Managing debts caused by Covid-19

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We are into our fourth week of lockdown and plenty of businesses out there are now dealing with a growing mountain of debts that they have little prospect of paying in the short term. Creditors pushing for payment will be entitled to resort to such enforcement processes as statutory demands, liquidations, personal demands under guarantees and the like.

The government has recently introduced some temporary measures to enable businesses who are negatively affected by Covid – 19 to put any existing debts into “hibernation” until they are able to start trading normally again. This won’t be a complete answer to financial struggles of debtor companies but if used correctly may give some relief from debts. It may also assist in staving off statutory demands and other demands for payment.

How will Business Debt Hibernation work?

The details of the legislation have not yet been worked through, but the proposal is that a debtor company will first put together a scheme for putting the business into hibernation. This scheme could cover such things as disclosure of all company debts and proposals for repayment or deferral of debts.

Once the scheme is prepared, from there, the company will need to discuss it with creditors and seek their approval.

Key features of the proposal referred to on the Companies office website are that:

  • directors will have to meet a threshold before being able to access the Business Debt Hibernation regime and putting a scheme to their creditors for approval
  • creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree
  • there will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further 6 month moratorium if the proposal is passed. This means that during that period, creditors will not be able to take any enforcement action against debtor companies.

Once approved, the Business Debt Hibernation scheme would be binding on all creditors other than the company’s employees. Once approved, the business would be able to continue to trade, subject to any restrictions that are agreed with creditors.

It is further proposed that any payments might be made by the company to any creditors would be exempt from the normal voidable transactions regime.

What should a debtor company do if they are aware they are going to continue to struggle to pay costs?

  • Give immediate thought to how a business hibernation debt scheme might apply to you.
  • Work through the nuts and bolts of the terms of any business hibernation debt scheme, including understanding the total level of indebtedness that might arise over a six-month period, what bills might be able to be paid and what bills will need to be deferred.
  • Communicate with creditors in order to obtain their approval. Creditors are going to want to be satisfied that there is no other means of payment and that the underlying business remains viable so that in the event a debt is deferred for six months, there is still a reasonable likelihood of payment.

For further information please contact me on 021 791 740

This article is not a substitute for legal advice about your own individual situation. Every case can be different so please seek legal advice or contact me direct for advice that applies to you.