The COVID-19 Response (Further Management Measures) Legislation Bill has passed into law and introduces a ‘Business Debt Hibernation’ process.
Business Debt Hibernation allows businesses affected by COVID-19 disruptions to place their existing debts on hold for up to 7 months to help them start trading normally again, rather than putting in place potentially irreversible processes such as liquidation.
At least half of the business’s creditors must agree to the arrangement the business proposes. While a business is in Business Debt Hibernation it can continue to trade, subject to any restrictions agreed with creditors as a condition of entering into hibernation.
Business Debt Hibernation is available to a wide range of businesses (including companies, trusts and partnerships) who were registered or existed prior to 3 April 2020, and satisfy a number of other conditions. It does not extend to licensed insurers, registered banks and non-bank deposit takers, and sole traders. Sole traders who become insolvent are instead subject to the Insolvency Act 2006 (which covers personal insolvency) because there is no separation between the trader’s business finances and their personal finances.
The business.govt.nz BDH tool provides information on how to place a business in Business Debt Hibernation.
Answers to frequent questions
Do businesses need to apply to Government to go into Business Debt Hibernation?
No, it is a direct agreement between a business and its creditors. The business can submit a Business Debt Hibernation Entry Notice to the Registrar, which provides a one-month protection period while the business discusses its proposal with creditors.
This notice can be found using the business.govt.nz BDH tool.
The business then puts a proposal to its creditors and if the majority agree with the proposal, then there will be a standstill on existing debt for the next 6 months.
Majority agreement means at least half the creditors agree with the proposal (50% by number and value).
The business must make its proposal and notify the creditors decision within 1 month or the option will lapse. During this one-month timeframe creditors cannot enforce existing debt.
Can any business go into Business Debt Hibernation?
Business Debt Hibernation is available to a wide range of businesses (including companies, trusts and partnerships) who were registered or existed prior to 3 April 2020. It does not include sole traders, insurers, banks and non-bank deposit takers, or those already in liquidation, voluntary administration, receivership or subject to statutory management.
Sole traders who become insolvent are instead subject to the Insolvency Act 2006 (which covers personal insolvency) because there is no separation between the trader’s business finances and their personal finances.
What if all creditors do not agree with the Business Debt Hibernation?
If the proposal has majority agreement, meaning 50% or more by number and value, all creditors are bound - not just those who voted for it. Creditors cannot enforce existing debt during the six-month standstill.
Creditors will, however, have the ability to go to the court to seek relief in exceptional circumstances.
Can businesses keep trading and incur new debt while in hibernation?
Yes, subject to any restrictions agreed with creditors as a condition of entering into it.
How long can a business be in Business Debt Hibernation?
Protections generally apply for 1 month and then an additional 6 months if the creditors approve the arrangement.
Can a transaction be unwound if the business in hibernation then liquidates
Any further payments, or dispositions of property, made by the business to third party creditors are exempt from the voidable transactions regime. This exemption does not extend to related parties.
This exemption is subject to the condition that the transaction was entered into in good faith by both parties, on arm’s length terms and without the intent to deprive the existing creditors of the business.