Business Debt Hibernation

How might Business Debt Hibernation affect you?

Following our recent article outlining the Government’s support packages for businesses, this article provides a short summary of how the Government’s proposed Business Debt Hibernation Scheme (Hibernation) is intended to work.

As with the other changes outlined by the Government on 3 April 2020, if passed by Parliament, legislation will be backdated to 3 April.

What are the proposed changes?

Hibernation is a process that will give businesses time to have discussions with creditors about prioritisation and payment of debt before putting in place potentially irreversible processes such as liquidation and voluntary administration. Hibernation suspends the enforcement of debts against the business – for one month where the business triggers the regime by providing a proposal to creditors, with an extension of six months if approved by creditors. Businesses can continue to trade in Hibernation, subject to any restrictions set out in the proposal.

Details aren’t yet clear but at this stage, the process appears to be:

• The business can be of any entity type, for example, a company, limited partnership, trust, partnership, except sole traders (and various other financial service providers);
• The business must pass some form of threshold, which is yet to be confirmed by Government. In our view, the threshold may include requirements such as: (i) the business being solvent before the Covid-19 lockdown commenced, (ii) the business having insufficient cash flow to pay its debts due to Covid-19, and (iii) that the business is likely to be able to pay its debts after the Hibernation is lifted;
• The business then puts together a proposal, and provides it to creditors
• Creditors have one month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% of creditors agree (by number and value). If approved, all creditors (other than employees) are bound by it;
• Debts will not be able to be enforced during the one month proposal consideration period. If the proposal is passed by the creditors, then debts will not be able to be enforced for a further six months; and
• Payments or dispositions of property by a company to creditors during Hibernation will be exempt from the voidable transactions regime, which will give creditors comfort that money or property they receive from companies in Hibernation can’t be clawed back by a liquidator that is later appointed. Some basic requirements will continue to apply, including acting in good faith, arms’ length terms, and not having intent to deprive existing creditors.

What does this mean for you?

The Government has stressed that the purpose of Hibernation is to give businesses time to talk to their creditors about debt and prioritise the payment of some debts while deferring others. This may allow for more businesses to remain in the control of their owners/operators, rather than being transferred to insolvency practitioners. Businesses are being urged to have open dialogue with banks and other creditors, as well as to take up other schemes offered by the Government - such as the Wage Subsidy Scheme and the Business Finance Guarantee Scheme.

It doesn’t appear that Hibernation is intended to give the business complete relief from all obligations. For example, it appears company directors must continue to comply with their duties, albeit potentially in a modified form (see our earlier article here). It is also not clear what the follow on impacts of Hibernation are. For example, can a creditor terminate a contract if a business in Hibernation fails to pay money or fails to perform a contract? Can a creditor charge interest during Hibernation? What if the Hibernating businesses debt and cash flow position returns to normal more quickly than anticipated?

The details of Hibernation are still being considered by the Government and as a result may change in the coming days/weeks.

Where to go for help?

If you think Hibernation may be useful for your business, or you receive a Hibernation proposal, and you are uncertain what to do next, we recommend that you discuss this with your accountant, lawyer or insolvency practitioner. If you don’t know who to call, please call NWM and we can assist. Phone us on (07) 834 6000.