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10 June 2020

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.

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:

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).

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.
  • 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.
  • In order 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.

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.

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.

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.

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.

 

SAFE HARBOUR FOR COMPANY DIRECTORS

Further legislative change has been introduced under Section 135 and 136 of the Companies Act to provide a ‘safe harbour’ to company directors who are trying to guide their company through difficult trading conditions as a result of Covid-19.

The safe harbour provisions are backdated to 3 April 2020 to provide protection to company directors for decisions for such things as taking on new obligations or a decision to continue trading, for the six month period from 3 April 2020.

The Safe Harbour provisions are available for companies incorporated prior to 3 April 2020 and if the following requirements are met:

  • In the good faith opinion of the directors, the company is facing or likely to face significant liquidity problems in the next six months as a result of the impact of the Covid-19 pandemic on them or their creditors.
  • The company was able to pay its debts as they fell due on 31 December 2019;
  • The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example because trading conditions are likely to improve or they are likely to reach an agreement with their creditors).
  • Directors must be cautious if the company has no realistic prospect of continuing to trade and deferment of liquidation would be detrimental to its creditors. Other directors duties remain for example, the duty to act in the best interests of the company, and the duty of good faith. Directors can still be held accountable for a serious breach of these duties and for dishonestly incurring debt. Please contact us to discuss your obligations.

These safe harbour provisions will apply from 3 April 2020 until 30 September 2020 however this may be extended by the government until 31 March 2021. The above amendments to the legislation and the Companies Act in particular, were granted the Royal Ascent on 15 May 2020 are available under Covid-19 Response (Further Management Measures) Legislation Act 2020.

 

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 12 June 2020 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 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 Smith

About Sam 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 Smith