DIVISION 1 (ONE) PROPOSAL
(Debts Exceeding $250,000.00)
What is a Division 1 Proposal?
An individual or a corporation with debts exceeding $250,000.00 or more has the option of submitting a Division 1 proposal between you or your company and the unsecured creditors. The proposal is simply an agreement between you or your company’s unsecured creditors whereby you agree to pay only a portion of your outstanding debts (Say one-half), thus avoiding bankruptcy. A proposal is made to the unsecured creditors through a bankruptcy trustee lawyer.
If the unsecured creditors accept the proposal based on the voting at the meeting of creditors as described below, and the court approves it, then the proposal is a binding contract which all unsecured creditors must accept even the creditors who did not vote for the proposal. If the unsecured creditors decide to vote against the proposal then the person or company is automatically bankrupt.
Why proposals are a better alternative for your creditors than bankruptcy and in most cases accepted!
A Proposal is a contract between a debtor and his creditors. It settles the creditors' rights if there are differences in priorities or treatment amongst them. It becomes a binding contract to that extent amongst the creditors themselves. They enter into the contract by voting on it and either assenting to it or defeating it."
- A proposal is better for individuals and companies that wish to avoid bankruptcy. Individuals may avoid having to liquidate assets and companies can avoid shutting down and continue on in business.
- From the Ontario Supreme Court decision in Re Sefel (1989) 76 C.B.R. (N.S.) 48.
- Filing a proposal has a number of immediate advantages for an individual under siege by his creditors:
- The filing of a proposal stops all legal actions undertaken or contemplated by unsecured creditors.
- The filing of a proposal gives the debtor some "breathing space" so that he can approach the creditors and explain his financial situation and ask for support.
Meeting of creditors to consider the proposal
Creditors vote on the proposal in person or by mail at a creditors' meeting held approximately three weeks after the Proposal is filed. The trustee must file a report to the creditors on the affairs of the debtor and causes of the financial difficulties.
The trustee must also present to the creditors his estimate of what the creditors would realize under a bankruptcy as compared with the amount they are being offered under the proposal. In order for the proposal to be justified, the creditors must be better off under the proposal than they would be under a bankruptcy.
The proposal must receive approval by at least 66.6% (2/3) in dollars and 50% plus one in number of eligible creditors who vote, and the proposal must be approved by the court. If the proposal is accepted by the creditors and approved by the court then all unsecured creditors are bound by the proposal; not just the creditors who voted in favor of the proposal.
If the proposal does not receive the required votes the debtor is immediately bankrupt effective on the date of the creditors' meeting.
Filing a proposal under the bankruptcy and insolvency act
-- KEY CONSIDERATIONS --
- A proposal can only be filed through a Trustee in Bankruptcy.
- A proposal is simply an agreement between the debtor and his creditors.
- The filing of a proposal stays all Legal actions undertaken or contemplated by unsecured creditors.
- Secured creditors are not bound by the terms of a proposal and therefore must concur in the filing of the proposal.
- The creditors must be better off under a proposal than under a bankruptcy.
- Creditors vote on the Proposal, in person or by mail, at a creditors' meeting held approximately three weeks after the proposal is filed.
- The trustee must file a report to the creditors on the affairs of the person and the causes of financial difficulty.
- In order to be accepted by the creditors, the proposal must receive approval by at least 66.6% (2/3) in dollars and 50% plus one in number of eligible creditors who vote. The proposal must then be approved by the court.
- If the proposal does not receive the required votes, the individual is immediately bankrupt effective on the date of the creditors meeting.
- Once the proposal is approved by the court then all unsecured creditors are bound by the proposal; not just the creditors who voted in favor of the proposal.
- If the terms of the proposal are not honored, then the trustee or a creditor may apply to court for the proposal to be annulled and the company placed into bankruptcy.
- Proposals must provide a better result to creditors than a bankruptcy. Otherwise, there is no reason for creditors to vote in favor of the Proposal. Note, however, that a "better" result can stem from a quicker distribution, lower costs of administration and a certain outcome of issues that may otherwise be contentious.
- Proposals are particularly useful in the following situations:
- Where the insolvent desires a "certain" result or a quick resolution and is prepared to pay a premium to achieve that result;
- Where discharge is likely to be contentious or a substantial condition is likely to be imposed;
- Where the insolvent finds bankruptcy unacceptable;
- Where the insolvent wishes to continue in business and will be prevented from so doing if obliged to disclose that he is a bankrupt when dealing with third parties;
- Where professional accreditation may be lost or put at risk by a bankruptcy
Vice President, Trustee
SCOTT, PICHELLI & EASTER LIMITED
Bankruptcy Trustee offices in Oakville & Burlington, Ontario, Canada