Understanding the Details of a Division I Proposal

A Division I Proposal (“Proposal”) is a legal binding process governed by the Bankruptcy and Insolvency Act (BIA) that can only be administered by a Licensed Insolvency Trustee (“LIT”).

Unlike informal negotiations, a Proposal acts as a binding contract between you and your creditors. A Proposal is very flexible and can be tailored to your company’s specific financial circumstances. It often includes a deferral of time for payment, an offer to settle in full satisfaction at something less than 100 cents on the dollar, converting debt to equity or a combination of all of these.

How Does a Proposal Benefit Me?

A Proposal offers flexibility to a company in financial distress as it provides a stay of proceedings preventing your company’s creditors from taking steps to enforce their claims. A Notice of Intention to File a Proposal will provide an immediate stay of proceedings for up to six months against both secured and unsecured creditors. This time allows the company an opportunity to formulate a Proposal. There may be exceptions to the stay of proceedings which is why it is very important to speak with a LIT before a decision to file a Proposal is made.

Role of an LIT (Licensed Insolvency Trustee)

The LIT is appointed to administer the Proposal and the company maintains control of its business while it formulates a plan that will ultimately return the company to financial stability.

Debtors will often approach their larger creditors in advance of filing the Proposal to seek their support. It must be approved by a majority in number of your creditors holding at least two-thirds in value of the claims. Once the Proposal has been accepted by the requisite majority of creditors, it must then be approved by the Court.

A Proposal accepted by the creditors and approved by the Court is binding on all unsecured creditors regardless of their vote. It is also binding on secured creditors whose classes voted for the acceptance of the Proposal.

Once the terms of your Proposal have been fulfilled, a Certificate of Full Performance will be issued which legally discharges the debts included in the Proposal.

When to Opt for Division I Proposal?

There are numerous provisions in the BIA which may impact a Proposal filing. There are also risks associated with same – for example, if a Proposal is not accepted by the creditors or approved by Court, a deemed bankruptcy will occur.

If your company is experiencing financial difficulties and you are not sure if a Proposal is the right choice for you, your first step is to seek the assistance of a LIT. Please contact one of the professionals at Crowe MacKay & Company. We will evaluate your financial situation and explain the pros and cons of the various options available that could help you solve your financial problems. We are here to help.

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