Several months ago, we provided a summary of the bankruptcy process. This week, our post looks at the basic process involved when an insolvent person (which by definition includes an individual and a corporation, among other “persons”) chooses to make a Division I proposal as an alternative to bankruptcy.
In a Division I proposal, an insolvent person attempts to work out a compromise to repay the insolvent person’s debts. A proposal, if accepted and performed, will typically provide creditors with a better recovery than might otherwise be achieved through the debtor’s bankruptcy. The debtor also stands to benefit since, unlike a bankruptcy, the proposal allows an insolvent person to gain temporary financial shelter so as to reorganize their financial affairs. For a corporate debtor, a successful proposal may allow it to re-emerge at the end of the proposal with its business operations still intact.
Filing the proposal
As with a bankruptcy, an insolvent person looking to make a proposal must work with a Licensed Insolvency Trustee (LIT). The LIT on behalf of the debtor will file the proposal itself or, more typically in the case of a corporation, will file a notice of intention to make a proposal with the Office of the Superintendent of Bankruptcy (OSB). The initial filing imposes a stay on creditors such that they may not commence or continue legal action to enforce their claims against the debtor.
Within five days following the filing, the LIT will notify creditors of the filing. In the case of a notice of intention, the proposal itself must be filed with the OSB within 30 days of a notice of intention, unless within that 30 day period the debtor makes an application to the court for an order extending the time for filing the proposal. Additional extensions may be applied for in appropriate situations.
Meeting of creditors
After the proposal has been filed, the creditors meet to vote on it. The proposal must be approved by a majority in number and two thirds in value of the unsecured creditors of each class. If a proposal is also made to secured creditors, then the secured creditors must also approve the proposal to them with the same majorities of number and value of claims. If approved by unsecured creditors, the proposal will then be presented to the court for review and approval. Approval by secured creditors is not a condition for presentation to the court.
Should the unsecured creditors or the Court refuse to approve the proposal, the debtor will be deemed to have made an assignment in bankruptcy. If all required approvals are obtained, the proposal becomes legally binding on both the debtor and unsecured creditors, as well as on any secured creditors who were made a party to the proposal if the required majority of secured creditors of the class voted in favour of the proposal.
Performance and release
Following approval, the debtor will make payments to creditors through the LIT in accordance with the provisions detailed in the proposal, and perform any other obligations that may have been stated in the proposal. Debts incurred after the proposal or notice of intention was filed are not subject to its provisions and will paid by the debtor in the normal course of the debtor’s business.
Should the debtor fail to perform the proposal in accordance with the terms, one or more creditors may apply to the court to have the proposal annulled in which case, the debtor will be deemed to have made an assignment in bankruptcy.
The proposal will be satisfied once the debtor’s obligations under the proposal have been completed. The LIT will then issue a certificate of full performance thereby releasing the debtor from debts covered under the proposal.
Given the risk of immediate bankruptcy if the original proposal is rejected by creditors, the importance of developing a sound proposal from the outset cannot be overstated. Insolvent persons, in particular corporations, are therefore wise to work in collaboration with an experienced insolvency lawyer to ensure that their proposal stands the best chance of acceptance by creditors.