Rebuilding your credit after a Consumer Proposal is an important step when you’re working on…
Bankruptcy is not the only option when your business is in financial trouble. A Division 1 Proposal can help you avoid Bankruptcy and get your business back on track. You’re certainly not ready to walk away. But it’s becoming clear that the financial hardship will not resolve on its own. You need a little help.
If this is the situation for your company, it may be time to take action. Much like a Consumer Proposal, this option for businesses allows you to pay a fraction of your unsecured debt.
What is a Corporate Proposal or Division 1 Proposal?
A Division 1 Proposal is a legal process governed by the Bankruptcy & Insolvency Act of Canada. This formal procedure, also known as a Corporate Proposal, is intended to help businesses avoid bankruptcy when they are unable to manage their debt through current income.
It can significantly reduce the amount owed to unsecured creditors. This includes, for example, credit cards, payday loans, the Canadian Revenue Agency, and more. A Corporate Proposal or Division 1 Proposal affords the business the ability to repay debt, regain sound financial footing, and put the company back on track toward profitability.
Who is Eligible for Division 1?
A business is eligible for Division 1 if:
- The corporation is insolvent, meaning that the business is generally unable to pay its debt as it comes due;
- The corporation owes more than $250,000 in unsecured debt; or
- The corporation owes less than $250,000, but the structure is complex, for example, a multinational corporation.
Individuals can also file a Division 1 if:
- The individual owes more than $250,000, excluding the mortgage on their principal residence.
Note to individuals considering Division 1:
Throughout this article, the language refers to businesses. However, if you are an individual filing Division 1, all of the provisions for businesses described herein apply to you.
Who Should Not File Division 1
As mentioned, Division 1 Proposals are intended primarily for corporations. If your business is a sole proprietorship or partnership, meaning it is not incorporated, then there is no legal separation between you and the business. In other words, you are the business. If this is your situation, you should consult a Licensed Insolvency Trustee regarding a Consumer Proposal or other options that may be right for you.
Individuals owing less than $250,000 could also file a Consumer Proposal.
Is Division 1 the Same as a Corporate Restructuring?
Corporate restructuring doesn’t always fall under the Division 1 umbrella. Companies may restructure to improve their competitive performance, enhance their earnings, or capture cost efficiencies, among other reasons. During restructuring, the business might reevaluate its:
- Management structure
- Cash flow
- Capital management, and more
When the informal restructuring process does address debt, it affords the business no legal protection against collection activity. It is a negotiated arrangement between the business and its creditors. There are no real rules. If just one creditor decides to go to court, the company doesn’t have a legal leg to stand on.
Formal corporate restructuring, on the other hand, may involve many of the same activities as the informal process. However, the restructuring is done within a Division 1 Proposal. The rules of engagement are clearly outlined in the Bankruptcy & Insolvency Act (BIA). It’s important to understand the protections and advantages offered by Division 1.
What Advantages Does Division 1 Offer?
Division 1 offers protection for the debtor and an opportunity to resume normal cash flows. The advantages to the business include:
- Stops adverse creditor actions
- Assigns a Licensed Insolvency Trustee to assist you in putting together the proposal
- Reduces the amount owed to unsecured creditors
- Extends the terms, allowing more time for repayment
- Helps the client avoid bankruptcy
The provisions of the BIA also protect creditors, ensuring that they are treated equitably.
Are There Disadvantages?
Since business finances are more complex than personal finances, Division 1 is more complicated than a Consumer Proposal. But Consumer Proposals are not available to corporations. If your business is insolvent but viable, a Division 1 Proposal may be the best solution.
What Does Division 1 Involve?
The process is straightforward with clear steps as outlined in the BIA. They include the following:
- You will meet with a Licensed Insolvency Trustee (LIT) to review your options. During this meeting, you’ll provide information regarding the company’s assets and debts. This information allows the LIT to develop a cash flow statement.
Although Division 1 is a good tool for many businesses, it may not be the right one for your company. The LIT ensures that the business will have sufficient cash flow to pay its ongoing expenses after restructuring.
- If you and the LIT agree, you and your LIT will prepare a proposal or an NOI, which states that you will file a proposal in the future. (See What is an NOI? below.) The LIT will also discuss with you the repayment amounts and terms, i.e., how much money you can reasonably afford to pay and by when. This is an important step that will help ensure the creditors view the proposal favorably.
- The Division 1 Proposal or the NOI is filed with the Office of the Superintendent of Bankruptcy (OSB).
- Once the Division 1 Proposal or the NOI is filed, the LIT notifies the creditors. All adverse actions against the business or individual must stop. This includes:
- Collection activity
- Lawsuits and garnishments
- Legal actions
- Interest accruals
- The creditors vote during a meeting. The proposal passes if more than 50 percent of the creditors comprising more than two-thirds of the total dollar amount vote to approve.
- The Court must also approve the Division 1 Proposal or NOI.
- Once accepted, the business or individual will start making payments to the LIT.
What Happens if the Division 1 Proposal is Rejected?
You will work closely with your LIT to ensure that your Division 1 Proposal is as enticing as possible. Creditors should receive more than they would if the company is forced into Bankruptcy. However, if the proposal is rejected, the company will immediately go into Bankruptcy.
What is an NOI?
In many cases, the LIT will file an NOI, (Notice of Intention to Make a Proposal). This gives the LIT additional time to prepare the Division 1 Proposal. The NOI affords the business the same protections from legal action as a Division 1 filing. Although the LIT must file the Division 1 Proposal within 30 days of the NOI, the court may grant an extension. The NOI is a promise to file an actual proposal as soon as possible.
What Are My Responsibilities?
Once you file a Division 1 Proposal or an NOI, it is your responsibility to:
- Make payments to the LIT
- Attend the creditor meeting
- Assist the LIT by disclosing information as required
- Meet all of the obligations agreed to in the Division 1 Proposal
What Happens After Division 1?
Once you complete the requirements of the Division 1 Proposal, the business is free and clear. This is normally five years; however, the terms can vary and early payoffs are welcome. Now the company has a clean slate and can rebuild its credit and continue to strengthen its financial health.
Will the Company Avoid Bankruptcy?
A viable business is one that is able to generate sufficient cash to cover operating expenses, pay salaries, meet its tax obligations, and more. By reducing your unsecured debt, you’ll have the best chance to create a profitable business. That’s exactly what the Bankruptcy & Insolvency Act is intended to provide.
Can you still see the potential despite the current monetary difficulties your business is facing? If you’re tired of the stress of trying to run a business with too much debt, give us a call. At Adamson & Associates Inc., it’s both our job and our privilege to help you find the best solution. A Division 1 Proposal could put time in your favor and significantly reduce your debt. Your free, no-obligation consultation is just a phone call away.
Call Adamson & Associates at 519-310-JOHN (5646).