Under the federal Bankruptcy and Insolvency Act (BIA), there are two types of proposals that may be available to debtors in certain circumstances as possible alternatives to bankruptcy. These are described as “Division I” and “Division II” proposals as the legal basis for them are set out in Part III of the BIA.
A proposal is an offer to creditors to pay a percentage of what is owed over a specific period of time, or to extend the amount of time to pay off the debt, or a combination of both of these options. Creditors vote to accept or reject the proposal.
The proposal gives an insolvent person temporary financial protection so the person can reorganize their finances. For a corporate debtor, a successful proposal may allow a corporate debtor to work through to the end of the proposal period and emerge from this process with its business operations still intact.
Unlike bankruptcy where the distribution list is set by statute, in a proposal the payment of claims is based on negotiations between the parties.
Division II Proposals (as described as “Consumer Proposals”)
Under Division II of the BIA, an individual (corporations are excluded) can submit a proposal to his/her creditors for the settlement, reduction or extension of claims.
A consumer proposal can be appropriate where the person’s debts have become unmanageable, but the debtor can still make some form of payment to creditors.
A consumer proposal is available to debtor individuals who have debts which total less than $250,000 (excluding mortgage debt secured by the individual’s principal residence) as long as the individual’s assets value exceeds the total outstanding debts.
The benefits to a consumer proposal include the following:
- Upon filing a proposal, legal proceedings by creditors, other than secured creditors, are postponed;
- The individual may be able to keep possession of certain assets that would otherwise be sold via bankruptcy;
- Extends the time during which the payments to creditors is made, to a maximum term of five years;
- Unless creditors holding 25% or more in value of proven claims request a meeting and vote of creditors, a creditor meeting is not held and the proposal is deemed to be accepted by creditors;
Division I Proposals
A proposal under this division of the BIA can provide assistance to a business that has a legitimate prospect of success but requires temporary protection from creditors in the short term.
Proposal acceptance is determined by the proposal receiving support of 50% or more of the number of creditors who represent at least two-thirds of the value of claims against the company for each class of creditors.
The benefits to a proposal under Division I include the following:
- Under a Division I proposal, there is no limit on the amount of debt owing by the debtor;
- Similar to the consumer proposal, there is postponement of proceedings against unsecured creditors once the proposal or a notice of intention has been filed;
- Once the proposal or notice has been filed, no one can commence or continue a claim against a director on any claim that arises before the proposal proceedings which relates to obligations of the corporation and its directors;
- If the proposal is accepted by the creditors and approved by the Court, all unsecured creditors are bound by the proposal, including those who voted against it;
- Secured creditors have the option of being part of a Division I proposal.
If you or your business are suffering from cash flow issues during this challenging time, you may wish to consider seeking legal advice to determine if a proposal can provide some financial relief.