ltd  AC 675.
In Planet Kids v Auckland Council, the Supreme Court of New Zealand has confirmed that the doctrine of frustration could apply to leases.
Examples of frustrating events could include an unavailability of a thing (e.g. if the premises which were leased have been burnt), unavailability of a person (e.g. if the person who was supposed to provide services have become unwell or passed away), or supervening illegality (e.g. performing the contract have become illegal through legislation or Government’s intervention, either permanently or for a prolonged period).
Application to COVID-19 crisis Whether the doctrine would be available to specific businesses during COVID-19 crisis will depend on various factors.
In Planet Kids v Auckland Council, relying on an earlier English authority, the New Zealand Supreme Court set out the following factors that would need to be considered in deciding whether a contract is frustrated:
The terms of the contract;
Its matrix or context;
The parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at least to the extent that these can be ascribed mutually and objectively;
The nature of the supervening event; and
The parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.
In the context of COVID-19, the relevant factors to consider are the length of the lease (e.g. a 10 years lease or a 6 months lease), the stage of the lease at the time of COVID-19 (e.g. initial or final stages), the nature of the business and its ability to operate from the premises during various Alert Levels, and any express indications within the lease agreement as to the availability of frustration.
For instance, if the lease is of a short term, and the business is not able to operate during some or all Alert Levels, there is a higher chance that the doctrine of frustration would apply. However, if the lease is for a period of 10 years and/or it was agreed within the lease agreement that no event could render the lease frustrated, it is very unlikely that the doctrine would be applicable.
Unlike the provisions of the Auckland District Law Society deed of lease, which might allow reduction to/stopping payments of rent on a temporary basis, in the event of a frustrated lease, the remedy is the termination of the lease. For this reason, before raising the doctrine of frustration, the tenants should carefully consider how losing the lease would impact their business after they are able to start operating their business again. The tenants would need to balance the long-term implications of the lost lease, against the immediate liquidity issues.
Conclusion The doctrine of frustration is a complex principle that should be relied upon carefully. If the tenant incorrectly relies on the doctrine, the tenant might be repudiating the lease and could become liable for the landlord’s losses.
Planet Kids v Auckland Council  NZSC 147.
If you need help with assessing whether your lease is suitable for termination in light of COVID-19 crisis, or if you need assistance to carry negotiations with the landlord, feel free to contact one of our experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.
On 3 April 2020, Finance Minister Grant Robertson announced further relief for businesses impacted by COVID-19 crisis.
The Government will be introducing legislation to make several temporary changes to the Companies Act 1993 (“the Act”) with the aim of helping companies running and keeping staff in jobs. The proposed changes are intended to help New Zealand economy to recover as quickly as possible from the current crisis and are expected to last for a period of six months.
Grant Robertson confirmed that the proposed legislative changes will be drafted as soon as possible, and the Government will be asking Parliament to make some of these changes retrospective from the date of the announcement.
Some of the changes that the Government intends to implement are summarised below.
To become law, the proposed changes will need to be agreed to by Parliament, and modifications could be carried out prior to them being passed into law. Accordingly, this is an interim update.
Changes in Director’s duties The Act is proposed to be modified to provide directors of companies which face insolvency issues because of COVID-19 a ‘safe harbour’ from various obligations under the Act. This is quite similar to the position adopted by Australia and it appears our government is following in their lead.
Currently, a director of a company could be breaching various obligations contained under the Act, including an obligation not to allow the company to trade recklessly (s 135 of the Act), by allowing a company facing cash flow issues to continue trading. Breach of such obligations could make the director personally liable for the amount equal to some or all of the debts of the company.
If agreed to by Parliament, over the next six months, directors’ decision to continue trading will not result in a breach of duties under the Act 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 crisis 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 (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).
The ‘safe harbour’ is intended to allow the directors of companies to keep the companies trading, rather than prematurely closing up, which could subsequently allow the companies to return to viability once the COVID-19 crisis has eased.
Grant Robertson has emphasised that the proposed changes do not mean that the directors could disregard the consequences of their actions completely. Grant Robertson said:
Other protections in the [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.
Cases of dishonestly and/or ill conduct will still be subject to civil and, in more serious cases, criminal penalties.
Ability for Business Debt Hibernation Changes will also be made to enable businesses affected by COVID-19 to put existing debts into hibernation.
This will be known as a Business Debt Hibernation regime and would happen in circumstances where there is an agreement of 50% of creditors (in number and value) of the business. The creditors will have one month from the date when the proposal is put to them to vote on it, and in the event it is passed, the proposal would bind all creditors (other than employees) and would be subject to any conditions agreed with creditors.
There will be a one-month moratorium on enforcement of debts from the date when the proposal is put to creditors, and a further six months if the proposal is passed.
Grant Robertson said:
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.
It will also be proposed that any further payments made by the business to third party creditors would be exempt from the voidable transaction regime (apart from related parties’ creditors). This is to encourage other business owners to transact with the business that is under the Business Debt Hibernation regime without being concerned that payments received by them could later be clawed back by the liquidator in the event the company still ends up being placed into liquidation.
The Business Debt Hibernation regime is intended to enable companies, which otherwise could face liquidation as a result of unpaid debts, to survive.
This could be a great way for businesses to kick the can down the road if they are facing insolvency and to give a fighting chance at survival.
Proposed Extension for Compliance with Deadlines A temporary relief will be granted to companies, limited partnerships, incorporated societies and other entities which are unable to comply with various deadline requirements under their constitutions or rules because of COVID-19.
Creation of Additional Powers to the Registrar of Companies Powers will be provided to the Registrar of Companies to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation.
It has been indicated that the Registrar will use its powers to relax the statutory deadlines in some of corporate governance legislation, for example relaxing the statutory deadlines for holding of AGMs, filing annual returns and etc, and also relax deadlines for the Registrar office itself to carry out their functions, such as processing applications.
Deferment of Insolvency Practitioner Regulation This is unusual. For years, the governments have been working on a regime to regulate insolvency practitioners. It is much needed. It was due to be implemented in June 2020.
The government now proposes to defer the regime for up to 12 months.
More Use of Electronic signatures Changes will be carried to allow the use of electronic signatures where necessary due to COVID-19 restrictions.
Conclusion It will be interesting to see the exact shape that the proposed changes to the Act will take.
If you have questions about the upcoming changes, or how they would impact your business, feel free to contact one of our experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.
The COVID 19 pandemic brings uncertainty not just to the public, but especially to business owners.
As at the date of writing this article, the government issued a level 3 alert, rising to level 4. We are about to be isolated and offices and other commercial buildings left inaccessible.
For business owners, this means among other things that all non-essential businesses must close. During this time, businesses will not have access to the premises. However, does this mean that it must pay for the time where there is no access?
If the lease is on the standard deed of lease from the Auckland District Law Society, then there may be reprieve.
Clause 27.5 provides that:
If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent or overcome any hazard, harm or loss that may be associated with the emergency including:
(c) Restriction on occupation of the premises by any competent authority.
Then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.
Clause 47.1(d) defines an “emergency” to mean a situation that:
(a) Is a result of any event, whether natural or otherwise, including an … epidemic; and (b) Causes or may cause loss of life or serious injury, illness or in any way seriously endangers the safety of the public or property; and (c) The event is not caused by any act or omission of the landlord or tenant.
In the present circumstances, it is highly arguable that there is an emergency as there is an epidemic. This is supported by the fact that an epidemic notice was issued under section 5 of the Epidemic Preparedness Act 2006. Further, the epidemic may cause loss of life and the event is not caused by any act or omission of the landlord or tenant.
Assuming that there is an emergency and the tenant is unable to gain access to the premises to fully conduct its business, then clause 27.5 states that the tenant would not be liable for a proportion of rent and outgoings from when the tenant became unable to gain access until that inability ceases.
Clause 27.6 provides a further option by giving either party the choice of terminating the lease by giving 10 working days written notice to the other if:
The tenant is unable to gain access to the premises for the period specified in the schedule; or
The party that terminates the lease can at any time prior to termination establish with reasonable certainty that the tenant is unable to gain access to the premises for that period.
Accordingly, depending on the period contained in the schedules, the tenant might also be able to terminate the lease.
What does this mean to tenants and landlords? It appears that the purpose of clauses 27.5 and 27.6 is to shift the burden of the cost of emergencies to the landlord. It is important to note that the operation of clause 27.5 does not require notice from the tenant. It means that clause 27.5 operates automatically and it would be highly arguable for tenants to rely on this clause for proportional rent and outgoings.
For landlords, this means that you need to anticipate for this potential outcome and make provision for less rental income.
We highly recommend that tenants and landlords work collaboratively during this period to ensure they both come out of stage 4 lockdown commercially viable. In many cases, the commercial relationship can continue once the dust settles as the reality for most landlords is they are likely to experience difficulty in finding replacement tenants during this time.
For more information, feel free to contact the legal experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.
Covid-19 and the Obligations and Options for Business Owners
For more information, feel free to contact the legal experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.
Generally, bankruptcy lasts for a period of three years. During this time, a bankrupt is subject to onerous conditions imposed by the Insolvency Act 2006. These conditions include, but are not limited to:
The bankrupt’s property vesting in the Official Assignee;
The continued monitoring of the bankrupt’s financial affairs;
Prohibition from being involved in the management of a company or being self-employed without the consent of the Official Assignee; and
Prohibition from travelling overseas without the consent of the Official Assignee.
The Courts have frequently acknowledged that the three-year term allows the Official Assignee to properly administer the estate of the bankrupt and it also allows for the protection of the community from the bankrupt.
Parliament, however, has also recognised that a bankruptcy term of three years may in certain instances not be necessary and there is a provision in the Insolvency Act 2006 which allows a bankrupt to end their bankruptcy earlier.
There is also a provision under the Insolvency Act 2006 which allows the bankrupt to annul their bankruptcy in limited circumstances.
Under s 294 of the Insolvency Act 2006, a bankrupt may apply for early discharge at any time. In making the application, a bankrupt should carefully consider the timing of the application. This is because if the bankrupt is unsuccessful, the Court will usually specify the earliest date the bankrupt may apply again, and the bankrupt may not be able to apply for a considerable period.
The Court, in making an order for early discharge, may immediately discharge the bankrupt or may discharge the bankrupt with conditions such as the order to pay a sum of money or report to a financial advisor.
Parliament has given the Court a broad discretion to discharge the bankrupt and the Courts have been careful to ensure that the discretion remains unfettered. Each application will be determined on the facts of each case.
Despite the broad discretion, a bankrupt will usually need to show some form of special circumstances which justify early discharge. This is because there is a public interest in a bankruptcy lasting three years.
For instance, in Re Kaye HC Auckland B2182/93, 9 May 1997, the court allowed an application for early discharge when the bankrupt was unable to find meaningful work without being discharged and there was no advantage to the bankrupt’s only creditor serving the full three-year term.
It is important that a bankrupt who wishes to apply for early discharge ensures that they are compliant with their obligations and prohibitions under the Insolvency Act 2006.
The Courts have been clear that punishment of a bankrupt is not a consideration for early discharge, rather, the Courts tend to look at whether the bankrupt poses a further risk to the commercial community.
Section 309 of the Insolvency Act 2006 allows a bankrupt to apply for annulment of their bankruptcy under three grounds:
The court considers that the bankrupt should not have been adjudicated in the first place;
The court is satisfied that the bankrupt’s debts have been fully paid or settled;
The court considers that the bankrupt’s debts should be revived because of a change in financial circumstances; or
The court has approved a composition with creditors.
The court considers that the bankrupt should not have been adjudicated
An application under this ground usually relates to some form of defect in procedure, abuse of process or where a material fact was not drawn to the Court’s attention at the adjudication hearing due to human error. The essence of any application for discharge under this ground is that the bankrupt, because of a defect in procedure or abuse of process, should not have been adjudicated in the first instance.
The threshold for annulment under this provision is high and the Courts will not entertain an effective rehearing of a bankruptcy proceeding.
In Re Willis, ex parte Willis  NZHC 2586, an interesting argument was raised regarding abuse of process. In that case, a wife was bankrupted by her husband for $12,000. At the time of the bankruptcy proceeding, the wife and husband were involved in an acrimonious relationship property dispute where the wife was due to receive $600,000 from her husband. The Court considered that the bankruptcy was couched in the context of the relationship property dispute. Associate Judge Sargisson held that the husband’s successful application to bankrupt his wife amounted to an abuse of bankruptcy proceedings and allowed the wife’s application for annulment.
A bankruptcy application that was not served validly will also render the proceedings a nullity.
In Fredrickson Centurion Finance Ltd HC, Auckland B 259-01, 11 February 2005, a debtor who arrived late at Court and was adjudicated bankrupt in his absence had the adjudication annulled.
A successful application under this ground has the effect of annulling a bankruptcy from the date of adjudication. This means that the bankrupt is never considered to have been bankrupt. In relation to the other grounds, the bankruptcy is annulled from the date of the court order.
The court is satisfied that the bankrupt’s debts have been fully paid or satisfied
In order for an application to be successful, the bankrupt will need to have paid or satisfied all of their debts. The ground does not necessarily require that all debts be paid in full, rather, that the debts are satisfied. This provision allows the bankrupt to negotiate settlement of their debt with individual creditors.
The Courts have taken a broad approach in relation to the definition of debts and the definition extends to all known debts of the bankrupt and not simply the debts of creditors who have lodged a claim in the bankrupt’s estate. It is important that the bankrupt is able to provide sufficient evidence to the Court which shows that all known debts have been paid in full or satisfied.
The bankrupt will also need to show that the Official Assignee’s fees in relation to the administration of their bankruptcy have been paid.
The court considers that the liability of the bankrupt should be revived
This ground is related to the one above, however, it does not require the payment of debts prior to the application for annulment. Rather, it simply requires a change in a bankrupt’s finances which allows the creditors to be paid (e.g. inheritance, gift and etc.).
It is important that, when an application is made under this ground, that the bankrupt can provide cogent evidence that the bankrupt has the ability to repay their debts.
Similarities and Differences
Applications for annulment and early discharge are similar proceedings in that they generally release an individual from obligations under the Insolvency Act 1993. However, the two different processes import fundamentally different consequences for an individual. These consequences can be summarised below.
If application is made under the first ground, the individual is considered never to have been adjudicated bankrupt.
All property that vested in the Official Assignee at the time of adjudication re-vests in the individual.
The individual is not released from their debts.
The individual is still considered to have been bankrupt. The procedure simply ended prior to the general three-year term.
All property that vested in the Official Assignee at the time of adjudication does not re-vest in the individual.
The individual is released from their debts prior to adjudication (subject to limited exceptions).
A bankrupt who wishes to end their bankruptcy should carefully consider the best way to terminate their bankruptcy. Our professionals will be able to assist with choosing the right option and also making an application to Court (if necessary).
If you have ever ‘stood-by’ a customer who is going through a rough patch by continuing to supply goods/services on credit and holding off on receiving payment, some of us will know there can be a happy ending to this story. With your goodwill and support your customer might manage to trade out of its difficulties, your relationship is stronger than ever and most importantly – you can be repaid in full.
Unfortunately, for some business owners, the story does not always end so happily when the liquidator comes knocking unexpectedly.
If the customer is later placed in liquidation, the liquidator may require the creditor to repay all or some of the payments (or other monetary or non-monetary benefits) received by the creditor from the liquidated company. This is known as the liquidator’s power to ‘clawback’ preferential transactions and is provided for under s 292 of the Companies Act 1993.
Sounds pretty unfair, right?
Voidable transactions (or liquidator’s ‘clawback’) regime is one of the most controversial features of insolvency law in New Zealand. It is designed to protect creditors against the tendency of the directors of troubled companies to pay themselves and their favorite or aggressive creditors before anyone else.
Because directors facing troubled waters typically pay the creditors they have a bias towards. Those creditors are usually the ones who hold personal guarantees. The director has a personal incentive to pay those creditors first. It may be friends or family.
Theory behind the regime
According to the pari passu principle, each and every creditor of the company should share equally and proportionately in the fruits of the liquidation.
The principle recognises that it is unfair to other creditors if an individual creditor can jump the queue and be paid prior to the liquidation because it is favored by the director of the company or because it is being more aggressive than others in its demands.
If payment has been made and the queue is jumped, the law works to make these payments voidable and provides the liquidator with powers to recover these payments for the common pool of creditors in the liquidation.
Operation of the regime in New Zealand
Pursuant to s 292 of the Companies Act 1993, the payments (or other monetary or non-monetary benefit) that the creditor received from the liquidated company may be considered voidable if the following criteria is satisfied:
At the time of payment, the liquidated company was unable to pay its due debts;
The liquidated company was later put into liquidation (either voluntarily or involuntarily);
The payment was within the period of 2 years before the liquidated company was put into liquidation; and
The effect of receiving the payment enabled the creditor to receive more than what they would have otherwise received had they waited for the liquidation to run its course.
Unfortunately, no matter how well intentioned the creditor was, at the time of accepting payment, the law in this area is only concerned with the “effect” of the transaction – if the liquidated company’s payment had the effect of favouring the creditor above other creditors, that payment is at risk of being clawed back.
This comes as a shock to most clients who come to see us after receiving a letter of demand from a liquidator requiring them to repay their hard-earned cash received up to 2 years prior to liquidation.
If a liquidator believes the above criteria is met, the creditor will be served with a voidable transaction notice attempting to void the payments (“VT Notice”). If no response is made to formally object to the VT Notice in compliance with the Companies Act 1993 within the strict time limit of 20 working days, the transaction is automatically set aside.
If an objection to the VT Notice is made, the liquidator could still seek to void the transaction by making an application to Court under s 295 of the Companies Act 1993. However, since this option is considerably costlier, it is not always pursued by liquidators (e.g. where there is limited funding and/or questionable prospects of recovery). Most liquidators will determine whether they will commence proceedings, settle, or abandon the claim based on the objection they receive to the VT Notice.
On that basis, a full and robust objection usually has a positive impact on the outcome for creditors.
In our experience, when business owners are faced with this situation, there are 3 mistakes they make. In particular:
They offer too much information to the liquidator when the liquidator investigates the transaction without obtaining any advice from an expert. Often, the liquidator’s enquiries are masked with a ‘friendly’ invitation to assist with the course of the liquidation, and the business owners volunteer information that is favorable to the voidable transaction claim;
They settle the claim without obtaining expert advice on potential defences and whether all criteria of the voidable transaction claim is satisfied under the Companies Act 1993.
They do not appreciate the importance of responding promptly to the VT Notice (liability for the full amount is automatic if no response is received on time, irrespective of the availability of defences).
Liquidators are often aware of these mistakes. Unfortunately, some liquidators might even abuse the process and issue VT Notices like confetti (as in the case of s 261 notices, please see here) in full knowledge that if no response is received in time, then the business owner is liable for the full amount.
There are several defences to the voidable transaction claim.
For example, the creditor will have a full defence to a claim if, at the time the liquidated company paid the creditor, the following criteria was met:
The creditor acted in good faith (e.g. honestly);
A reasonable person in the creditors shoes would not have suspected, and the creditor did not have reasonable grounds to suspect, that the liquidated company was, or would become insolvent; and
The creditor gave value for the payment or altered their position in the reasonably held belief that the payment was valid and would not be set aside.
In most cases, creditors will generally be able to satisfy criteria (1) and (3) above. The defence usually turns to whether (2) can be satisfied. The law in this area is not well settled and to run a successful defence requires careful consideration of the facts on a case by case basis.
Another commonly raised defence is the exception of the ‘running account’. This exception to the voidable transaction regime might apply where the parties to a transaction were in a continuing business relationship. In such circumstances, the Companies Act 1993 directs to view all of the transactions that are part of that relationship as a single transaction. In these circumstances, the ‘preferential’ effect of the transactions can be reduced or illuminated in full.
Creditors ought to deal with liquidators carefully. They ought not give information that liquidator seek without first considering whether the information is helpful and or harmful and to consider whether the liquidator is actually entitled to the information.
A creditor needs to act quickly if they receive a VT Notice so that transactions are not automatically set aside.
Our lawyers at Norling Law are experts in this field and routinely act for both business owners and liquidators. If you are the recipient of a VT Notice, our experts can help you to craft a carefully structured objection, and/or negotiate with the liquidator to achieve the best possible outcome for you.
Alternatively, if you intend to receive payment from an ‘at risk’ customer, we can help you to re-structure the transaction to minimise the risk of a future clawback.
Because there are ways to minimise the risk of a liquidator pursuing the transaction as a voidable transaction at a later date.