Business Debt Hibernation - or Buying Time to Calm the Wolves at the Door

Introduction

This article highlights an important but little-noticed piece of New Zealand legislation hurriedly prepared and enacted in response to the Covid-19 pandemic1.  The Business Debt Hibernation scheme was created to help companies, partnerships, trusts, or incorporated societies established before 3 April 2020 to cope with and manage certain existing debts where those entities are unable to immediately pay those debts due to the impact of Covid-19, but where their prospects of payment in the future are much better.

What Does the Business Debt Hibernation Scheme Do?

The scheme allows eligible businesses affected by Covid-19 disruptions to place their existing debts on hold, or at least under managed payment arrangements, for up to seven months to help them start trading normally again. The first month of that period of protection is to enable the affected business to endeavour to put together a business debt hibernation arrangement by giving notice to the Companies Office together with certain specified additional information including an outline of their proposed debt hibernation arrangement for the ensuing six months or more; and to send that proposal to all of the business' creditors with existing debts likely to be affected by the arrangement and voting arrangements which could provide for either a meeting or postal vote, with a minimum five working day voting deadline.

If the proposal is supported and accepted by at least half of the business' creditors, by both number and by value, then the business debt hibernation proposal is treated as accepted and all creditors of the company holding existing debts caught by the Business Debt Hibernation scheme will be bound by the majority creditor agreement.

During the first month while the arrangement is sought to be put in place, and then during the following six months of the arrangement if it is passed, no creditors bound by the arrangement (including those who voted against it) can take steps to enforce their existing debts (unless a creditor successfully applies to the Court for relief citing exceptional circumstances). However, this moratorium will not affect debts incurred by the business entity after the business debt hibernation proposal is approved.

An approved business debt hibernation ends automatically at the end of the six-month protection period.  However, it may end earlier if the business sends a cancellation notice to the Companies Office and to all of its creditors, or if the business entity enters into a formal creditor compromise under the more complex provisions of Part 14 of the Companies Act 1993, a voluntary administration, under Section 15A of that Act upon the appointment of a receiver, or is liquidated.

Given the nature and effect of the Business Debt Hibernation scheme, any liquidation during the duration of an approved business hibernation cannot of course be ordered on the basis of a creditor's existing debt already caught by the scheme.  However, it is possible that an unpaid debt first incurred after the Business Debt Hibernation arrangement was approved might form the basis of a liquidation order or, more likely, that a liquidation has come about on a resolution of the company's shareholders who have themselves resolved to wind the company up after all.

What Businesses and Entities are Eligible for the Business Debt Hibernation Scheme?

In addition to being in existence before 3 April 2020, eligible businesses must be of the right type and must be "viable" for the purposes of the scheme. The eligible types of businesses include charitable trusts, New Zealand and overseas incorporated companies, friendly or incorporated societies, limited partnerships, and unincorporated partnerships and trusts. However, unfortunately sole traders are not eligible for the scheme.

Businesses considered viable are those that:

(a) as at 31 December 2019, were able to pay their debts as they became due in the normal course of business; which are not already in liquidation, voluntary administration, or some other form of similar process; and

(b) the Board of the entity (or its equivalent) believes on reasonable grounds that it is more likely than not that the business entity will be able to pay its due debts on or after 30 September 2021, taking into account current financial forecasts and other criteria.

Not all debts are caught by the Business Debt Hibernation scheme. Excluded are debts owed to General Security Agreement holders, employees, the IRD for employee PAYE, and debts incurred after a business debt hibernation has been approved (but this does not exclude 'later' debts arising where the original obligation was incurred prior to hibernation approval; for example, ongoing rent obligations).

Why Should You Consider Business Debt Hibernation and What are its Advantages Over Other Procedures Like Voluntary Administration or Formal Compromise Under the Companies Act 1993?

First, this process is much simpler, and can be implemented more quickly and cost-effectively than the more complex and less available formal procedures that have been in place since before the advent of the Covid-19 pandemic.  These have traditionally included creditor compromises under Part 14 of the Companies Act 1993, formal applications to Court for approval of arrangements or compromises under Part 15 of that Act, or voluntary administration under Part 15A of the same Act.

By contrast, the Business Debt Hibernation scheme was conceived as a deliberately fast-tracked and speedy process put in place as an emergency response to the unheralded and unanticipated impact of Covid-19. It provides for a simple process which it is quite possible that many business entities could implement themselves. The scheme also sets a more easily achieved creditor approval threshold of 50% by number and value, as opposed to the Part 14 formal compromise threshold of 50% of creditors representing 75% in value of all debt owed to creditors.

While in most cases it would be advisable to at least obtain some professional accounting and/or legal support and advice, it is open to businesses to quickly utilise available existing template documents to promptly put together a proposal, give notice of their intended entry into their arrangement to the Companies Office, and then dispatch the required proposal and accompanying documents to all of the creditors holding qualifying existing debts with a request that they submit their votes on the proposal by post in as little as a further week. Meanwhile, the protections afforded to the business entity against enforcement of those debts while approval of the arrangement is sought, automatically apply.

Where Can I Get Further Information?

The New Zealand Companies office website has a useful explanation of the Business Debt Hibernation scheme, and some pro forma templates and documents available to download, at the following website address: https://www.companiesoffice.govt.nz/covid-19/business-debt-hibernation

Also, if you think that you may be eligible and would benefit from entry into the Business Debt Hibernation scheme, please do not hesitate to contact McVeagh Fleming to further discuss your eligibility and options, and to obtain our assistance to help you through the process if you wish to endeavour to put the Business Debt Hibernation scheme in place for your own business. In particular, please contact any of the following members of our firm:

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City Office:

‍Craig Andrews (candrews@mcveaghfleming.co.nz) (09) 306 6745

Andrew Knight (aknight@mcveaghfleming.co.nz) (09) 306 6730
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‍Albany Office:

Steve Graham (sgraham@mcveaghfleming.co.nz) (09) 966 3607

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1    In the COVID-19 Response (Further Management Measures)Legislation Act by amendment of the Companies Act 1993 to introduce Covid-19 business debt hibernation scheme as new Schedule 13 of the Companies Act 1993.