As part of its ongoing response to COVID-19 the Government has created a novel business debt hibernation scheme (“BDH”). BDH may allow a business with short term cash-flow issues as a result of COVID-19 to buy up to six months’ time to pay its creditors. If the BDH proposal is accepted, businesses are “protected” during this period from certain enforcement actions.

 

The key high-level takeaways on BDH are:

 

  • The scheme applies to a variety of entities but excludes sole traders.
  • BDH only applies to entities formed before 3 April 2020.
  • A business commences an arrangement by sending an entry notice. This gives the business a period of one month to reach an arrangement with creditors. The business has “protection” during this period so it can make its BDH proposal.
  • Where the business is a company at least 80% of directors must vote in favour of entering BDH. Each director voting in favour of entry must make certain certifications.
  • The business is required to repay creditors in full.
  • BDH does not apply to any new debts the business incurs.
  • BDH does not cover debts such as employee wages or debts owing to secured creditors who have a general security agreement (GSA).
  • The proposal must be sent to all creditors. More than half of the business’s creditors by number and value must vote in favour of the proposal for it to be accepted and take effect. Interestingly ordinary creditor compromises have a 75% threshold.
  • If the BDH proposal does not pass then creditors have their usual rights at law.
  • If accepted the business has six months of “protection” where generally enforcement action cannot be started or continued including against certain guarantors of the business.
  • If the BDH proposal is accepted all creditors are bound by the proposal not just the ones who voted in favour of it.
  • At this stage a business has until 24 December 2020 to enter BDH but may only do so once.

 

BDH is another option for businesses struggling to meet their trade creditors as a result of COVID-19. BDH may be a good option where traditional options are less favourable to the business and their creditors. This could be, for example, where selling assets would leave the business unable to operate profitably or the winding up of the business is the only other remaining option. Other general options available to businesses including the Government’s small business cashflow loan scheme, ordinary commercial lending, voluntary administration and creditor compromises. Therefore, the question as to whether BDH is right for a particular business will necessarily lead to consideration of these options too.

 

The BDH scheme is designed to give businesses some breathing room from COVID-19 so they can continue survive the unanticipated effects of COVID-19. Irrespective of the problems faced by any particular business, a business’s creditors are not obliged to accept BDH. Therefore, in order for a proposal to be attractive to creditors, the business will have to demonstrate that the proposal is better than the other enforcement alternatives available to creditors. This is likely to be, where it can be proven that the business is viable medium to long term and the winding up of the business will lead to demonstrably worse consequences than if a short-term forbearance is agreed to by creditors.

 

The above is a summary of the high-level workings of BDH. Of course, with any major decision we would encourage all businesses to take specialist professional advice.

James Stewart

ddi +64 9 553 9239

p +64 9 361 5563  extn 112

james.stewart@swlegal.co.nz