New Zealand company directors operate in an increasingly challenging environment. Economic uncertainty, rising costs and changing market conditions can place pressure on even well-managed businesses. Directors must consider cash flow, supplier terms and workforce resilience when planning for the medium term. This backdrop tests governance and strategic judgment across sectors.
Against this backdrop, Prime Minister Christopher Luxon signaled support for introducing a form of Safe Harbor protection for company directors. He argued that the current laws may be too restrictive and may not allow directors to make appropriate strategic decisions.
What Is Director Safe Harbor?
In simple terms, safe harbor laws are designed to protect directors from certain personal liability risks while they attempt to rescue a financially distressed company.
Without safe harbor protection, directors may fear that continuing to trade whilst a company experiences financial difficulty could later expose them to personal claims if the business ultimately fails. As a result, directors may feel pressured to place a company into liquidation or administration earlier than necessary.
Safe harbor laws seek to address this problem by allowing directors to pursue genuine restructuring or turnaround strategies without automatically incurring personal liability.
Why Is Safe Harbor Being Discussed in New Zealand?
The debate has intensified following several high-profile cases concerning directors’ duties, particularly the Mainzeal litigation and broader concerns about the operation of sections 135 and 136 of the Companies Act 1993.
The New Zealand Law Commission is currently conducting a comprehensive review of directors’ duties. One of the issues being considered is whether New Zealand should adopt legislation similar to Australia’s safe harbor regime.
How Australia’s Safe Harbor Works
Australia introduced its safe harbor regime in 2017.
Under Australian law, directors may obtain protection from insolvent trading liability if they begin developing and implementing a course of action that is reasonably likely to produce a better outcome for the company than immediate formal insolvency.
The legislation encourages directors to:
- Assess the company’s financial position properly.
- Seek professional restructuring advice.
- Maintain appropriate financial records.
- Develop and implement a genuine turnaround plan.
- Act early when signs of financial distress emerge.
The protection is not automatic. Directors must actively pursue a credible strategy to improve the company’s position within a “reasonable period” and comply with a number of statutory requirements. Simply hoping that circumstances improve is insufficient.
How New Zealand Currently Differs
Unlike Australia, New Zealand does not currently have a statutory Safe Harbor regime for these types of issues.
New Zealand directors remain subject to the general duties contained in the Companies Act.
These include obligations not to engage in reckless trading and not to incur obligations the company cannot reasonably perform. Furthermore, New Zealand did introduce temporary Safe Harbor measures during the COVID-19 pandemic.
These provisions gave directors limited protection where financial difficulties arose as a result of the pandemic and conditions were satisfied.
However, those measures were temporary and have since expired.
Consequently, New Zealand directors currently have less statutory protection than their Australian counterparts when attempting to rescue a distressed business.
Potential Benefits of a New Zealand Safe Harbor Regime
For business owners, investors and directors, the potential advantages are relatively easy to
understand.
- Encouraging Earlier Action: Directors may be more willing to confront financial problems early if they know they have some protection whilst implementing a
genuine and well considered restructuring plan within a reasonable time period. - Better Outcomes for Creditors: A successful turnaround can often produce a better return for creditors than an immediate liquidation or other statutory insolvency process.
- Preserving Businesses and Jobs: Viable businesses sometimes experience temporary financial distress. Safe harbor laws can provide breathing space for
- restructuring efforts that preserve employment and enterprise value.
- Promoting a Rescue Culture: Many commentators argue that insolvency laws should encourage business rescue rather than premature liquidation. Australia’s reforms were designed with this objective in mind.
Potential Risks and Criticisms
Despite the attractions of reform, safe harbor legislation is not without critics. Some creditor groups may argue that greater director protection could delay inevitable business failures and increase losses to suppliers, lenders, and other stakeholders. Others may question how broadly protection should extend and what safeguards should be imposed to prevent abuse.
The challenge for lawmakers is finding the right balance between encouraging legitimate restructuring efforts and protecting creditors from irresponsible conduct. This balance is likely to be a central issue if New Zealand proceeds with reform.
What Should Directors Be Doing Now?
Until any legislative changes occur, New Zealand directors should continue to focus on fundamental governance principles:
- Monitor the company’s financial position carefully.
- Maintain accurate financial records.
- Seek legal and accounting advice early when financial difficulties emerge.
- Document board decisions appropriately.
- Ensure decisions are made in the company’s best interests and with proper regard to creditors where financial distress exists.
These practices are prudent regardless of whether safe harbor legislation is ultimately introduced.
Looking Ahead
New Zealand appears to be at an important crossroads in the evolution of directors’ duties in
relation to insolvency issues. The Law Commission’s review, coupled with political discussion
around safe harbor reform, suggests that change may be on the horizon.
For directors and business owners, the key takeaway is straightforward: Australia has
demonstrated that a properly designed safe harbor regime can provide directors with greater
confidence to pursue business rescue strategies.
Whether New Zealand adopts a similar model remains uncertain, but the issue now appears
to be moving from academic debate into mainstream policy discussion.
Sean Lynch
Barrister & Solicitor, Director
Lynch & Co, Corporate & Commercial Law
If you require any commercial legal assistance, please contact Sean Lynch at sean@lynchandco.co.nz, or ph 09 948 8433.
The above article is not intended as legal advice because each set of circumstances will differ. Specific legal advice is required for each particular case.
