The Government is moving to safeguard businesses from insolvency with 'safe harbour' legislation for directors’
liabilities and a business debt hibernation regime.
Practically, the business debt hibernation regime will see company directors seeking agreement from their creditors to
‘hibernate’ from their debt – more than half of the people they owe money to will have to agree, and that agreement must
represent more than 50% of money owed.
There will be a threshold test to be passed before directors can seek creditor approval, still to be announced.
Creditors will have a month from receipt of the business' proposal to decide if they agree to put a business’ debt into
The intent is to allow businesses to keep control of their financial situation, without needing to go through existing
slower and harder to execute processes under our companies law or, if terminal, an insolvency process. The Government
wants a ‘safeguarding’ solution that is simple and flexible, can be enacted quickly, and can be readily applied without
obtaining legal advice (more on that later).
Our companies law already includes a number of processes which can be used by a company to make arrangements with its
creditors to secure its ongoing trading future. However, these involve significant time and resource (for example a
scheme involves court approval, and voluntary administration involves the appointment of an insolvency practitioner). Or
there is a high threshold for approval (for example, a creditor compromise requires the agreement of half of creditors
by number and 75% by value). And in some cases there will be a combination of both those practical hurdles.
The beauty of the business debt hibernation (BDH) regime is its relative simplicity - but we cannot ignore that it gives
rise to a myriad of complicated quandaries. So the detail will be key.
BDH does not have some of the safeguards contained in existing constructs in New Zealand companies law. In particular,
the creditor approval threshold is lower and there is no independent practitioner running the business during the
moratorium period. This is deliberate to achieve the speed and agility the government seeks, and the circumstances
However, it is a difficult balance to strike. Each company's financial position and creditor composition will differ.
Not all creditors' interests will be aligned. Creditor dynamics may be difficult to navigate. Minority creditors will be
dragged by the decision of the majority so it is important that the rights of minority creditors are protected in an
appropriate way. The detail on the threshold test and the types of conditions that a BDH proposal may contain will be
key to addressing this.
Success of the BDH regime will rely to an extent on good-faith assessments, and confidence by directors that they can
trade their way out of the debt burden when it falls due. In times like these such decisions can be clear-eyed, but also
clouded by a desperate kind of optimism. There is the obvious risk that companies (which were otherwise of questionable
solvency pre-Covid) will use these provisions to buy time. Again, the detail of the threshold test will be key to avoid
potential abuse of the regime.
The Government will be acutely aware of the risk of knock-on consequences - the risk that a moratorium could in turn see
a business' creditor needing to seek its own moratorium. Minor creditors are surely at risk here. Larger creditors may
have the reserves to weather a moratorium or may otherwise be in a position to take a portfolio view on which requests
to approve. Minor creditors are likely to be those that need some form of payment the most and have less breathing space
to endure seven months of sitting on their rights. And of course, as the economy comes back to life the new normal may
turn some things on their heads. Some businesses that would have been described as larger creditors just two months ago
may now be the ones most in need of emergency respiration.
The suggestion in the Companies Office announcement that the BDH scheme is designed in a way so that businesses can
readily apply it to their circumstances without needing legal advice is a curious one. The solvency twilight zone is not
really the time for directors to avoid getting good professional advice. Asking all of one's creditors for a six-month
break on paying debt is a decision no business should take lightly, especially where the consequences of rejection may
ultimately be terminal.
Savvy businesses will involve lawyers, and accountants or insolvency practitioners to help craft any BDH proposal in a
way that increases the likelihood of creditors agreeing to it. The involvement of professional advisers may help give
creditors a degree of comfort in the management of the company, the robustness of any plan and the business' prospects
of recovery. Some businesses may look to go further and put in place some formal oversight or control by an accountant
or insolvency practitioner for the moratorium period.
It is admirable that the Government is developing novel solutions that will remove some stress from vital areas of the
economy and give hope to beleaguered directors. But in the rollout the people who run our businesses may well find
themselves needing access to the sort of legal and - especially – accounting advice they may be thinking they can avoid.
Indeed, this advice might be precisely what is needed to get any BDH proposal across the line, and to avoid unforeseen
consequences down the line.