Solutions For Business
If you are a business owner, your business may be undergoing financial difficulties.
On the other hand, if you are a creditor (for example, a supplier or a lender), one of your customers may be undergoing some hardships and is unable to pay their accounts with you.
We present some options available to you, depending on whether you are a business owner or a creditor.
Options For Business Owners
A proposal is an arrangement proposed by a debtor company and negotiated with its creditors, usually with the assistance of a Licensed Insolvency Trustee. There are two types of proposals – an informal proposal negotiated outside the Bankruptcy and Insolvency Act, and a formal proposal filed under the Bankruptcy and Insolvency Act .
A debtor company undergoing financial difficulty may make an informal proposal to its creditors to negotiate either a reduction in the amount owed, a change in terms of payment, or both.
An informal proposal is ideal in more simplistic situations where the creditors are few in number and they believe that there is no better alternative than to settle.
The debtor company usually approaches each creditor individually, explaining the circumstances and the offer of settlement. This could be done with the assistance of a Licensed Insolvency Trustee to act as a facilitator between the debtor company and its creditors.
If the proposal is declined by the creditors, a bankruptcy will not automatically occur. If the proposal is successful and the debtor company complies with the terms agreed upon, the settlement is completed and business continues.
Some advantages and disadvantages of an informal proposal are as follows:
|Rejection of informal proposal doesn't result in automatic bankruptcy||No stay of proceedings – creditors can continue collection action|
|Opportunity to have different settlement terms for different creditors||Requires acceptance by all creditors. Unsatisfied creditors can continue collection action|
|Cost is generally less than a formal proposal under the Bankruptcy and Insolvency Act||Sometimes difficult to negotiate with creditors as they often question the validity of information provided by the debtor|
Commercial Proposal (Division I Proposal)
In contrast to an informal proposal, a Division I proposal under the Bankruptcy and Insolvency Act has two distinct advantages. First, upon filing a proposal, a stay of proceedings is immediately in effect. Second, a Division I proposal, if accepted by the appropriate percentage of creditors, becomes binding on all unsecured creditors. That is, it does not require the acceptance of all creditors.
There are generally no restrictions on what type of proposal can be offered to creditors. However, the most common proposal terms are as follows:
- The company can make monthly payments out of its cash-flow over several years to pay off the settlement amount.
- The company can make a lump sum settlement by obtaining funds from a third party who may invest or lend money to the company in return for shares or a promissory note.
- The company can table a “liquidating proposal.” Under such a proposal, the shareholders set up a new corporation. The new corporation purchases the assets from the debtor company and the sale proceeds are used to finance the debtor company’s proposal.
Once these details are determined, the proposal is drafted and signed by an authorized signing officer of the company, along with other statutory documents. The proposal is filed with the Office of the Superintendent of Bankruptcy (OSB), a division of Industry Canada . Once the proposal is filed, a stay of proceedings is in effect, and the company becomes creditor-proof.
The Licensed Insolvency Trustee is required to schedule a meeting of creditors to review and discuss the proposal. In anticipation of that meeting the trustee sends a copy of the proposal and a report on the proposal to the creditors.
At the meeting, the creditors vote (in person or by proxy) either for or against the proposal. The approval of the proposal requires the support of a majority in the number of creditors present at the meeting, and two-thirds in the value of the claims filed by those creditors. If these voting criteria are not met, then the proposal fails and the company is automatically bankrupt.
There may be amendments to the proposal that are made at the meeting of creditors as a result of discussions or negotiations with certain creditors. If the creditors and the company mutually agree to amendments to the proposal, then the creditors vote for the amended version of the proposal.
Once the creditors approve the proposal, the trustee arranges for the bankruptcy court to review and approve the proposal. The court reviews the proposal for fairness and ensures that it complies with certain statutory requirements.
Upon the approval of the proposal by the court, the company proceeds to fulfill the terms of the proposal. Upon fulfilling the obligations under the proposal, the company is discharged from its debts.
Some advantages and disadvantages of Division I proposals are outlined as follows:
|Upon filing a proposal with Industry Canada, a stay of proceedings is in effect||Professional fees are generally more expensive than an informal proposal because of the additional time involved in complying with statutory requirements, facilitating the creditors meeting and obtaining court approval|
|All creditors all dealt with equitably, as set out in priority fashion required by law||Company is automatically bankrupt if the proposal is rejected|
|The debtor company's cash flow can be used to finance current operating expenditures without having to pay suppliers for past debts|
|Creditors feel more comfortable when a Licensed Insolvency Trustee is involved in the process|
Options For Creditors
Quite often, a business will obtain financing from a lender in return for a pledge of its assets to the lender as security for the loan.
A General Security Agreement (“GSA”) is a form of security issued by the borrowing company to the lender. It will typically have in its terms the nature of the security and the assets pledged, as well as the lender’s right to appoint a receiver to realize on these assets in the event of default by the borrower.
If a GSA is given by a borrower to a lender, and the borrower is not in compliance with its terms, then a receivership could occur. In this situation, a receiver may be appointed by the lender pursuant to the terms of the GSA. Alternatively, if the lender anticipates that the borrower will not voluntarily cooperate with the receiver or there are complex issues involved, the lender may apply to the court for the appointment of a receiver.
Upon its appointment, the receiver will take possession of the borrower’s assets and deal with them according to lender’s instructions.
Under the Bankruptcy and Insolvency Act , a creditor (or creditors in conjunction) has the right to petition the court to issue a bankruptcy order against the debtor company, rendering it bankrupt. A creditor may consider petitioning a debtor into bankruptcy in the following circumstances:
- The debtor company has ceased to pay its debts, but assets are still available for the unsecured creditors
- The financial position of the company is rapidly deteriorating to the detriment of the unsecured creditors
- Fraud is suspected. For example, it appears that non-arm’s length parties (e.g., shareholders) are taking assets out of the company to the detriment of the creditors
A successful petition requires proof of the following:
- The debt or debts owing to the creditor or creditors amount to $1,000 or more; and
- The debtor company has committed an act of bankruptcy within the six month period preceding the date the petition was filed. The Bankruptcy and Insolvency Act lists several “acts of bankruptcy” but the most common one cited in petitions is that the company “cannot pay its debts generally as they become due”.
Upon the issuance of a bankruptcy order by the court (which renders the debtor company bankrupt and appoints the bankruptcy trustee), the trustee immediately takes possession of the company’s assets and makes an inventory. It also takes possession of the company’s books and records.
In circumstances where fraud may be suspected, forcibly rendering a company bankrupt has the advantage of allowing the creditors to investigate suspicious transactions made prior to the bankruptcy. The creditors have an opportunity to question company management at the meeting of creditors, which is generally held 21-days after the bankruptcy date. Company management may also be examined under oath by the Office of the Superintendent of Bankruptcy and the court.