In some circumstances, an insolvent company may be able to resolve its financial issues without resort to bankruptcy; where this is possible, the debtor and all stakeholders are usually better served through a restructuring than a bankruptcy. In general, a restructuring provides a better return to creditors than a bankruptcy, and permits a company to continue operating for the continued benefit of its creditors, customers, and employees.
The main pieces of legislation through which companies restructure are the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”). However, CCAA proceedings are only available to companies whose debts amount to at least $5,000,000.00. For companies with debts totalling less than that, the procedure set out at Division I of the BIA (often referred to as a “Division I Proposal”) is available.
Starting a Division I Proposal
A Division I Proposal routinely begins with the debtor filing a Notice of Intention to Make a Proposal (“NOI”) with the government Official Receiver. The company’s creditors are notified, and the company then has 10 days to file a cash flow statement and related documentation. A licensed Insolvency Trustee must be involved from the outset, and assists the company throughout.
From the date the NOI is filed, the debtor company has 30 days to file a formal Proposal. During that time all proceedings or actions by creditors are frozen or stayed. The timeline (along with the stay) can be extended in 45-day increments, up to six months in total, with the approval of the Court. During this period the trustee assists the company in negotiating with its creditors on the terms of a proposal to discharge its debts in exchange for some lesser payment and/or other consideration.
While the above sets out the most common route, it is also possible to start a Division I Proposal by filing the Proposal itself without an NOI.
Meeting of Creditors to Vote on Proposal
Once a proposal is filed with the Court and with the Official Receiver, a meeting of creditors must be convened within 21 days to vote on the Proposal. Generally speaking, to succeed the Proposal must be approved by a majority in number and two-thirds in value of the creditors who are present at the meeting (in person or by proxy). If the Proposal is accepted by the creditors, it then needs to be approved by the Court, at which point it will take effect and be binding on all unsecured creditors.
If the proposal is not accepted by the creditors, the company is automatically assigned into bankruptcy.
An experienced lawyer can provide a debtor company with advice to determine how best to prepare for and deal with its insolvency.