Temporary legislation passed in May 2020 introduced a ‘Business Debt Hibernation’ process. As part of the Government’s plan to accelerate the economic recovery from COVID-19, rules allowing affected businesses to put their debts on hold have been extended by 10 months. The Business Debt Hibernation scheme was due to expire on 24 December 2020 but is now going through to 31 October 2021.
Business Debt Hibernation allows businesses affected by COVID-19 disruptions to apply for an initial month of protection while they talk to their creditors — during this period most creditors can’t take legal action to enforce their debts, eg applying for your business to be liquidated. If your creditors agree, you can get a further 6 months of protection.
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, 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.
Find out if business debt hibernation is an option for you
business.govt.nz has a comprehensive BDH tool that provides information on how to place a business in Business Debt Hibernation.
- Learn about each step in the process
- Use the step-by-step tool and read case study examples to help you decide whether business debt hibernation is an option for you
- Access the forms to enter business debt hibernation and templates to help with your creditor proposal
- Understand key legal requirements so you don’t get it wrong.
You don’t need a login to use this tool.Use the BDH tool on business.govt.nz
Some frequently asked questions
What businesses are eligible for Business Debt Hibernation?
To be eligible for Business Debt Hibernation, businesses need to be:
- the right type
- formed or established before 3 April 2020.
Eligible business types include:
- charitable trusts
- companies (NZ and overseas)
- friendly societies
- incorporated societies
- industrial & provident societies
- limited partnerships (NZ and overseas)
- public sector entities
- unincorporated partnerships
- unincorporated trusts
- others, eg unregistered unincorporated entities such as Maori trusts.
The details of the business debt hibernation will be made publicly available in the relevant business entity’s register. View unregistered entities that have entered into Business Debt Hibernation (BDH).
Sole traders are not eligible. Neither are registered banks, licensed insurers, and non-bank deposit takers.
Clauses 3 and 4 of Schedule 13 of the Companies Act 1993 give the definitive list of eligible business types.
The business is considered viable if:
- as at 31 December 2019, the entity was able to pay its debts as they became due in the normal course of business
- the entity is not already in liquidation, voluntary administration, or other similar processes
- the board (or equivalent) believes it’s more likely than not that the entity will be able to pay its due debts on and after 30 September 2021, taking account of financial forecasts and other criteria
Clause 5 of Schedule 13 of the Companies Act 1993 give the definitive requirements.
What records do you need to keep if you enter Business Debt Hibernation?
Like other official business records, you need to keep any records relating to Business Debt Hibernation at your registered office address (if you have one) or your place of business.
These records include:
- financial records to prove your financial position at 31 December 2019 (for businesses established before 1 January 2020)
- copies of any decisions or resolutions about entering Business Debt Hibernation
- copies of signed certificates from each supporting board member, showing their agreement to enter Business Debt Hibernation
- copies of Entry Notice sent to Registrar and to creditors
- copies of proposed arrangement sent to creditors and any variations
- information about any creditor meeting
- copies of communications with creditors about Business Debt Hibernation
- copies of creditors’ votes
- copies of certificates – by authorised person who counts votes and by Board on result of vote
- copy of the Creditor Decision Notice sent to the Registrar.
What needs to be sent to creditors?
When you have sent your Entry Notice to the Companies Office, you must also send a copy to each of your creditors, including:
- a signed certificate from each supporting board member, showing their agreement to enter Business Debt Hibernation according to the Act (eg there is reason to believe creditors will accept your proposal and your business will be able to pay its debts as they are due)
- at least a high-level description of your proposed arrangement
- the total number of creditors and the total amount you owe
- the postal or email address and telephone number for inquiries
- the date you sent the Entry Notice to the Companies Office.
This is not your creditor proposal but gives your creditors the initial information they need. If a board does not send this information each director has committed an offence and can receive a fine.
Some organisations may set up dedicated phone lines or email addresses for communicating about business debt hibernation. For example, if Inland Revenue is one of your creditors, you can send your Entry Notice and Creditor Proposal to firstname.lastname@example.org
Clause 7 of the Schedule 13 of the Companies Act 1993 gives the definitive requirements.
How do you organise a creditor proposal?
A cover letter for your creditor proposal is not a legal requirement, but gives you one option for explaining the basic proposal clearly and explaining why you think creditors will find it appealing.
Your creditor proposal must include:
- instructions for voting
- a detailed description of the arrangement you propose and the reasons for proposing it
- the exact wording of the vote
- who will receive and count the votes
- a reminder that all creditors must accept the arrangement if it is approved.
- send the creditor proposal to all your creditors, giving it to them at least 5 working days before the vote or the voting deadline
- give enough detail for creditors to decide how to vote.
You can hold a meeting for creditors to hear and vote on the proposal if you want to, but you don’t have to hold one.
Clauses 9 and 10 of Schedule 13 of the Companies Act 1993 give the definitive requirements.
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 afterwards?
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.
What additional steps do you need to take if you are regulated by the Financial Markets Authority (FMA)?
Entities that are licensed by the FMA or provide a broking service must inform the FMA as well as the Registrar and creditors on entering BDH. FMA regulated entities may also need to consider a number of other matters including disclosure requirements under the Financial Markets Conduct Act 2013.
How do you end Business Debt Hibernation early?
Business Debt Hibernation ends automatically at the end of the 6 month protection period. To end Business Debt Hibernation early, send a Cancellation Notice to the Companies Office and a copy of the notice to all creditors. Your Cancellation Notice needs to:
- state that the board (or equivalent) has agreed to cancel Business Debt Hibernation
- give the date your business intends to come out of Business Debt Hibernation.
You must give the cancellation notice to the Companies Office and all creditors at least 5 working days before you intend to leave Business Debt Hibernation.
Clause 19 of Schedule 13 of the Companies Act 1993 gives the definitive requirements.
Business Debt Hibernation also ends automatically if the business enters a creditor compromise, voluntary administration, receivership, or liquidation. If this happens, send a Notice under clause 70 to the Companies Office. You must give the notice to the Companies Office within 5 working days of the liquidation or other arrangement.
Clauses 18 and 70 of Schedule 13 of the Companies Act 1993 give the definitive requirements.
Published 7 May 2020, last updated 2 December 2020