16 July 2020

Business Debt Hibernation – Survival Following COVID-19

What do you do when a debtor company asks you for Business Debt Hibernation?  Business Debt Hibernation (BDH) allows companies affected by COVID-19 to put in place a one month voluntary arrangement whereby creditors are paid a percentage of outstanding debt, with the balance delayed. Under the new Schedule 13 of the Companies Act 1993, where debtors require further time, and if creditors agree, a further period of six months protection can be arranged.

Does your debtor company qualify?

A debtor company may apply for BDH if:

• It was able to pay its debts as at 31 December 2019;
• It has or is likely to have in the next six months significant cashflow problems, however will be able to pay its debts after that six month period (and by no later than 30 September 2021);
• At least 80% of the directors pass a resolution for BDH for an initial one month period;
• The directors who vote for BDH sign a certificate setting out the grounds as to how the company will be able to pay its debts within the prescribed timeframe;
• The directors state they are acting in good faith.

Companies registered after 1 January 2020 and before 3 April 2020 are automatically excluded from applying for BDH.

What say do creditors have?

Before expiry of the initial one month period, creditors must vote as to whether BDH should continue for a further six months.  All company creditors should receive:

• A copy of the proposed resolution for BDH for a further six months;
• The proposed arrangement;
• “How to vote” instructions;
• Confirmation that the vote is binding.

For the vote, a “related creditor’s” vote cannot be taken into account.  After a successful vote, notice of the BDH extension will be registered with the Companies Office.  The six months starts from the date of registration.

The arrangement

An arrangement can:

• Reduce the amount to be paid during BDH (however, creditors cannot alter debt interest rates);
• Postpone payment dates;
• Prevent the exercise of powers/restrain creditor rights during BDH.  For instance, it could be that a debtor company only pays 40 cents in the dollar during BDH, but the 60 cents in the dollar remains to be paid after BDH.

An arrangement cannot cancel, vary, or prevent the exercise of creditor rights at the end of the BDH.

During BDH, recovery options can be limited.  To ensure recovery, it is important to closely review the arrangement and decide whether the arrangement affords adequate protection.

Following BDH

BDH will end:

• After the initial one month plus six months (seven months in total); or
• Earlier if the directors agree.

The Court may order that a creditor is not bound by an arrangement if the arrangement approval process was flawed or is unfairly prejudicial to the creditor.  There are strict timeframes on challenging an arrangement in Court, so being proactive is essential.

On receipt of a BDH notice, reviewing the proposed arrangement is a useful first step in deciding whether further action is required.  If you are unhappy with the arrangement, Court action is available.

If you would like further information, please contact Daniel Shore on 07 958 7477.