Debt Hibernation Regime
A COVID-19 Business Debt Hibernation regime is being introduced into the Act. This regime is designed to encourage Directors to talk to their creditors early and encourage businesses to continue transacting with other businesses, by hibernating debts until the company is able to return to normal trading again.
This regime will have some conditions:
- Directors will have to meet a threshold before being able to use the regime (this threshold is yet to be announced);
- creditors will have one month to decide after a proposal is put to them, with more than 50% of creditors (by value and number) having to agree for the proposal to go ahead;
- there is a one month postponement on the enforcement of debts from the date the creditors are notified of the proposal, and a further six month postponement if the proposal goes ahead; and
- it is subject to a condition that any transactions are entered into in good faith, on arm’s length terms and without intent to deprive existing creditors.
This regime will be available to all forms of entities, including those that do not have a legal personality such as trusts and partnerships. However, it does not include insurers, registered banks, non-bank deposit takers or sole traders.
A proposal that goes ahead will be binding on all creditors other than employees, and will be subject to any conditions agreed during the proposal. If the proposal is not accepted by creditors, existing options such as trading on, voluntary administration and appointing a liquidator are still available to companies. Therefore, it is fundamental to be upfront with creditors about the company’s position as early as possible in order to get the majority needed.
Provided by Lane Neave - safe harbours for directors’ duties & debt hibernation regime during covid-19