Business Debt Hibernation

The COVID-19 Response (Further Management Measures) Legislation Act has now been enacted by Parliament. The Act makes changes to the Companies Act and other related legislation to help businesses facing insolvency due to COVID-19 to continue trading. The Act also includes relief for companies and other entities facing difficulties in complying with their statutory obligations, or obligations under their constitutions or rules, because of COVID-19.

The Act introduces a ‘safe harbour’ from sections 135 and 136 of the Companies Act to provide relief to company directors facing insolvency as a result of COVID-19. Sport NZ supported the extension of the ‘safe harbour’ provisions to include incorporated societies, charitable trusts and other unincorporated bodies however the Epidemic Response Committee, on the advice of the Ministry of Business, Innovation and Employment, decided they should apply to companies only, due to the fact that the duties on incorporated societies exist in common law only and are not currently defined in statute.

Incorporated societies, charitable trusts and other unincorporated bodies can however utilise the Act’s debt hibernation regime, which enables businesses (and this will include sporting bodies) to place existing debts into hibernation for up to seven months. A business may hibernate its debts if, at 31 December 2019, it was able to pay its debts, and at least 80% of the directors agree it may do so. A business may hibernate its debts for a further 6 months if a majority of its creditors agree. If creditors reject the proposal, directors can either continue trading, enter voluntary administration or appoint a liquidator.  Note hibernation does not allow you to compromise (that is, reduce) your debts.  It only allows you to agree with your creditors to defer the payment of the debts by six months.

During the period of debt hibernation, creditors of a business will not be able to place it into liquidation (with some exceptions). Further information on the debt hibernation scheme is available here.