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26 August 2021

Financial relief for businesses - what is available to me?

The government have instigated a number of measures to help businesses affected by Covid-19 manage their cash flow and debt during the current difficult trading conditions.

Following the August 2021 Covid-19 outbreak and move to a national alert level 4 lockdown, we have updated the following information regarding financial relief for businesses.

Debt Hibernation measures and the Small Business Cash Flow Loans (SBCFL) are still available as detailed below. The criteria for determining a 30% drop in revenue for the  SBCFL is now that the business  must show at least a 30% drop in revenue due to Covid-19, measured over a 14-day period in the past six months compared with the same 14-day period a year ago. If your revenue from the same period a year ago was also affected by Covid-19, compare the same 14-day period two years ago.

Under the Debt Hibernation measures the date for confirmation that the debt is more likely than not able to be repaid is still currently 30 September 2021 and has not yet been extended by parliament (see point 2 below).  Urgent legislative changes may be enacted to extend this date.

 At this stage the Safe Harbour for Directors exemptions have expired (20 September 2020) and are no longer available.  The government may re-introduce those exemptions following the latest outbreak of Covid and interruption to businesses.

The government have instigated a number of measures to help businesses affected by Covid-19 manage their cash flow and debt during the current difficult trading conditions.  This article summarises the measures available to provide relief to businesses:

DEBT HIBERNATION

The Debt Hibernation regime allows a business to continue trading and to place their existing debt into hibernation until they are able to resume trading at normal levels as long as certain criteria are met. These provisions also provide for a ‘safe harbour’ regime to protect directors from reckless trading or insolvent trading claims during this time. The Debt Hibernation provisions are available to any corporate entity (company), trust or partnership. They are not available for sole traders.  The criteria are summarised as follows:

  1. Eligibility

In order to be eligible for the Debt Hibernation scheme, the following conditions must be met:

  • The entity must have been formed before 3 April 2020;
  • The business type must meet the definitions as provided in the Companies Act, for example a company, charitable trust, incorporated society, Limited partnership (excluding sole traders).

 

  1. Viable Business
    • The business must have been able to pay their debts as they fell due in the normal course of business as at 31 December 2019.
    • The business must not already be in liquidation, voluntary administration or a similar process.
    • The Board or their equivalent (i.e. directors) believe that more likely than not the entity will be able to pay its due debt on and after 30 September 2021 taking into account financial forecasts and other criteria. Clause 5, Schedule 13 of the Companies Act provides the legislative requirements in this regard. (This date is unchanged as at 25 August 2021).
    • If the business is eligible for the Business Debt Hibernation regime then it will be able to put a proposal to its existing creditors.  If the proposal is accepted, then there is a one month moratorium on the enforcement of debt from the date creditors are notified of the proposal.  If the proposal is accepted by the creditors, then a further six month moratorium on the enforcement of debts is available.  This hibernation period is intended to provide time for business to continue trading through the Covid-19 lockdown conditions and attempt to improve the financial position of the business during the six month period.
    • To make a proposal to creditors, 80% of the directors of the company must vote in favour of putting a proposal to the creditors of the company for Debt Hibernation. An entry notice must then be issued.

 

  1. Entry Notice
    • The company must complete an Entry Notice to be provided to each creditor of the company setting out the proposal. The Entry Notice must contain the following information:
      • A directors’ certificate confirming that at least 80% of the directors entitled to vote are in agreement to entering the hibernation regime (the directors must reasonably believe that the creditors will accept the proposal and that the business will be able to pay their debts following the Debt Hibernation).
      • Set out the proposed arrangements.
      • Provide details of the total number of creditors and the total amount owed. The impact of providing this information should be carefully considered as some of these details may be commercially sensitive.
      • Provide an address, email and phone details for enquiries to the company.
      • The date that the Entry Notice is sent to the Companies Office.
      • If the Board or directors do not send this information to the creditors in the Entry Notice, this is considered an offence under clause 7, schedule 13 of the Companies Act and fines may be payable. We recommend that both accounting and legal advice is sought when considering a proposal for Debt Hibernation and prior to sending the Entry Notice to ensure that the company is eligible and that all legislative requirements have been met.

 

  1. Creditor Proposal

The next step is to prepare the Creditor Proposal. Again the Creditor Proposal must contain the specified information. It is recommended that a cover letter is also sent to each creditor to explain the basic proposal and why it should be accepted as a good option for the creditors. The Debt Hibernation regime is only available if the proposal is accepted by a minimum of 50% of creditors (both in number and value). The manner in which the cover letter and Creditor Proposal is drafted will have a significant impact on the likelihood of 50% or more of the Creditors agreeing to the proposal. Please contact us for assistance in drafting these documents. The documents must describe the proposal in sufficient detail to enable the creditors to form a reasoned judgement regarding their agreement to the proposal. The proposal should include the following:

  • Copy of the Entry Notice;
  • Voting form;
  • List of creditors and amounts owed to creditors;
  • Cash flow forecast;
  • Set out the benefits to the creditors;
  • Expected date that creditors will be repaid.

 

  1. Effect of Debt Hibernation regime
    • If a minimum of 50% of creditors (both in number and value) agree to the business entering the Debt Hibernation regime, then the company will receive the benefit of a six month moratorium of the usual debt enforcement regime available under the Companies Act.
    • For example any further payments or distribution of property made by the business to third party creditors would be exempt from the voidable transactions regime (including clawback provisions in a liquidation). If the proposal to enter Debt Hibernation is not accepted by 50% or more of all creditors, then the Debt Hibernation provisions are not available to the business. A company can only enter Debt Hibernation once and if creditors do not agree to enter the proposal, the business is not able to try again later. We recommend that initial discussions are entered into with creditors early to ascertain their likelihood of agreeing to the proposal.
    • If the majority of creditors agree to the proposal then the business will have the benefit of a one month moratorium and then an additional six month period of Debt Hibernation where existing debts are effectively put on hold for six months in order to help the business start trading again without the threat of creditors putting the business into a liquidation process.

 

  1. Summary

The Debt Hibernation regime may be a valuable tool in allowing your business to successfully weather the effect of Covid-19 and provide relief for pressure on your cash flow and from creditors. However, care must be taken to ensure that all legislative requirements are met and that the directors or Board are aware of their duties and the implications of being found to be in breach of these duties. Please contact us to discuss this further.

 

CASH FLOW LOANS

  • A further measure introduced that may assist businesses, and in particular sole traders who are unable to access debt hibernation, is the availability of cash flow loans, available through the Inland Revenue Department.
  • A business entity (company, sole trader, trust or partnership etc) may make an application for a cash flow loan by 31 December 2023 (updated date) through the Inland Revenue website.
  • The cash flow loan is only available to small to medium businesses with 50 or fewer full time equivalent employees.
  • The cash flow loan is of up to $10,000. A further $1,800 per full time equivalent employee is also available on the same terms.  The loan is available for up to 5 years.  Interest is payable on the loan at 3% per annum however if the loan is fully repaid in the first year then no interest is payable.  No repayments are required within the first 24 months of the loan.

SUMMARY

Debt Hibernation, Safe Harbour (not currently available) and Cash flow loans may provide valuable relief for your business and ease cashflow issues.

Please contact us to discuss these options and how they may benefit your business.

 

Disclaimer

The above information is of a general nature only. The information in this article does in no way constitute legal advice and all readers should contact a law firm for advice relating to your specific circumstances.

Sam Sutherland (Smith)

About Sam Sutherland (Smith)

Sam is a member of our Commercial Team. She has a strong focus on commercial property transactions, as well as company law and business structuring.

View all posts by Sam Sutherland (Smith)