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Potential Traps For Businesses In Government Bailout?

I want to start with applause for the Government’s wage subsidy; it’s a great lifeline for business and employees, 580,000 of them at last count. But a package designed to ease anxiety itself contains anxieties. The provisions need clarity. There is devil in the detail for bigger businesses right down to the SMEs.

In order to qualify for the subsidy, employers or directors must sign a statutory declaration. If you make mistakes you are liable for imprisonment under the Crimes Act, and civil servants will already be marking cards here.

What concerns me is the changing language. At first there was talk about businesses needing to “try their hardest” to pass on the money to employees. Then came the phrase “best efforts”, and now “best endeavours”. Best endeavours are two words not used lightly in law. Best endeavours are a legal standard that can be tested in court, not just vernacular.

It may well be that you need the money - in part - to have your business continue. You are expected, for example, to draw on cash reserves, talk to your bank, chat with your insurance company and take active steps to mitigate the effects of Covid-19 in the workplace.

Does drawing on cash reserves include undrawn credit facilities? It could. You may have $10 million dollars you could draw, but as an importer, for instance, $8m of that will be needed to pay for the first cargoes that resume delivery once trading recommences. It may seem obvious you don’t want to draw down on that, but it’s available money; it’s not like cash in hand, but are you obliged to draw it? Again, how much of your cash in hand do you want to be forking out, if down the track it will cripple your business recovery?

I don’t think it can reasonably be expected (or interpreted) that cash reserves which might have been “drawn” to be available to the business will need to have been fully spent. The word ‘subsidising’ means to support an organisation or activity financially. To my mind that implies also supporting it to continue as a going concern. I suggest that it’s not necessary to have first spent the cash before receiving the subsidy. To do so would mean the only source of cash would then be the subsidy which would be insufficient to keep enterprises afloat. But what is the Government's thinking?

Businesses are applying for money for the best reasons in most cases, to preserve the livelihoods of employees. If you commit to a wage subsidy for an employee, you are committing to his or her employment for 12 weeks. You may be paying someone a lot, lot more than $585.50 per week, so there are hard decisions to be made about your business's welfare on top of theirs. The Government is recommending conversations with insurance companies, but New Zealand Business Interruption insurance excludes pandemics. Chats with the bank will revolve around its willingness to tide you over, and the bank will assess how well you can endure this time, and recover from it.

“Drawing on cash reserves as appropriate” is a vague stricture in these circumstances. What is needed, for clarification and to protect employers in the months of investigations to come post-lockdown, is a space in that declaration form where you can explain your individual rationale for spending the money given. It may not be read closely now, but it could be important later. It would let businesses explain their priorities and concerns. The justice of those can be judged in time, and greed exposed. At least anxiety around the letter of the law – or rather the fourteen ominous letters in the phrase ‘best endeavours’ - would be assuaged to some extent. Behind the money being given stands the power of the Crimes Act; we need to make it clear how businesses can proceed, and if that is too unwieldy to do in fine detail, we need at least to let them explain their reasoning as they fight to survive.

The terms of the subsidy are evolving, which is desirably flexible. But that involves difficult deliberations when directors and principals of businesses are at home trying to keep up with criteria probably without the best home office set-up. And, it's quite possible that their businesses are in the twilight zone of solvency with directors and principals concerned about potentially trading while insolvent and incurring personal liability. Statutory declarations should never be made lightly, and when employers are trying to save jobs, they do not need the added burden of thinking that when the dust settles the Government may come after them over decisions made with (genuinely) the best intentions.

Author: Martin Wiseman, New Zealand Country Managing Partner, DLA Piper

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