Business debt hibernation scheme – what is it and how does it work?

As we all get back to work and some sense of normalcy after the uncertainty of the past few weeks, it’s time to look at how we will manage the aftereffects of Covid-19. If your business is struggling to make debt repayments right now, you may want to consider the business debt hibernation (BDH) scheme.

What is the business debt hibernation scheme?

The business debt hibernation scheme was designed to give businesses some breathing room for six months from creditor action, ideally to prevent businesses from going into liquidation or having to take other drastic action during this period of uncertainty. An explanation about BDH can be found here and the process and eligibility criteria can be found here.

While in hibernation, businesses can trade as usual, however as with all businesses cash is king, so even though you can defer payment of debt in certain instances under the scheme, you still need cash to continue to trade.

Entities entering BDH can incur new debt, but only if they comply with the agreed conditions with their original creditors, and suppliers are prepared to give them credit, possibly over and above what they are already owed.

Who is eligible for the business debt hibernation scheme?

Companies, partnerships, and trusts including sports clubs and churches are eligible for the BDH scheme.

However, to be eligible, 80 per cent of the directors or officers, need to sign a resolution confirming that the entity was viable, that is, can pay its debts as and when they were due in the normal course of business as at December 31, 2019. This may disqualify a number of businesses, if they, for instance had significant GST or PAYE arrears at that time even if payment plans were subsequently agreed.

Sole traders, insurers, banks, and those already in liquidation or receivership are not eligible.

How does the business debt hibernation scheme work?

The BDH scheme is a facility whereby a moratorium (protection period) is granted between an entity and its creditors.

Therefore, enforcement of debt is suspended for a period of one month, while the terms of a proposal with creditors is formed and put before creditors for formal voting for acceptance or rejection. It is not in itself a binding proposal or deal, just a time period allowing for a plan to be devised and considered.

However, the BDH is not binding on secured creditors, and particularly those with a general security agreement over the entity's business and assets, so discussion with your primary banks and other secured lenders needs to be undertaken before BDH becomes a real option. In addition, employee entitlements are excluded, as are some debts due to the Inland Revenue.

The BDH process is reasonably complex and with the speed the legislation was drafted, there will inevitably be uncertainties as to how it will work in practice.

Debtfix recommends you seek help from an accredited insolvency practitioner and a member of RITANZ, the professional body that represents business recovery and turnaround specialists.

The first step in the DDH process is filing an Entry Notice on the Companies Register.

Then issue that notice to all of the entity’s creditors, including details of the proposed “arrangement in sufficient detail to enable a creditor to form a reasoned judgment in relation to it”, a notice convening the meeting of creditors, and creditor voting papers.

The arrangement or proposal may be a deferred payment plan for the debts to be repaid over a period of time, a reduction, that is, write off the level of debt payable, or a combination of the two.

• If the proposal is rejected by creditors, then the BDH scheme automatically fails.

• If the proposal is agreed by creditors (50 per cent by number and value), then the terms of the proposal are then binding on the company and its creditors, whether they voted in favour or not – subject to appeal.

The goal of the BDH scheme is to give businesses a chance to get back to trading normally as quickly as possible. However, it has certain limitations and may not be right for every entity, but there are other alternatives which an insolvency practitioner is best placed to advise on.

Many business commentators report we will be living with the impact of the Covid-19 crisis for a long time to come, so do take time to understand your options and figure out what the best course of action for your business.

Importantly, take informed advice before launching into a process that might not be right.