Reading time: 5 minutes

COVID-19 and the associated lockdowns have made the last year a difficult time for many businesses. Luckily, the government has developed a range of schemes and measures to support businesses through challenging financial circumstances. One such measure is the Business Debt Hibernation Scheme. This scheme helps to support businesses with cash flow and debt issues through a period where they may otherwise struggle to meet their debts. This scheme will run through to 31 October 2021.

This article explains the Business Debt Hibernation Scheme, how it works, and what businesses are eligible. 

What Is the Business Debt Hibernation Scheme?

COVID-19 exacted a difficult toll for many businesses, restricting cash flow and seeing debt pile up. The government passed a new Business Debt Hibernation scheme in May 2020, and it has recently been extended through to 31 October 2021. 

This scheme provides a process for most businesses in New Zealand to put their debts on hold for a period of time after talking to creditors. It helps companies, partnerships and other entities to manage their debts by taking a break from debts for some time. Sole traders are unfortunately not eligible for the scheme. 

The scheme is a valuable option to consider for any business facing financial stress due to the pandemic. It is well worth considering your options if your business has solvency issues. The nature of those financial issues does not matter. You can apply for assistance if you are struggling with issues like lost revenue due to a lockdown or a depletion of customers and clients from overseas. Any kind of disruption can affect cash flow and make paying debts harder than usual. The government’s scheme is perfect for managing this kind of debt bottleneck. 

How Does the Business Debt Hibernation Scheme Work?

There are a few steps to the Business Debt Hibernation scheme. As a first step, eligible businesses can apply for an initial month of protection while talking to their creditors. During this period, most creditors cannot take legal action to enforce their debts against your business (like applying for your business to be liquidated). If your creditors agree to an arrangement, you can get a further six months of protection.

Note that at least half of the business’ creditors must agree to the arrangement your business proposes. While a business is in business debt hibernation, it can continue to trade. However, your business may be subject to any possible restrictions agreed with creditors as a condition of entering into hibernation. 

There are lots of advantages to this system for your business. Business debt hibernation can: 

  • reduce your burden of existing debts;
  • allow your business to stay solvent
  • allow your business to remain trading as normal; and
  • be a better option than borrowing additional money or voluntary administration. 

You should certainly seek legal advice if you are negotiating this kind of arrangements with creditors. 

What Kind of Businesses Are Eligible for the Scheme?

Most businesses in New Zealand are eligible for the Business Debt Hibernation Scheme, though there are still three criteria to satisfy. 

Criteria

Description

What is your business structure? 

Unfortunately, not all business structures are eligible for the scheme. The scheme does not extend to sole traders, licensed insurers and registered banks. 

However, it does apply to charitable trusts and incorporated societies. In other words, not just companies are eligible for the scheme. You can seek advice from the Companies Office if you are unsure.

Can you pay your debts? 

Your business must have been able to pay its debts as of 31 December 2019 and cannot already be in liquidation or voluntary administration. The business’ board (or equivalent) must believe it is more likely than not that your business will be able to pay its due debts on and after 30 September 2021.

When was your business established?

Your business must have been formed or established before 3 April 2020.

Key Takeaways

The government’s Business Debt Hibernation Scheme is a fantastic option to consider for any company, partnership or trust to manage their cash flow if COVID-19 has made it challenging to maintain solvency. The government has extended the scheme through to 31 October 2021. Businesses receive an initial month of protection from debt enforcement. At the same time, they negotiate with creditors and receive a further six months of protection if at least half of the business’ creditors agree. While not all businesses in New Zealand are eligible (solo traders are not), most businesses established before April 2020 will be able to apply for the scheme. 

If you want to know more about the Business Debt Hibernation Scheme, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is the Business Debt Hibernation Scheme?

A government scheme brought about by COVID-19, to give businesses another option to manage their debt and cashflow. Negotiating a debt hibernation period with creditors means that businesses get a period of respite until they can restart their cash flow and start trading normally again.

What businesses are eligible for the Business Debt Hibernation Scheme?

All companies, partnerships, trusts and many other kinds of business structures are eligible for the scheme. However, sole traders are not (and neither are registered banks or licensed insurers).

What is the initial period of protection in the Business Debt Hibernation Scheme?

The scheme allows businesses affected by COVID-19 disruptions to apply for an initial month of protection where creditors generally cannot take legal action to enforce their debts against the business. The idea of this month is to provide space to negotiate with creditors to try and agree on a longer period of business debt hibernation.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2020 Excellence in Technology & Innovation – Finalist – Australasian Law Awards 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice – Winner – Australasian Lawyer 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2021 Law Firm of the Year - Australasian Law Awards 2021 Law Firm of the Year - Australasian Law Awards
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards