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.
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If a business has already set up the arrangement, and creditors have agreed, they still get a further six months of protection from when their creditors agreed to their proposal.
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, read more on financial support for business.
If business debt hibernation was right for your business, this was how it helped you manage your debts.
You still needed to pay off your debts in full. Business debt hibernation helped manage your debts while you were protected but they didn’t go away altogether. And it was only for debts you already had. Any new debts would’ve had the terms and conditions your creditors set. Some debts weren’t covered by business debt hibernation, eg employee wages and debts to secured creditors with a general security agreement.
Business debt hibernation reduced the burden of existing debts, so you could stay solvent and start trading normally again. For example, you could have taken a couple of months to get back up to speed, and then pay back the remaining debt over the following quarter. It was an option to consider alongside borrowing money, or processes like creditor compromises or voluntary administration.
You could have organised business debt hibernation yourself, or received help from a lawyer or accountant. If you did it yourself, you needed to be aware of several legal requirements. For example, you needed to complete several formal declarations and statements. You also needed to organise a proposal and have your creditors agree with it.
Use a Cancellation Notice to tell the Companies Office that you want to come out of business debt hibernation early.
Cancellation Notice [PDF 117KB](external link) — Companies Office
Use a Notice under clause 70 to tell the Companies Office that your business debt hibernation has ended early because the business has entered a creditor compromise, voluntary administration, receivership or liquidation.
Notice under clause 70 [PDF 122KB](external link) — Companies Office
Business debt hibernation is no longer available, but other options are still in place to assist. 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.
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 31 December 2023 through Inland Revenue. Find out if you’re eligible and how to apply on the COVID-19: Financial support for businesses page.
The initial process of engaging with business debt hibernation were to decide whether to organise things yourself, or get help from a lawyer or accountant. Getting professional help if you could was a good idea.
A professional who’s familiar with the processes involved took you through all the following steps and helped you get things right. That gave you the best chance of success, and reduced your chances of getting into trouble because of an error. You needed to check those involved in your business were prepared to enter business debt hibernation. If you have more than one director (or equivalent), you needed to prove at least 80% were in favour.
As part of you debt hibernation planning, you would have made a proposal to your creditors about how you planned to pay them back. You need to pay your debts as you have arranged. Keep an eye on your progress to make sure you’re able to pay back your remaining debts as agreed.
The business debt hibernation scheme applies to all your creditors, not only the ones who agreed to your repayment proposal. You also need to take steps to pay back creditors who didn’t agree to your proposal. 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 don’t need to send any notices at the end of the six months of protection.
You can end 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. To end business debt hibernation early, send a Cancellation Notice to the Companies Office and a copy of the notice to all creditors.
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.
How do you end business debt hibernation early?(external link) — Companies Office
You need to meet legal obligations throughout the process, eg 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.
Here are a few case studies to see how business debt hibernation could be considered for different business situations.
Joe’s the director of a small business printing custom signs for shops. He’s looking forward to lots of new jobs as his clients reorganise their shopfronts. But he lost all his work during the lockdown and his outstanding debts to materials suppliers are due before enough income from his new jobs will reach his bank account.
Joe talks things through with his accountant, who explains business debt hibernation might help him get through his cash flow crunch. It’s a much more appealing idea than selling off his equipment to cover his debts, which would mean he’d miss out on the new jobs he’s looking forward to.
Joe’s accountant can handle it all for him because he’s already set up to manage his official company information. He talks Joe through the process, showing Joe some scenarios for shifting some of his debt repayment a few months later. One scenario looks promising. It involves paying half of each debt on time, and half at the end of the protection period.
The accountant files the paperwork and notifies the creditors for him. Joe’s nervous when he talks to some of his creditors to explain the proposal in person. But they can see the plan is sensible, the business is viable, and it’s their best chance to avoid losing any money. This is particularly important for some of the smaller creditors, who are in a tight spot themselves. The vote goes well. Joe’s accountant gets all the paperwork finished off well before the deadline.
The next few months are busy. Joe pays half of each bill as it becomes due. He also takes care to pay any new bills on time in full, because they are not covered by business debt hibernation. At the end of the protection period, Joe has managed to catch up and pay back all his existing debts. He breathes a sigh of relief when it’s all over.
Ana is a trustee for a community trust that organises local events. The trust needs help to cover some outstanding costs until they can restart their popular events. Ana and the other trustees decide to manage the process themselves, with Ana taking the lead.
Ana follows the instructions but finds a few things take much more time than she expected. For example, it turns out that a previous trustee who moved overseas still has the authority to manage their information at the Companies Office. After a few international phone calls and a bit of a wait, she gets them to transfer the authority to her.
Ana organises the proposal and voting herself. It takes some effort, although the templates she uses help. She hurries to get everything sorted before the month ends.
In the end Ana gets the proposal approved. Her creditors were very understanding and are pleased they won’t lose any money. The arrangement goes well and the trust is able to pay back everything it owes.
Confirming your authority(external link) — New Zealand Business
David is on the board of a manufacturing company with about 100 employees. Getting their cash flow back to normal will take a while, particularly as they have suppliers overseas and export most of what they make.
David and his fellow board members are well aware of their duties as directors. For example, they must not create a substantial risk of serious loss to creditors, and they must act in good faith, always doing what they think is best for the company.
The company’s international business means there’s plenty to think about when considering business debt hibernation. So they put together a team of two board members, the company’s external accountant, and a lawyer that specialises in this topic.
The team confirms business debt hibernation is a good option and puts together detailed information to support a creditor proposal. They collect detailed current financial information, and forecast a set of scenarios so creditors can compare the outcomes:
The team also talks to some of the company’s key creditors, to get a feeling for what they would be looking for in a proposal.
The scenarios show the team has taken care to find the best course of action. At a special meeting, the board agree to seek business debt hibernation and send the proposal the team has prepared. The team stays in place to manage the rest of the process, making sure all the paperwork is meticulous and meets all the legal requirements.
All the team’s groundwork pays off. All except one of their creditors agree to the creditor proposal, so the company is able to go ahead with six months of business debt hibernation. The board carefully monitors progress during that period, so they can continue to reassure creditors that they are on track for a full recovery.
Sole trader Ari hears about business debt hibernation from a friend with another small business. He thinks it sounds like just what he needs. He has some outstanding bills from buying new equipment for his arborist business, and tricky cash flow from his interrupted work which is only now starting to pick up again.
Ari reads up about business debt hibernation in between jobs, and is disappointed to find that as a sole trader he’s not eligible. He can see how the financial paperwork could be tricky though. He sees some other options suggested, and learns about the Small business cash flow loan scheme. That sounds like it could help him cover his payments until business is back to normal. He finds out more about it and gets himself set up with a small loan.