(This is one of a series of blogs on Covid-19. See the others here.)
Many of New Zealand’s startups have an investor director on their boards. As the economic effects of the Covid-19 pandemic play out, investors’ portfolio companies may quickly become financially distressed.
We’ve looked at areas for investor directors to think about in respect of portfolio companies experiencing financial difficulties.
Under the New Zealand Companies Act 1993 (Act) directors must not allow the company to engage in reckless trading or agree to the company incurring an obligation unless they reasonably believe the company will be able to perform it, when required.
On 3 April, the Government announced that they were making changes to legislation to help businesses facing insolvency due to Covid-19. Subject to the proposals being agreed to by Parliament, the announced chances will provide a safe harbour from these above provisions of the Act. Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties if certain circumstances apply. Check out our blog on these safe harbour provisions to learn more.
Investor directors will still need to be mindful of their duties to exercise care, diligence, and skill, and also to act in good faith and in the best interests of company. These duties will continue to apply when the announced changes come into effect.
Where a company is in financial distress, directors should:
If a company projects that it cannot meet payroll, that is likely to be a very good indicator that the company cannot continue to trade. The new safe harbour provisions will of course come into play on any analysis of this.
Directors should keep a paper trail of decisions made, including in all directors’ resolutions and certifications. They should also state clearly any reports, financial statements or projections upon which directors are relying in making these decisions.
This is an issue specific to investor directors. In normal times, the interests of the company and investor are closely aligned. However, during a period of financial distress, this may change with founders and the investor having different views on strategy. The investor director will still need to meet the same obligations as all other directors and can face the same liabilities and possible claims for breaches of the Act. At the same time, they need to balance this with their obligations to their investor.
To help manage the conflict issue and minimise potential investigation of an investor director’s conduct, consider the following:
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