Creditworthiness Health Check: Time to Take an Annual Review and Plan for the Future
As 2021 draws to a close and businesses begin to think about what operations will look like in the new year, it will be necessary to reflect on the impact of Covid-19 and prepare for life in the Covid protection framework (CPF). At this time of year, it’s common for employees to go through an annual performance review. Directors should consider doing the same with respect to the solvency and financial health of their business.
While 2020 saw a brief economic decline after periods of Alert Levels 4 and 3, a strong economic recovery followed. No one needs to remember the much longer periods Auckland (in particular) and the Waikato went into lockdown in 2021. Given the hardships endured during the extended periods of lockdown and a new operating environment under the CPF, the recovery is likely to look different.
As the Reserve Bank reported, the national economy is experiencing ongoing supply shortages, rising transportation costs, labor shortages and we would expect inflation to rise to about 4% in the short term.
Directors have a number of challenges ahead in the short to medium to long term as the economy begins to open up. In this article, we answer the need for:
- Immediate planning, in particular around the response to Covid-19, and vaccination policies;
- Short-term planning, especially around operations within the framework of the CPF; and
- Medium- and long-term planning, in particular the sustainability of businesses, and measures to be taken to face the significant difficulties encountered by many businesses.
Immediate priorities: Covid-19 response plan and vaccination policy
One of the most difficult issues facing administrators is managing the risk of infection and transmission of Covid-19 in the workplace. Perhaps the most controversial part of managing this risk is the Covid-19 vaccination policies and their legality. Immunization policies are at the intersection of four complex legal issues: health and safety, human rights, privacy and labor law.
Although this is a complex and relatively new area of law, it is important for all businesses, regardless of their size or their interactions with clients, to first consider whether the current Ordinance on public health responses (vaccinations) Covid-19 applies to any of its work, and whether a vaccination policy is required. A policy should address:
- The company’s assessment of the risk of infection and transmission of Covid-19, and the means proposed to eliminate or minimize this risk (note that companies must collaborate with workers to carry out this risk assessment and propose means to control the risk);
- Any vaccination requirements for staff; and
- Immunization requirements for customers and other third parties (such as contractors) visiting business premises.
Minister Hipkins has indicated that an amendment to the COVID-19 Public Health Response Act of 2020 will be presented to Parliament by the end of November. This amendment will cover the legality of vaccination certificates for some companies and provide more security for other companies seeking to impose a vaccination policy. Although no company can require that a person be vaccinated, after a risk assessment, they may be able to require that certain work be performed by people who have been vaccinated.
The November amendment to the COVID-19 Public Health Response Law is likely to provide significant clarity for companies considering implementing an immunization policy, including a framework for risk assessments and engagement with workers. In preparation for this amendment, directors should start considering a business risk assessment now. According to the indications of the government, the risk assessments carried out before the modification of the legislation will still be valid and enforceable.
For anyone seeking advice on these complex issues, please contact our Employment team.
Short-term priorities: Planning for the CPF
Government support programs have been effective in cushioning the immediate effects of Covid-19 restrictions, however, as these restrictions are relaxed and government support dries up, some companies may come under significant pressure.
For many directors, the first approach after the Covid-19 restrictions were put in place was a survival approach. This consisted of a variety of factors including wage subsidy, resurgence assistance payments, short-term absence payments, vacation assistance program, loan programs, financial guarantees, debt hibernation, rent relief (in a “fair proportion”) and cash drawdowns. reservations.
As we move into the CPF, it is unlikely that a “survival” strategy will be achievable. There are three main reasons for this:
- Government support: As immunization rates increase and we enter CPF, government support will be less. Before Covid-19, public debt stood at around $ 60 billion. Debt now stands at over $ 100 billion. The Treasury warned that this was an unsustainable trajectory.
- Interest rates: While interest rates have reached an all time high, increases are already being observed and further increases are expected in the short to medium term. In October 2021, due to inflationary pressures, the Reserve Bank increased the official treasury rate (OCR) for the first time in 7 years. Economists expect OCR to gradually increase to around 2%. The resulting rise in interest rates will be a concern for companies that have borrowed heavily.
- Inflationary pressures: As noted above, inflation is expected to rise above 4% in the near term. Supply shortages (especially building materials), rising transportation costs, and labor shortages have all led to a sharp surge in inflation.
It is important that administrators develop a ‘post’ Covid-19 plan and consider how the business will operate in the CPF. One of the critical considerations is whether the CPF imposes a requirement for a vaccination certificate on the company. If this is the case and administrators choose not to use vaccination certificates, the CPF is likely to impose significant constraints on the company. Minister Robertson stressed that when this is the case it is unlikely all type of support will be made available.
To help Auckland businesses make the transition to CPF, the government is offering an advisory support program. Auckland businesses will be able to request up to $ 3,000 in advice and planning assistance, and an additional $ 4,000 to implement that advice through the Regional Business Partner Program.
Directors should determine if their business qualifies for advisory support as they develop their plan.
Medium and long term priorities
Before New Zealand enters the CPF, now is the time for directors to reassess their existing and planned solvency levels. If this forecast is cause for concern, action should be taken to address the issues. It is important that directors take these steps now to ensure that they continue to meet their obligations.
Due to the effects of Covid-19, the 1993 Companies Act was amended to provide directors with a safe harbor with respect to certain obligations. When the company experienced liquidity problems due to Covid-19, the director would not default on his obligations by continuing to operate if the company was able to pay its debts by September 30, 2021. The sphere period security has now expired. Directors who continue to trade and contract in bonds must do so with the ability to pay their debts as they fall due.
As the recent Mainzeal In this case, directors have strict obligations with which they must comply. Directors should carefully consider the obligations entered into by the company and determine whether continued trading may result in liability for reckless trading. It is important that the directors do not allow or accept that the company continues to operate when there is a significant risk of serious loss to creditors.
Business leaders who have been significantly affected by Covid-19 may find themselves in a worrying situation with regard to their solvency. It is important to recognize this and seek advice, as there are a variety of options. There may be the option of raising capital, negotiating with creditors, or using other restructuring tools such as debt cancellation or conversion to equity.
Directors must determine which third parties they report to and whether the terms of the contract adequately protect a business in the event of a third party insolvency. In doing so, they must consider what their alternative options are in the event of default by one of these third parties and whether they may find themselves exposed as unsecured creditors.
As New Zealand prepares to live with Covid-19, now is the time for administrators to assess their obligations and plans.