COVID-19: Business debt hibernation

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Business Finance

Business debt hibernation helps companies and other entities affected by COVID-19 manage their existing debts until they can start trading normally again. For example, businesses may agree with creditors to delay repaying some of their debt.

What is business debt hibernation

Business debt hibernation is a government initiative created in response to COVID-19. It helps companies, trusts, and other business entities affected by COVID-19 to manage their debts.

Unfortunately, sole traders aren’t eligible for business debt hibernation. If you are a sole trader and seeking government support, check out the cash flow loans and support page.

If business debt hibernation is right for your business, this is how it helps you manage your debts.

  • You set up an arrangement for your existing debts, eg paying your creditors only a percentage of what you owe them on time and delaying the rest.
  • You get up to a month of protection while you set up the arrangement, meaning most creditors can’t enforce their debts, eg applying for your business to be liquidated.
  • If your creditors agree, you get a further six months of protection.

You still need to pay off your debts in full. Business debt hibernation helps you manage your debts while you are protected but they don’t go away altogether. And it’s only for debts you already have. Any new debts will have the terms and conditions your creditors set. Some debts aren’t covered by business debt hibernation, eg employee wages and debts to secured creditors with a general security agreement.

Business debt hibernation reduces the burden of existing debts, so you can stay solvent and start trading normally again. For example, you might take a couple of months to get back up to speed, and then pay back the remaining debt over the following quarter. It’s a new option to consider alongside borrowing money, or processes like creditor compromises or voluntary administration.

You can organise business debt hibernation yourself, or get help from a lawyer or accountant. If you do it yourself, you’ll need to be aware of several legal requirements. For example, you’ll need to complete several formal declarations and statements. You’ll also need to organise a proposal and agree it with your creditors.

Business debt hibernation isn’t only for companies. It’s also for societies, trusts and other types of organisation. Sole traders are not eligible. If you’re a sole trader seeking government support, check out the Small business cash flow loan scheme on the Cash flow loans and support page.

More detail about eligibility

Step-by-step guide

When you should consider business debt hibernation

If you’re in financial trouble, or can see it approaching, the sooner you consider your options the better. COVID-19 has affected businesses in many ways. Maybe you lost most of your revenue during Alert Level 4 but still had costs. Maybe you’re still not able to trade normally, or maybe your customers are just taking a while to come back. Disruption like this can make a mess of your cash flow, leaving your finances too tight to cover all your debts.

Try some other options first

You’ll need to understand what your cash flow looks like for the next few months. Forecasting your cash flow helps you understand your business health. You might discover you can squeeze by if you put some spending on hold, or boost your revenue with a new idea.

If you don’t already have a forecast, try the Cash flow forecaster tool.

Cash flow forecaster (external link)

Perhaps a loan will help. The Small business cash flow loan scheme provides government loans for small businesses, including sole traders and self-employed, to support their immediate cash flow needs. Applications are open until 12 June through Inland Revenue. Find out if you’re eligible and how to apply on the Cash flow loans and support page.

Cash flow loans and support

If you still can’t cover existing debts from your cash flow, business debt hibernation could give you the temporary protection you need. It’s useful to understand the process for entering business debt hibernation if you decide to go ahead.

Start planning

Decide whether to organise things yourself, or get help from a lawyer or accountant. It’s a great idea to get professional help if you can.

A professional who’s familiar with the processes involved can take you through all the following steps and help you get things right. That gives you the best chance of success, and reduces your chances of getting into trouble because of an error. Deciding about getting help first means you can get support straight away and avoid any false starts or wasted effort.

Next, check you are eligible. Business debt hibernation is open to companies, trusts, societies and other entities. You need to meet some requirements. For example, your business needs to have been established before 3 April 2020. And it needs to be viable in the medium to long term as long as you get help with your existing debts.

More detail about eligibility

Check those involved in your business are prepared to enter business debt hibernation. If you have more than one director (or equivalent), you need to prove at least 80% are in favour.

Plan ahead for the rest of the process. Think about what arrangement you want to propose and gather the information you’ll need.

Enter business debt hibernation

Complete an Entry Notice using the form on this page, and send it to the Companies Office. The Entry Notice gives you an initial month of protection, to give you time to sort out an arrangement with your creditors. You send this notice to your creditors, along with other legally required info and documents.

Legal requirements for sending Entry Notice to creditors

You can only enter business debt hibernation once. If you can’t get your creditors to agree to your proposal, you can’t come back after the initial month and try again. You’ll need to consider other ways to manage your debts.

Make a proposal to creditors

You need a plan to get back to business as usual and repay your debts in full. Without a plan, your creditors are unlikely to believe you will recover. For example, you could propose all creditors get half of what you owe them on time, and you pay the rest back at the end of the protection period or another date.

The proposal needs to make financial sense to everyone involved. It should be just enough to make the difference between returning to normal trading and having to take steps like voluntary administration or even closing down the business.

The proposal should be a better deal for your creditors than the alternative of trying to get their money back if the business fails. And you need to prove all this, eg with cash flow forecasts and other evidence to make your proposal compelling.

Send the proposal to all your creditors, along with other legally required info. Set up a vote, and give your creditors at least five working days to respond. More than half your creditors, by size of debt and by number, must vote in favour. This is fewer than some alternatives, eg creditor compromises need 75% support among creditors.

More detail about organising your creditor proposal

NZTE Guidance: Solvency and COVID-19  — New Zealand Trade and Enterprise

Creditor Proposal Pro-Forma

Letter to Creditors Template

Send your Creditor Decision Notice

When you have the results of the vote, complete a Creditor Decision Notice using the form on this page. Send it to the Companies Office. You need to send your Creditor Decision Notice before your initial month of protection ends.

If your creditors approve the proposal, sending the Creditor Decision Notice gives you six months of protection from the date the board records the decision.

Pay back your debts as agreed

If your creditors approved your proposal, pay your debts as you have arranged. The business debt hibernation scheme applies to all your creditors, not only the ones who agreed. Keep an eye on your progress to make sure you’re able to pay back your remaining debts as agreed.

If your creditors didn’t approve your proposal, you need to take other steps to pay them back. This may include voluntary administration to restructure your business. Or closing your business down and selling off assets (liquidation) to pay creditors part of what you owe them.

Business debt hibernation ends automatically at the end of the protection period. You can come out of business debt hibernation early if you choose to. For example, you may pay back all the protected debts and want to clear the status from your company information. Or you may decide you need to close down the business, and want to remove the protection first.

More detail about cancelling business debt hibernation

Business debt hibernation decision tool

Use this tool to better understand whether business debt hibernation is an option for you, and how to get started.

Business debt hibernation is available to companies, trusts, and other entities that meet a set of conditions. In the tool we talk about ‘your business’. You can also use the tool if you are part of a trust or other entity, or if you are an agent acting for one.

Business debt hibernation forms

Use an Entry Notice to tell the Companies Office that you want to enter business debt hibernation.

Use a Creditor Decision Notice to tell the Companies Office whether or not your creditors approved the arrangement you proposed.

Creditor Decision Notice – approved — Companies Office

Creditor Decision Notice – not approved — Companies Office

Understand your legal obligations. Get help from a professional if you can.

You need to meet legal obligations throughout the process, eg when completing the Entry Notice, when notifying creditors that you are seeking business debt hibernation, when sending a proposal to creditors, and when holding a vote and completing the Creditor Decision Notice. Getting help from your lawyer or accountant is a good way to ensure you meet your obligations and don’t become liable as a result of any errors in your process.

SOURCE: BUSINESS. GOVT. NZ

Peter Green

Peter Green