Is your business facing solvency issues due to COVID-19?

Commercial | Print Article

The Government has recently passed temporary legislation to help companies facing cashflow difficulties due to COVID-19. Businesses can now place certain debts into ‘hibernation’ while continuing to trade. This supplements more traditional options available to businesses facing solvency issues.

Business Debt Hibernation

The temporary Business Debt Hibernation (BDH) regime creates another option to help businesses keep trading, despite cashflow pressures. The BDH scheme puts a one month freeze on the enforcement of debts during the proposal process. A further six months ‘hibernation’ will be available if the proposal is passed.

A process will need to be followed to put a BDH scheme in place; it is not automatic. The business will need to meet a certain threshold, put a proposal to their creditors and obtain agreement from 50% (by number and value) of those creditors within a month.

While an entity is in BDH, it will be able to continue to trade, subject to any restrictions agreed with creditors. Certain debts cannot be hibernated, including debts to the IRD and employment related debts and (for the six months) certain secured creditors. Otherwise, BDH will apply to creditors regardless of whether they voted for the proposal.

To encourage businesses to continue to transact, new payments or dispositions of property are exempt from the voidable transactions regime (unless it is to a related party) while a business is in BDH. However, transactions will still need to be entered into in good faith by both parties, on arm’s length terms and without intent to deprive existing creditors of the company.

Many businesses will be eligible for BDH, including companies, trusts and partnerships. However, sole traders, licensed insurers, registered banks and non-bank deposit takers are exempt.

For further advice

Due to the complexity in the legislation, and their novelty, obtaining legal advice before relying on these announcements is crucial. This is not a situation where DIY is appropriate; failure to comply can have a significant impact (for example, there are a number of areas where a director placing a business in BDH can inadvertently commit an offence by not following the specific steps required).

Additionally, while this legislation is new, solvency issues aren’t. There are other options available, which may provide a better long term solution for you and your creditors. BDH is not as flexible as alternatives that can result in a reduction or restructure of debt. Tailored advice will identify the best option for your situation.