1

2

Introduction: The Business Hibernation Plan ......................................................................................... 3

Executive Summary ................................................................................................................................. 4

But First, a Little About Us ...................................................................................................................... 5

Suspending or Reducing Your Commercial Lease ................................................................................... 6

Employment cost reduction .................................................................................................................. 10

Do a deal with the IRD for outstanding tax ........................................................................................... 13

Payment plans with your creditors ....................................................................................................... 14

Recovering your debts .......................................................................................................................... 15

Business Debt Hibernation.................................................................................................................... 17

Corporate Creditor Compromise .......................................................................................................... 26

Next Steps: Get Help Now..................................................................................................................... 29

TABLE OF CONTENTS

3

In this book, we outline the legal playbook to hibernate your business in the era (and post era) of

Covid-19.

This playbook is aimed at helping those who have had their business turned off overnight due to this

pandemic. The aim of these businesses is to hibernate during this period so they can survive and go

on to thrive.

For those who can continue to trade, much of this book will also be relevant and usable as you too

must reduce expenses and increase cash in any market.

For those who are unable to survive using these techniques or any other, we suggest an emergency

call with one of our experts, which will be free, to discuss your situation and the options available to

achieve the best strategic outcome. You can book a call with an expert here:

https://norlinglaw.co.nz/consultation-brent/

For regular updates, we will be uploading videos here: https://norlinglaw.co.nz/videos/ and

publications here: https://norlinglaw.co.nz/blog/.

This book was drafted, named and launched before the NZ Government launched their “Business

Hibernation” scheme. It has since been updated to include the formal scheme incorporated by the

NZ Government.

Introduction: The Business Hibernation Plan

4

In this book, we will discuss some quick options to help businesses ‘hibernate’ temporarily during

hard times. To us, hibernating strategies means reducing expenses and increasing cash flow, so we

explore some options to do this:

• The legalities around suspending or reducing the rent on your commercial lease.

• How to reduce your employment costs.

• How to do a deal with the IRD to remove interest/penalties and get on a payment

arrangement.

• How to approach payment arrangements with your creditors.

• How to recover debts in these turbulent times.

In some cases, businesses need more formality to bind creditors into an arrangement so the

business can survive. We will also discuss two more formal options, being:

• A formal creditor compromise; and

• A formal Business Debt Hibernation.

These two options can be used to bind creditors into a formal arrangement.

Executive Summary

5

Our prime concern is to obtain favourable results for our clients. While we provide a number of

specialist services, ultimately we resolve complex commercial disputes.

Norling Law is a specialist Litigation and Dispute Resolution practice that has been regularly

recognised in New Zealand Law Awards/Legal 500 for the quality and expertise of our service since

2014 – 2020.1

In 2019, Norling Law was a winner of Innovative Firm of the year.

In 2020, Norling Law was a winner of Innovative Firm of the year.

One of our core practice areas is Insolvency and Restructuring.

We are experts in what we do. We do what we do well, and nothing else. We are firm believers that

lawyers have pockets of knowledge and that they should practice within those areas.

If we are not the right lawyer, we will communicate that early and make an introduction to the right

person who is an expert and can add maximum value.

We are passionate about the areas of law to which we practice and we are focused on delivering

exceptional results.

We are based on the North Shore, Auckland and our clients are across New Zealand and abroad.

1 Details of awards here: https://norlinglaw.co.nz/people/.

But First, a Little About Us

6

As at the date of writing this book, the New Zealand Government had issued the stages it will use for

managing the pandemic. New Zealand went into lockdown. All non-essential businesses closed

during this period.

We were isolated, and for many, offices and other commercial buildings were left inaccessible.

However, does this mean that businesses must pay rent for the time when there is no access?

If the lease is on the standard deed of lease from the Auckland District Law Society, then there may

be a reprieve.

Clause 27.5 of the standard deed of lease from the Auckland District Law Society provides that:

If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the

Tenant’s business from the premises because of reasons of safety of the public or property or the need

to prevent or overcome any hazard, harm or loss that may be associated with the emergency

including:

…

(c) Restriction on occupation of the premises by any competent authority.

Then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing

on the date when the Tenant became unable to gain access to the premises to fully conduct the

Tenant’s business from the premises until the inability ceases.

Clause 47.1(d) defines an “emergency” to mean a situation that:

(a) Is a result of any event, whether natural or otherwise, including an … epidemic; and

(b) Causes or may cause loss of life or serious injury, illness or in any way seriously endangers the

safety of the public or property; and

(c) The event is not caused by any act or omission of the landlord or tenant.

In the present circumstances, it is highly arguable that there is an emergency within its meaning of

clause 47(1). This is supported by the fact that an epidemic notice has been issued under s 5 of the

Suspending or Reducing Your Commercial Lease

7

Epidemic Preparedness Act 2006. Further, the current epidemic may cause loss of life and the event

is not caused by any act or omission of the landlord or tenant.

Assuming that there is an emergency and the tenant is unable to gain access to the premises to fully

conduct its business, then clause 27.5 states that the tenant would not be liable for a proportion of

rent and outgoings from when the tenant became unable to gain access until that inability ceases.

It is important to note that the operation of clause 27.5 does not require notice from the tenant. It

means that clause 27.5 operates automatically and it would be highly arguable for tenants to rely on

this clause for proportional rent and outgoings. What does this mean to tenants and landlords? If

you are the tenant, you are likely to argue that zero access requires $0 rent whereas the landlord

will want payment. They are, of course, storing your business assets during this time. For landlords,

this means that you need to anticipate this potential outcome and make provision for less rental

income.

Clause 27.6 of the standard deed of lease from the Auckland District Law Society provides a further

option by giving either party the choice of terminating the lease by giving 10 working days written

notice to the other if:

The tenant is unable to gain access to the premises for the period specified in the schedule; or

The party that terminates the lease can at any time prior to termination establish with reasonable

certainty that the tenant is unable to gain access to the premises for that period.

Accordingly, depending on the period contained in the schedules, the tenant might also be able to

terminate the lease.

It appears that the purpose of clauses 27.5 and 27.6 is to shift the burden of the cost of emergencies

to the landlord.

The Doctrine of Frustration?

The doctrine of frustration of contract allows parties to be relieved from their legal obligations

where contracts have become impossible to perform. Frustration occurs where neither party has

been the ‘defaulting party’ regarding their contractual obligations, but it has become incapable of

performing the contract due to circumstances that are outside of the parties’ control.

In National Carriers Ltd v Panalpina (Northern) Ltd, Lord Simon explained the doctrine in the

following manner:

8

Frustration of a contract takes place when there supervenes an event (without default of

either party and for which the contract makes no sufficient provision) which so significantly

changes the nature (not merely the expense or onerousness) of the outstanding contractual

rights and/or obligations from what the parties could reasonably have contemplated at the

time of its execution that it would be unjust to hold them to the literal sense of its

stipulations in the new circumstances; in such case the law declares both parties to be

discharged from further performance.

The threshold to satisfy that the contract has been frustrated is high and the doctrine would not

generally be applicable where the compliance with the contract is temporarily delayed, or the

contract has become more expensive.

In Planet Kids v Auckland Council, the Supreme Court of New Zealand has confirmed that the

doctrine of frustration could apply to leases.

Examples of frustrating events could include an unavailability of a thing (e.g. if the premises which

were leased have been burnt), unavailability of a person (e.g. if the person who was supposed to

provide services have become unwell or passed away), or supervening illegality (e.g. performing the

contract have become illegal through legislation or Government’s intervention, either permanently

or for a prolonged period).

Whether the doctrine would be available to specific businesses during COVID-19 crisis will depend

on various factors.

In Planet Kids v Auckland Council, relying on an earlier English authority, the New Zealand Supreme

Court set out the following factors that would need to be considered in deciding whether a contract

is frustrated:

a. The terms of the contract;

b. Its matrix or context;

c. The parties’ knowledge, expectations, assumptions and contemplations, in particular as to

risk, as at the time of the contract, at least to the extent that these can be ascribed mutually

and objectively;

d. The nature of the supervening event; and

e. The parties’ reasonable and objectively ascertainable calculations as to the possibilities of

future performance in the new circumstances.

In the context of COVID-19, the relevant factors to consider are the length of the lease (e.g. a 10

years lease or a 6 months lease), the stage of the lease at the time of COVID-19 (e.g. initial or final

9

stages), the nature of the business and its ability to operate from the premises during various Alert

Levels, and any express indications within the lease agreement as to the availability of frustration.

For instance, if the lease is of a short term, and the business is not able to operate during some or all

Alert Levels, there is a higher chance that the doctrine of frustration would apply. However, if the

lease is for a period of 10 years and/or it was agreed within the lease agreement that no event could

render the lease frustrated, it is very unlikely that the doctrine would be applicable.

Unlike the provisions of the Auckland District Law Society deed of lease, which might allow reduction

to/stopping payments of rent on a temporary basis, in the event of a frustrated lease, the remedy is

the termination of the lease. For this reason, before raising the doctrine of frustration, the tenants

should carefully consider how losing the lease would impact their business after they are able to

start operating their business again. The tenants would need to balance the long-term implications

of the lost lease, against the immediate liquidity issues.

The doctrine of frustration is a complex principle that should be relied upon carefully. If the tenant

incorrectly relies on the doctrine, the tenant might be repudiating the lease and could become liable

for the landlord’s losses.

10

Employment cost reduction

The first consideration at this time is to assess whether the business is eligible for the employer

subsidy. There is lots of information on that, so we do not intend to be one of the hundreds of

businesses that repeat this information. You can find information on the Government website here:

https://www.workandincome.govt.nz/products/a-z-benefits/covid-19-support.html

A sad reality is that many businesses are going to need to reduce staff costs further as the

Government support is not adequate for the circumstances.

This is possible. It can be brutal for all concerned, but it is necessary for survival in many cases.

Trial Period Employees

These may be the simplest of all to deal with. Those on trial periods can have contracts terminated

with relative ease. Last in, first out is often more popular with many business owners than letting go

long term and loyal employees.

Another alternative is to move these employees to casual contracts, which is possible while the

employee is still on a trial period. Not all employees would welcome this change. However, there are

some who would accept it.

Casual Employees

Where there are employees who are genuinely casual employees, there is no expectation of ongoing

work. Employers can deal with these employees by ceasing to offer work or limiting their work

hours.

“Genuineness” of the casual nature is key. They should have a casual agreement, irregular hours and

both parties can change hours as necessary. There are many factors to consider. If in doubt, seek

advice.

Permanent Employees

Broadly, there are two options.

Firstly, an employer could seek to deal with the arrangement by agreement. This involves a meeting

to discuss the issues. Outcomes could be:

11

• A reduction in salary by agreement;

• A reduction in hours by agreement;

• Employees agree to take annual leave;

• Employees agree to take unpaid leave; or

• Employees agreeing to a combination of the above.

The second option involves the employer taking a more active approach which involves more

process to be effective. The second option is redundancy.

The parties owe obligations of good faith to each other. Therefore, the process should be done in

good faith. To effectively complete the process, the employers need to have a clear proposal that

they wish to make to the employees.

Make sure the redundancy proposal is based on sound business reasons and is clearly articulated. In

this case, business closure (or reduction) due to Covid-19 is a sound reason.

The employer should also ensure that the process and decision-making is compliant with the

procedures and criteria set out in any employment agreement or employer policy.

The employer needs to ensure that all relevant is disclosed to affected employees.

Next, the employer should give every affected employee a proper opportunity to give feedback on

the proposal before a decision is made. Only then, should the employer carefully consider employee

feedback and give reasons why that feedback is not accepted and proceed to make a decision.

Consultation prior to the decision is key. Employers need to ensure redundancy selection criteria are

rational and clearly explained and are consulted on.

So, lets break it down into simple to follow steps in the context of Covid-19:

Step one: Document the proposal.

Step two: Present the proposal to employees.

Step three: Gather feedback from employees.

Step four: Genuinely consider the feedback from employees.

Step five: Confirm the new structure – in writing and via a meeting.

Step six: Implement the change.

12

In these uncertain times due to Covid-19, the ‘normal’ rules on redundancy ought to be disregarded

to some extent. It is our view that the Courts should take a sympathetic approach to employers who

restructured due to Covid-19 and as long as the fundamentals are complied with, the timeframes

required for the process can be significantly truncated.

Where it is expected that the business will be able to return to its normal workload within a short

period after Covid-19 outbreak, it is recommended that the first option of agreement with

employees is explored well before proceeding to the redundancy process. As finding the right staff

after the outbreak might be difficult and this might slow the business down from returning to its

efficiency. However, where it is expected that the business will take a while to recover, proceeding

to redundancy might be a better option.

13

Do a deal with the IRD for outstanding tax

Tax relief and income assistance is available to people affected by the downturn in business due to

Covid-19. The IRD have a range of ways to help depending on your circumstances.

The IRD has discretion to write off interest and penalties and to enter into instalment arrangement

for payment. The IRD even has the ability to write off core tax in some cases.

Each case is very dependent on its own circumstances, but we can expect the IRD to be very

understanding on the difficulties facing business owners at this time.

As such, it is important that you continue to file returns and remain current in your tax obligations

whilst proactively communicating (in a meaningful way) with the IRD. Failure to file returns on time

and being cooperative with the IRD is likely to prejudice future negotiations with the IRD to seek a

relief.

If you are to make a proposal to write off tax, interest or penalties or enter into an instalment

arrangement, we recommend you get representation in doing so.

14

Payment plans with your creditors

For some, cash just simply will not be available to pay creditors.

There is one rule here: Do not put your head in the sand. Communicate. Communicate.

Communicate. There is only one thing worse than not communicating and it is this:

https://norlinglaw.co.nz/aiovg_videos/public-service-announcement-to-debtors/

If you cannot pay, pick up the phone and discuss this with the creditor. Find a solution that is one

you both can live with. Some possibilities are:

• A payment holiday until we are out of stage 4 to allow you to get your business fully

operational again;

• A payment plan that allows you to pay out of your new version of cash flow; or

• Deferral of payment for a longer period of time, but this may come with the provision of

security, so has downsides.

Creditors hate it when you do not communicate, so be upfront. We also expect creditors to be more

cooperative and agreeable to negotiations during this difficult period.

Present your solution in a way that demonstrates the alternatives. For example, if they push for

payment now, it may be that they ‘cannot get blood out of a stone’ and so it may just result in a

liquidation where no one wins. Whereas if the creditor works with you, they get something out of it

that is better than liquidation.

Every case will be different.

15

Recovering your debts

This mission is crucial.

A business cannot operate if debtors do not pay.

You have two options, collect debts yourself, or get a professional to do it. Here are the 13 steps you

need to take should you chose to do it yourself:

Step one: Have a contract. Make sure all entitlements and obligations are crystal clear.

Step two: Make sure the contract is presented, agreed and signed.

Step three: Be very clear on the due date for the invoice. Make sure there is no ambiguity.

Step four: Remove any barriers to payment. Are you able to direct debit? Can you take credit card?

Can you give a link via accounting software (like Xero) to ‘pay now’.

Step five: If appropriate to your business, automate some of the follow-up emails.

Step six: Have a very firm internal collection policy and take the time to define what steps will be

taken as the debt ages. Remember, the older the debt, the harder it is to collect.

Step seven: Remember communication is key. Often, the person within your business with the client

relationship should be the person to follow up the payment initially. Use this as an opportunity to

get a commitment as to when you can expect payment. In this environment, acknowledge the

disaster we are in. It is hard for everyone. Demonstrate you care but also need them to meet their

commitment to you.

Step eight: Decide how long you will give the debtor to pay. 7 days? 14 days? 30 days?

Step nine: Stick to your word. If there has not been a payment when due and promised, follow up

again and ask when payment can be expected.

Step ten: Refer the collection to someone other than the person with the client relationship to

handle (either internally or externally). This demonstrates an escalation in seriousness. It is also

easier for someone without the relationship to have the ‘hard’ discussion that is necessary at this

16

point. That person will also be less likely to accept the multitude of excuses that are likely flowing at

this point.

Step eleven: If they still do not pay, communicate what you will do next. The promise you make

should align with the collection policy you have defined. For example, after 30 or 60 days overdue,

your policy may be to refer the debt to an external agency for collection or to commence legal

proceedings. At this point, remind them that they will be liable for all collection costs and interest as

per your terms of trading and that this will significantly increase the cost to them.

Step twelve: Again, stick to your word. If they don not pay. Refer it to collection. Or instigate legal

proceedings.

Step thirteen: Do not fail to follow through on any promise to take action. That will only water down

what you do next. It will give the debtor comfort that they can delay and deprioritise this debt (as

debtors usually are juggling numerous debts, not just one).

Over the years, Norling Law has proven to be one of the most effective debt collection lawyers in

Auckland, New Zealand.

We understand how debtors work. We understand that debtors do not pay for only one of two

reasons. They cannot or they will not. We quickly identify which category they fit into and tailor our

approach appropriately.

Where necessary, we employ an aggressive approach to the collection of debt to ensure our clients

are paid first. We also have a depth of knowledge in litigation strategies and processes to ensure

that your matter navigates the Court process quickly and efficiently.

You can also look at selling your debts to a debt buyer who will collect these debts at no risk or cost

to you. If you want a proven process, we recommend 90 Nine. If that path is of interest, you can

apply here: https://www.90nine.co.nz/apply-now

17

Business Debt Hibernation

Overview

Parliament has made significant changes to the Companies Act 1993 (CA) due to Covid-19 crisis. This

part of our book addresses one such change, which has introduced the ability for certain entities to

enter into a formal Business Debt Hibernation (BDH).

BDH helps companies and other entities affected by COVID-19 to manage their existing debts until

they can start trading normally again. For example, businesses may agree with creditors to delay

repaying some of their debt.

If BDH is right for your business, it may help your business to manage its debts as:

a. You can set up an arrangement for your business’s existing debts, e.g. paying your business’s

creditors only a percentage of what it owes them on time and delaying the rest.

b. You can get up to a month of protection from creditors while you set up the arrangement,

meaning most creditors cannot enforce their debts, e.g. apply for your business to be

liquidated.

c. If your creditors agree, you get a further six months of protection.

There are some limitations to BDH as well. For example:

a. Unlike a creditor compromise (addressed in the following chapter), under BDH, entities must

still pay off debts in full. BDH helps entities to manage debts while they are protected, but

the debts do not go away altogether. As such, it is a management mechanism, and not a

solution to wipe the slate clean. If a clean slate is sought, other restructuring mechanisms

will need to be used.

b. It is only for debts the entities already have in existence. Any new debts will have the terms

and conditions the creditors set.

c. Some debts are not covered by BDH, e.g. employee wages and debts to secured creditors

with a General Security Agreement.

BDH reduces the burden of existing debts, so you can stay solvent and start trading normally again.

For example, it might take a couple of months to get back up to speed, and then pay back the

18

remaining debt over the following quarter. It is a new option to consider alongside borrowing

money, or processes like creditor compromises or voluntary administration. Whether BHD is the

best way forward for a struggling business will be case dependent.

If you do decide to proceed with BDH, while you work your arrangement proposal through (up to

one month), creditors cannot enforce their debt against your entity. Meaning, they cannot apply to

liquidate your company during this period, or use other enforcement mechanisms. This will provide

a helpful breathing space for you while you focus on moving the plan forward.

The BDH proposal will be accepted if the majority of creditors in number and value, who vote, vote

to support it.

You can organise BDH for your entity yourself, or get help from a lawyer. If you do it yourself, you

need to be aware of several legal requirements. For example, you need to complete several formal

declarations and statements. You also need to organise an arrangement proposal and agree it with

your creditors. In most cases, we recommend assistance from a professional.

Step one: Determine Eligibility for BDH

To be eligible for BDH, businesses need to be:

a. The right type;

b. Viable; and

c. Formed or established before 3 April 2020.

Eligible business types include:

a. Charitable trusts;

b. Companies (NZ and overseas);

c. Friendly societies;

d. Incorporated societies;

e. Industrial & provident societies;

f. Limited partnerships (NZ and overseas);

g. Public sector entities;

h. Unincorporated partnerships;

i. Unincorporated trusts; or

j. Others, e.g. unregistered unincorporated entities such as Māori trusts.

Sole traders are not eligible. Neither are registered banks, licensed insurers, and non-bank deposit

takers.

19

The business is considered viable if:

a. As at 31 December 2019, the entity was able to pay its debts as they became due in the

normal course of business;

b. The entity is not already in liquidation, voluntary administration, or other similar processes;

and

c. The board (or equivalent) believes it is more likely than not that the entity will be able to pay

its due debts on and after 30 September 2021, taking account of financial forecasts and

other criteria.

Step Two: Decide and Plan

If your business is eligible, the next decision is to determine whether BDH is a useful regime to use.

There are other alternatives that could be available to your business, such as borrowing funds to

repay the existing creditors, entering into a voluntary administration or a creditor compromise.

For the purposes of the options above, the director may have regard to:

a. The likelihood of trading conditions improving;

b. The likelihood of a proposed arrangement being approved by its creditors under this

schedule (or of the entity reaching a compromise or other arrangement with its creditors);

c. Any other matters they consider to be relevant.

You will need to decide whether to organise things yourself, or get help from a lawyer. Like any

legislative regime, it is a great idea to get professional help if you can.

A professional who is familiar with the processes involved can take you through all the steps and

help you get things right. That gives you the best chance of success, and reduces your chances of

getting into a trouble because of an error.

“Deciding to get help first means you can get support

straight away and avoid any false starts or wasted effort.”

- Ministry of Business, Innovation and Employment

Plan ahead for the rest of the process. Think about what arrangement you want to propose and

gather the information you will need.

20

“You can only enter business debt hibernation once. If you

can’t get your creditors to agree to your proposal, you

can’t come back after the initial month and try again.”

- Ministry of Business, Innovation and Employment

If you fail, you will need to consider other ways to manage your debts. It is therefore critical to get it

right.

The Directors’ Certification

Further, you need to check that those involved in your business are prepared to enter BDH. The

board of an entity may agree to entering into a BDH if:

a. As at 31 December 2019, the entity was able to pay its debts as they became due in the

normal course of business; and

b. At least 80% of the directors of the entity vote in favour of a resolution for the entity to

enter into a BDH; and

c. Each director who votes in favour of the resolution has made a statutory declaration that:

(i) declares that, as at 31 December 2019, the entity was able to pay its debts as

they became due in the normal course of business; and

(ii) the entity has, or in the next 6 months is likely to have, significant liquidity

problems; and

(iii) the liquidity problems are, or will be, a result of the effects of Covid-19 on the

entity, its debtors, or its creditors;

(iv) it is more likely than not that the entity will be able to pay its due debts on and

after 31 September 2021 (or such other date as may be regulated); and

(v) Sets out the grounds for the opinions.

The certifications required by directors ought not be entered into on a pro forma basis. It is a serious

certification which includes the giving of a statutory declaration. The consequences of getting this

wrong could be very onerous. Close attention is required.

21

Step 3: The Entry Notice

To start the process, you need to complete an Entry Notice and send it to the Companies Office.2 The

Entry Notice gives you an initial month of protection, to give you time to sort out an arrangement

with the creditors.

You then need to send the Entry Notice to your creditors, along with other legally required

information and documents. This includes:

a. A signed certificate from each supporting board member in accordance with the CA,

showing their agreement to enter into BDH and providing other required certifications;

b. At least a high-level description of your business’s proposed arrangement;

c. The total number of creditors and the total amount your business owes;

d. The postal or email address and telephone number for enquiries; and

e. The date you sent the Entry Notice to the Companies Office.

The formalities matter. It is important that all information is accurate and present.

This is not your business’s main proposal, but gives your creditors the initial information they need.

If a board does not send this information, each director commits an offence and can be fined.

Once you submit the Entry Notice, your company is protected for one month from legal action to

enforce debts. The protection extends for up to six months if the proposal is accepted (except

exempted creditors).

Step 4: The Proposal

You need to have a plan. You need to show your creditors you have a plan but you need some time

to implement it.

Without a plan, your creditors are unlikely to believe you will recover. For example, you could

propose all creditors get half of what you owe them on time, and you pay the rest back at the end of

the protection period or another date. The proposal needs to make financial sense to everyone

involved.

The proposal should be a better deal for your creditors than the alternative of trying to get their

money back if the business fails. We find a proper comparison of outcomes useful to persuade and

you need to prove all this, e.g. with cash flow forecasts and other evidence to make your proposal

compelling.

2 Use this form for the notice: https://www.companiesoffice.govt.nz/assets/covid-19-bdh/bdh-notices/entry-notice.pdf.

22

Send the proposal to all business’ creditors, along with other legally required information. Your

creditor proposal must include:

a. Instructions for voting;

b. A detailed description of the arrangement you propose and the reasons for proposing it;

c. The exact wording of the vote;

d. Details of who will receive and count the votes; and

e. Explain the implications on creditors if the proposal passes.

You must:

a. Send the creditor proposal to all your creditors at least five working days before the vote or

the voting deadline; and

b. Give enough detail for creditors to decide how to vote.

A cover letter for your creditor proposal is not a legal requirement, but gives you another

opportunity for explaining the basic proposal clearly and explaining why you think creditors will find

it appealing. We encourage a full and robust cover letter explaining the situation. You should reflect

on what the purpose of the proposal is. We consider the purpose is to persuade creditors to accept

the proposal in favour of their standard rights and entitlements. Care should be taken to fully inform

and persuade the creditors.

It is for those reasons that we recommend obtaining expert advice to assist in the preparation and

presentation of the proposal.

You can hold a meeting for creditors to hear and vote on the proposal if you want to, but you do not

have to hold one. In some cases, particularly with larger volumes of debt, a meeting may be useful in

terms of persuading creditors to vote in favour of the proposal. It also allows an open and

transparent process to take and answer questions for the purposes of informing and persuading.

Step 5: Voting on the Proposal

The proposal will be successful if the majority of your creditors in number and value vote to support

the proposal. This is fewer than some alternatives, e.g. creditor compromises need 75% support

among creditors (see below for more detail).

Only creditors who vote will have their votes counted.

In the proposal sent to creditors, you must nominate a person to collect and count the votes. This

role is important. In the event of dispute or ambiguity, this person will determine the outcome,

which is only subject to review at the High Court (an expensive exercise).

23

Can Related Creditors Vote?

There are certain restrictions on related creditors from voting on the proposal.

A “Related Creditor” means, in relation to the debtor entity:

a. A promoter; or

b. A relative or spouse of a promoter; or

c. A relative of a spouse of a promoter; or

d. A director, shareholder, or other member; or

e. A relative or spouse of a director, shareholder, or other member; or

f. A relative of a spouse of a director, shareholder, or other member; or

g. A related body corporate; or

h. Another entity of which a director is also a director of the entity.

The definition is quite wide! The purpose is to put the decision in the hands of third party creditors

and to stop related parties rigging the outcome.

Under the scheme, related creditors cannot vote unless approved by the High Court.

The related creditor may apply to the High Court for an order that its vote be taken into account.

A related creditor that intends to apply to the High Court must:

a. Before a vote is taken on the resolution, send notice in writing to the entity that the creditor

is a related creditor and intends to apply to the High Court for an order that its vote be taken

into account; and

b. Within 5 working days of the meeting of creditors, make an application to the High Court.

There are various factors that the High Court may take into account when considering the

application.

If a related creditor votes on the resolution without a High Court approval, the vote must be

disregarded and notice must be sent to the creditor stating the reasons for the decline.

Implications of proposal being accepted

If the BDH proposal passes, it is binding on all creditors who have been given notice. It also applies to

creditors who had began their enforcement ten working days before the notice was sent to the

Registrar of Companies.

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Creditors who the BDH applies to include those who are owed a debt or liability, present or future,

certain or contingent, whether it is an ascertained debt or a liability for damages.

The BDH scheme cannot apply to the following excluded creditors:

a. An employee of the entity in relation to salary, wages, or other amounts owing by the entity

to the employee in connection with the employment relationship; or

b. Creditors incurred after the Entry Notice was provided.

The Shield Provided by BDH

Essentially, once passed, creditors who were provided with the Entry Notice are unable to enforce

their existing debts. For example:

a. Creditors cannot enforce personal guarantees against guarantors of the business’s debt

during the protected period.

b. Debt collection enforcement is restrained during the protected period meaning debtor

companies cannot be liquidated.

c. Landlords are unable to enforce defaults under their Deeds of Lease during the protected

period.

d. Most secured creditors are unable to enforce their security over the debtor company during

the protected period.

The same prohibitions apply during one month after the Entry Notice is provided to the creditors.

However, there are some exceptions when it comes to the prohibition on secured creditors

enforcing their debts. For example, if the creditor has security over perishable items, such as food,

the secured creditor may enforce their security. Further, those with General Security over the debtor

company (e.g. the bank) may enforce their security in the usual way once the initial one month has

expired.

Conclusion

The regime was designed to be simple. The NZ Government said that it was designed so that

businesses could navigate the process themselves without the cost of external advisors.

In our view, they have failed to meet this standard.

The scheme is not straightforward. It has many procedural requirements and the consequences of

getting it wrong could make or break a business. Further, there are personal obligations on directors

to certify correctly.

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In most cases we will recommend that you get help.

We offer a free 30 minute legal consultation where we can discuss the situation and the best

outcome. You can book here: https://norlinglaw.co.nz/consultation-brent/

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Corporate Creditor Compromise

A compromise is a procedure whereby the insolvent company can reach an arrangement with its

creditors to pay them less than the total outstanding amount and/or pay the owed amount over

time. The purpose of a compromise is to enable a company to trade out of its insolvency thereby

avoiding other insolvency procedures, such as liquidation and/or receivership.

A compromise can be informal, where a private settlement arrangement is reached with all creditors

of the insolvent company. The advantage of an informal compromise is that it is generally more

flexible, and there are fewer expenses. The disadvantage of an informal compromise is that for this

to work, all creditors need to agree to it. An informal compromise can be arranged by the insolvent

company independently, or with the assistance of a professional such as accountant and/or lawyer.

Parts 14 and 15 of the CA 1993 provide a facility for statutory compromises which, if properly

followed, and all necessary requirements are satisfied, are binding on all creditors, including those

who were against them. Such facilities are beneficial when an informal compromise cannot be

agreed upon with all creditors, which is common where there is a bigger pool of creditors and/or

good relationship with creditors has been destroyed. The disadvantage of formal statutory

compromises is that their implementation is generally more expensive. Engagement of a

professional such as an accountant and/or lawyer is essential to ensure that the technical statutory

requirements are satisfied (and in the case of a compromise under Part 15, compulsory as an

application to High Court is required).

The key to a successful compromise, be it informal or statutory under the CA 1993, is the ability to

demonstrate to the creditors (or the Court, in the case of a compromise under Part 15 of the CA

1993) that in the compromise they will receive more than they would have otherwise received in a

liquidation. Generally, creditors would only agree to a compromise if they are satisfied that the

reduced amount and/or delayed payment is better than the alternative payment that they could

receive from a creditor’s distribution in a liquidation (if any).

It is also important that the proposal that is being made is an achievable plan for the insolvent

company. As otherwise, the insolvent company could make a number of payments under the

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proposal, and still end up being placed into liquidation and/or receivership in the event there is a

default.

When to consider creditor compromise rather than other insolvency procedures

A creditor compromise is generally the best solution in the following scenarios:

a. The company is viable, and there is a high interest in saving both the company and the

business.

b. The insolvency has resulted due to a one-off event.

c. The company has a good relationship with the main creditors.

d. The company has essential contracts that could be lost in the event of other insolvency

procedures as they would trigger an event of default.

e. There is no immediate threat from a creditor to put the company into liquidation and/or

receivership.

Compromise under Part 14 of the Companies Act 1993 (the CA)

A Part 14 compromise is an arrangement that can be reached between the insolvent company and

the creditors themselves, without the need to apply to High Court.

The board of directors of the insolvent company may formulate a proposal, and then provide it to all

creditors of the company who will be impacted by the compromise and the Registrar of Companies,

together with prescribed details and information. The following prescribed information must be

provided:3

a. Notice of the intention to hold a creditors’ meeting complying with Schedule 5 of the CA

1993;

b. Names and addresses of the proponents and the capacity in which they are acting;

c. Address and telephone number to which inquiries may be directed during normal business

hours;

d. Events that led to the need for a compromise;

e. What the compromise proposal entails in relation to the amount and timing of payment(s),

and the consequences of the compromise being accepted;

f. The extent of interest of a director in the proposed compromise; and

g. A copy of the list of creditors who will be affected by the proposal and the amount owing or

estimated to be owing to each of them.

3 CA 1993, s 229(2).

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For the compromise to be implemented, it must receive the approval of at least 50% by number and

75% by value of the creditors in each class of creditors who vote on the proposal,4 either at a formal

creditors’ meeting or by way of postal votes.

It is crucial that the classes of creditors, based on their legal rights and economic interests, are

identified. The purpose of this rule is to avoid oppression of minority creditors. The Courts have

stated that classes of creditors should be created using a pragmatic, business-oriented approach,

which is based on considering both the legal rights and the economic interests of the creditors.

Creditors should be separated into different classes if their legal rights or economic interests are so

different that they cannot meaningfully consult with each other.

Related creditors (e.g. directors, shareholders or individuals or entities associated with them) are

sometimes included for voting to support a proposal. Related creditors' interests are too dissimilar

from the other creditors, and they should be put into a separate class for the purpose of voting on

the compromise. Careful consideration should be given to ‘related’ creditors so that they do not

unfairly prejudice third party creditors.

If approved, the compromise binds all creditors to whom notice of the proposal was given, even

those creditors who voted against the proposal and, once payment has been made under the terms

of the compromise, any residual balance must be written off by the creditor.5

It is open to individual creditors, within 10 working days, to challenge a proposal in High Court if they

believe that certain procedures were not complied with and/or there was irregularity and/or the

compromise is unfairly prejudicial, and seek an order that creditor is not bound by the compromise.6

For example, if correct classes were not identified, the compromise may later be overturned by the

High Court.

Compromise under Part 15 of the CA 1993

Part 15 of the CA 1993 enables the High Court, on application of the insolvent company, a creditor or

a shareholder, to order an arrangement, amalgamation, or compromise, on the company, and any

other person that the Court thinks fit.

Before making an order, the Court can direct a wide range of procedural orders it considers

appropriate, including that the notice of the application is given to a specific person, that a meeting

of creditors and/or shareholders is held, that a report on the proposal is provided to Court, etc. The

4 Above, Schedule 5, cl 5. 5 Above, s 230(2). 6 Above, s 232(3).

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Next Steps: Get Help Now

proposal is then voted at a meeting of creditors and/or shareholders. If the proposal is voted by the

required majority, the proposal then goes back to Court for the final approval.

The intent behind Part 15 seems to have been to create the ability to bind creditors to compromises

even where the required consent is not obtainable.

If you would like expert assistance with any of these matters or matters within our areas of practice,

do not hesitate to book a FREE legal consultation with one of our experts. On the legal consultation

we will discuss your circumstances, the options and solutions.

If you would like assistance to collect debts you can book a free discussion here:

https://norlinglaw.co.nz/consultation-brent/.