Division One Proposals

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Division One Proposals can be filed by a natural person or by a corporation.
They are not the preferred course of action for many people because they tend to be cumbersome compared with the stream lined consumer proposals, and because getting them approved can be more difficult than, what is experienced in a consumer proposal. However, there are also advantages to using them, in specific situations, and they are the only real option that exists when a consumer proposal can’t be used.

There is no limit on how much debt a person can have and they allow for creditors to be put into different classes of creditors and they are a better option where a person has numerous secured creditors and wants to negotiate differently with the various secured creditors. They are the only proposal that can be used for a corporation with less than five million in debts and they can be started easily with what is called a Notice of Intention to file a proposal, which puts an immediate stay of proceedings in place. However, some people see the downside of the automatic bankruptcy, if the proposal is not accepted as a reason not to using them. That being said, the normal course of action for someone with a consumer proposal that fails is to file bankruptcy, so the effect is not as severe as might be presumed.

What is a Division One Proposal?
A Division One Proposal is simply an agreement between a person and his/her creditors whereby the person pays only a portion of his/her debts thereby avoiding bankruptcy. A proposal is made to the creditors through a trustee. If the creditors vote in favour of the proposal and the court approves it, then the proposal is a binding contract between the creditors and the person making the proposal. If the creditors vote against the proposal then the person is bankrupt.

Proposals are a better deal for the creditors than bankruptcy and in the vast majority of cases are accepted!
A Proposal is a contract between a debtor and the 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. Creditors agree to enter into the contract by voting on in favour of the proposal, or if they are not in favour, they can vote against it and defeat it.

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 considers the Division One 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 an 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 favour 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.

If Proposal Approved
If the proposal is approved, the person who made the proposal will be required to comply with the terms of the proposal. Upon all of the payments being made, a certificate of Full Performance will be issued. Just like in a personal bankruptcy or a consumer proposal, the person will be discharged.

Key considerations when filing a consumer proposal are:

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;
If secured creditors vote against the proposal, they are not bound by the terms of a Proposal, yet if the unsecured creditors vote in favour, the proposal could be approved on some, but not all of the creditors;
To get accepted, the creditors must be better off under a Proposal than under a bankruptcy, which usually means, it will cost you more;
Creditors vote on the Proposal, in person or by mail, at a creditors' meeting held approximately three weeks after the Proposal is filed and the person making the proposal must be present;
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 favour of the Proposal; or
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.

Reasons why a Personal Proposal my be a better choice than Bankruptcy
Proposals must provide a better result to creditors than a bankruptcy. Otherwise, there is no reason for creditors to vote in favour 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 with some professional assistance the business can once again be profitable, or a portion of the business can be profitable if the business is restructured and a portion of the debt retired;
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 person or corporation finds bankruptcy unacceptable;
Where the insolvent person or corporation 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;
Where a bankruptcy will result in a secured creditor acting on its security;
Where the insolvent has previously been bankrupt.