An insolvent business has options other than bankruptcy. One such option is to pursue a proposal under the Bankruptcy and Insolvency Act. This temporary shelter affords the business an opportunity to devise a new plan or proposal to make to its creditors to manage debt while working to regain financial stability. In a successful proposal, unsecured creditors achieve a better recovery, and the debtor company is able to continue operating and avoid bankruptcy. However, not all proposals are successful, and a number of factors can cause a proposal to fail.
A meeting of creditors must be held within 21 days of the proposal’s filing. In order for a proposal to move forward, it must be approved by:
- A majority in the number of creditors; and
- Two-thirds in dollar value of the total debt
If the proposal is not approved be creditors, the debtor company is deemed to have made an assignment in bankruptcy.
If successfully approved by creditor vote, the proposal can move onto the next step: court approval. In considering the proposal, a judge must be satisfied that the proposal is both reasonable and beneficial to the creditors.
If the Court grants approval, all creditors (including those who voted against) are bound by the proposal’s terms. If the Court rejects the proposal, again the debtor company is deemed bankrupt.
With both the debtor and its creditors standing to benefit, seeking the counsel of an experienced insolvency lawyer provides the best chance of success in moving a restructuring plan from proposal to actual execution.