What is a Division 1 Proposal?
An individual or a corporation with debts exceeding $250,000 has the option of submitting a Division 1 proposal between the individual, or the company, and the unsecured creditors. The proposal is simply an agreement between the individual, or the company’s, and their unsecured creditors whereby there is an agreement for the individual or the company to pay only a portion of the outstanding debts (Example: 50%), thus avoiding bankruptcy. A proposal is made to the unsecured creditors through a licensed insolvency trustee lawyer.
If the unsecured creditors accept the proposal, based on the voting at the meeting of creditors as described below, and the court then approves it, the proposal is a binding contract which all unsecured creditors must accept, including 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.
When Can Division 1 Proposals Help?
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 doing so if he/she is obligated to disclose that he/she is bankrupt when dealing with third parties.
Why Creditors Prefer Proposals to Bankruptcy – And Usually Accept!
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 the extent of the aforementioned priorities and treatments, 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.
- 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.
- Filing gives the debtor some "breathing space" so that he can approach creditors to 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 the date of the creditors' meeting.
Filing a Proposal Under the Bankruptcy and Insolvency Act
When filing your proposal, make sure to factor in these key considerations:
- A proposal can only be filed through a licensed insolvency trustee.
- 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 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 favour of the proposal.
- If the terms of the proposal are not honoured, 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.
