Published 7 May 2020, last updated 1 November 2021
Temporary legislation passed in May 2020 introduced a 'Business Debt Hibernation' process, allowing businesses affected by COVID-19 to put their debts on hold. Eligible businesses were able to enter into Business Debt Hibernation (BDH) up to 31 October 2021.
On this page:
- Entering into Business Debt Hibernation
- Approaching creditors with a proposal
- Ending Business Debt Hibernation
- Records you must keep
BDH allowed businesses to apply for an initial month’s protection, giving them time to talk to their creditors. During this period, most creditors cannot take legal action to enforce their debts, for example, by applying for a business to be liquidated. If creditors agree, the period of protection can be extended by a further 6 months.
Businesses entering into BDH were required to send an Entry Notice to the Companies Office. We then published this notice on the relevant business entity’s register.
Eligible business types
- 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.
Clauses 3 and 4 of Schedule 13 of the Companies Act 1993 give the definitive list of eligible business types.
A business was 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 was not already in liquidation, voluntary administration, or other similar processes
- the board (or equivalent) believed it was more likely than not that the entity would be able to pay its due debts on and after 30 September 2021, taking account of financial forecasts and other criteria. For entities that entered into BDH after 24 December 2020, the date by which an entity would be able to pay its due debts was extended to July 2022.
Clause 5 of Schedule 13 of the Companies Act 1993 gives the definitive requirements.
What information was required when a business entered BDH
A business entering into BDH was required to send a completed Entry Notice to the Companies Office. It was also required to send a copy to each of the company’s creditors, along with:
- a signed certificate from each supporting board member, showing their agreement to enter Business Debt Hibernation according to the Act
- at least a high-level description of the proposed arrangement
- the total number of creditors and the total amount owed
- a postal or email address and telephone number for inquiries
- the date the Entry Notice was sent to the Companies Office.
This was not the creditor proposal but gave creditors the initial information they needed. If a board did not provide this information as required, each director committed an offence and could receive a fine.
Clause 7 of the Schedule 13 of the Companies Act 1993 gives the definitive requirements.
For BDH to continue, by the end of the initial month's protection period at least half of the business’s creditors must agree to the arrangement the business proposes. If the proposal has majority agreement, all creditors are bound — not just those who voted for it.
While a business is in debt hibernation it can continue to trade, subject to any restrictions agreed with creditors.
Creditors cannot enforce existing debt during the 6-month standstill. They will, however, have the ability to go to the court to seek relief in exceptional circumstances.
Organising 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.
Some creditor organisations have 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 Creditor Proposal to email@example.com
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.
Send us notice of the creditors decision
You must send us a Creditor Decision Notice within 1 month, even if your creditors do not approve the arrangement you propose.
Complete the appropriate notice then send us a copy.
Business Debt Hibernation ends automatically at the end of the 6-month protection period.
Ending Business Debt Hibernation early
To end Business Debt Hibernation early, send us a Cancellation Notice at least 5 working days before you intend to leave Business Debt Hibernation. At the same time, send 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.
Clause 19 of Schedule 13 of the Companies Act 1993 gives the definitive requirements.
If the business enters a creditor compromise, voluntary administration, receivership, or liquidation
Business Debt Hibernation also ends automatically if the business enters a creditor compromise, voluntary administration, receivership, or liquidation.
If this happens, send us a Notice under clause 70 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.
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.
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 the Entry Notice sent to the Registrar and to creditors
- copies of the 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.