Commercial Restructuring under the Canadian Bankruptcy and Insolvency Act
Creditor's rights in the event that a business files for a proposal in Canada.
There is a provision under Part III of the Canadian Bankruptcy and Insolvency Act (BIA) for an insolvent business to file a 'Proposal' with its creditors. In layperson's terms it is like making a modified arrangement with its creditors to pay them off in an acceptable manner which is generally over a longer period of time. These kinds of proposals made by businesses are termed Division I Commercial Proposals under Part III BIA.
The BIA (Weblink: http://laws-lois.justice.gc.ca/eng/acts/B-3/) was reformed in 1992 with an objective to promote business proposal as an alternative to bankruptcy. While 'Bankruptcy' corresponds to the liquidation of the debtor's business assets and the end of its operations, a Commercial 'Proposal' involves settling debts between the debtor and its creditors, enabling an insolvent business entity to continue operating in the market. The intent was to promote ‘rehabilitation’ of an insolvent over ‘liquidation’ and turn increase recovery for the creditors. However, a proposal if not viable and unacceptable to the creditors fails, which then leads to the business being forced to declare bankruptcy.
Statistics however shows that approximately one in every two business proposals succeeds proving that proposal as an alternative to bankruptcy is working in the Canadian insolvency arena. This in a way proves to be a win-win situation both for the insolvent company and its creditors as the business whose proposal gets accepted, continues to operate and the creditors recover at least something from the debtor-company for the debt owed and perhaps can make up the shortfall by continuing to deal with the company as opposed to the chances of getting near to nothing had the insolvent debtor company filed for bankruptcy.
How does a business make a Commercial Proposal under Division 1 Part III BIA? What is the process?
The procedure of making a Commercial Proposal begins when an insolvent business seeks the help of an administrator who typically is a trustee in bankruptcy or a person appointed by the Superintendent of Bankruptcy. The trustee on behalf of the insolvent company files either a Notice of Intention to Make a Proposal ("Notice of Intention-NIMP" [BIA section 50.4]) or the Proposal itself with the Official Receiver (OR).
What happens after a Proposal is filed with the Official Receiver (OR)?
Within 10 days after filing the proposal with the Official Receiver, the trustee is required to send the OR a ‘Projected Cash Flow Statement’ and its reasonableness and a debtor's endorsed cash flow statement. No extension to this time limit of ten days is allowed and if the cash flow statements are not filed within this 10 day period, the insolvent business, filing the proposal, is deemed to have declared bankruptcy.
Unless protected by court orders, any creditor may obtain a copy of the cash-flow statement on request made to the trustee
After a Notice of Intention is filed with the OR, the trustee then has up to thirty days to file the Proposal itself. If the trustee fails to file the Proposal, the business is deemed to have declared bankruptcy. The effective date of the bankruptcy would be on the expiry date of the thirty-day period. If the trustee is unable to file the Proposal within the thirty-day period, there is a provision in BIA to seek extensions. These extensions are granted in increments not exceeding forty-five days up to a maximum of five additional months. (In essence an insolvent business has no more than six months to file a proposal.) The court reserves the rights to refuse requests for such extensions or alternatively impose special conditions on the extension of a proposal.
Within five days after the filing of a notice of intention, the trustee named therein must notify every known creditor.
Before the expiry of the initial thirty-day time limit for filing the Proposal, or any extension granted in the case of a NIMP or before the first creditor's meeting in the case the proposal has already been filed, any creditor has the right to seek the court's order in having the proposal cancelled. In order to seek the termination order of a Proposal the creditor will have to prove in court that the business making the Proposal lacks due diligence and a viable Proposal is unlikely to be made before the expiry of the time allotted or that the creditors as a whole would be challenged in material respect (materially prejudiced).
Once a trustee files a Notice of Intent or a Commercial Proposal on behalf of an insolvent business, it cannot be withdrawn. The main outcomes could be an acceptance by the creditors (which allows the business to continue) or rejection (which leads to bankruptcy and ultimate liquidation of the company).
However, during this entire process the insolvent business can declare bankruptcy at any time.
What happens once a Notice of Intention or a Proposal has been filed?
Once a Notice of Intention or a Proposal has been filed a 'Stay of Proceedings' (stay) takes effect. The stay applies to secured and unsecured creditors.
Under this stay, creditors cannot terminate leases or amend existing contracts and agreements. However, after the Notice of Intention or the Proposal has been filed, going forward, creditors are under no obligation to extend any future credit and can insist on cash-terms for any goods or services sold in future to the insolvent business. The same would apply to any rental payments on leased property.
This stay remains in effect until the Proposal has been performed without default or the debtor goes bankrupt. This allows the insolvent business to restructure its debt with its creditors and formulate the Proposal without interference.
A Commercial Proposal is made to all creditors. All unsecured claims constitute one class, unless the proposal provides for more than one class of unsecured claim. Secured creditors can be separated into classes based on "commonality of interest" [BIA 50. 1.4]. This commonality is based on factors like the structure of the debt, its hierarchy, the remedies of default or otherwise as to how the court decides the interests of the creditors.
Some exceptions to the Stay of Proceedings:
If a secured creditor serves the insolvent business with a Notice of Intention to Enforce Security under the BIA more than ten days before the debtor filed a NIMP (notice of intention) then the stay does not apply to that particular secured creditor. [BIA subsection 244(1)]
If secured creditor took possession of secured assets of the insolvent business for the purpose of realization before the notice of intention (NIMP) was filed from dealing with those assets
If the Commercial Proposal does not address the claims of a particular secured creditor, the stay in that case does not apply to that creditor
If a certain class of secured creditors rejects the Proposal, then the stay does not apply to the secured creditors in that class.
Voting on the Proposal:
The following creditors with proven claims are entitled to vote:
All unsecured creditors, and
Those secured creditors in respect of whose secured claims the proposal was made;
The creditors vote by class, according to the class of their respective claims, and for that purpose
All unsecured claims constitute one class, unless the proposal provides for more than one class of unsecured claim, and
The classes of secured claims [As determined under BIA subsection 50(1.4)];
The votes of the secured creditors do not count, but are relevant only for the purpose of BIA subsection 62(2); and
The Proposal shall be deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors vote for the acceptance of the proposal by a majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the meeting and voting on the resolution.
Upon acceptance of the Proposal the trustee, within five days, applies to the court for its formal sanction (the court has to accept the Proposal).
Fifteen days before the hearing, the trustee sends a notice of the hearing date and place to the insolvent business, the OR, and to all creditors with proven claims.
Ten days before the hearing, the trustee sends a report on the Proposal to the OR and files this report with the court at least two days before the hearing.
If a Proposal is accepted, it is binding on all unsecured creditors and on those secured creditors whose claims were dealt in the Proposal and whose class voted to for it.
If a Proposal is rejected, the business is automatically assigned into bankruptcy and the trustee administering the Proposal immediately calls for a meeting of all known creditors to consider the affairs of the now bankrupt business and to confirm the appointment of the existing trustee or to appoint a new one as a trustee in bankruptcy.
Certain claims, such as wages and the Trustee's fees and expenses; Government claims, such as source deductions and GST and PST, are given special priority.
The Proposal must include a provision for payment in full within six months after approval of the Proposal for amounts that were owed to the federal or provincial government when the Notice of Intention or Proposal was filed.
What if the insolvent business stops making the payments and defaults on the performance of the proposal?
If the insolvent business fails to keep the terms of your proposal and does not remedy the default within thirty days, the trustee informs both the OR and the creditors within thirty days. The creditors have a choice to waive the default if they believe that the default was unintentional or that the insolvent business has intentions of, and the capacity to, remedy the default. If the default is not waived, either the trustee or the creditors may apply to the court for the annulment of the Proposal.
If a Proposal is annulled, it results in automatic bankruptcy for the business making the proposal (the business will be deemed bankrupt on the date of the annulment.) Within five days of the annulment order from the court, the trustee will send out a notice to all known creditors of a creditors' meeting to consider the affairs of the now bankrupt business and to confirm the appointment of the existing trustee or to appoint a new one as a trustee in bankruptcy
What happens after the successful completion of the Commercial Proposal?
A business that successfully complies with the terms of the Proposal receives a ‘Certificate of Compliance’. The debts owed by the business are considered to be satisfied and no action can be brought by any creditor to recover any shortfall between the original debt and the amount paid under the terms of the Proposal.
Does it cost to make a proposal?
There is a filing fee to be paid to the Superintendent of Bankruptcy. In addition, the trustee is entitled to be paid. These fees are prescribed by the Bankruptcy and Insolvency Rules which may be consulted on the Office of the Superintendent of Bankruptcy's (OSB) Web site at: http://osb-bsf.ic.gc.ca.
Typically the business makes all payments prescribed in the proposal to the trustee. The trustee deducts its costs and fees, and the Superintendent's levy (a five percent levy on all payments to creditors) and then distributes the net proceeds to the creditors.
How can Commercial Proposals be statistically viewed?
In 2007 Business insolvencies in Canada declined by 6.8% over 2006 where the number of new cases filed in 2007 totaled 7,624. This is the sixth consecutive annual decrease in business insolvencies — each of them more than 6%. Commercial Proposals on the other hand have shown about a 7% rise in 2007 over 2006. In 2006 the total number of commercial proposals filed was 3,036 as compared to the 3,241 filed in 2007.
The inference drawn from these numbers is that perhaps commercial proposals are helping businesses going in for rehabilitation and averting liquidation. For creditors this is good news as it implies enhanced recoveries of liability dollars in the Canadian world of business insolvencies.
Defining some terms used in this article
Official Receiver (OR): is an employee of the federal government who works in the Office of the Superintendent of Bankruptcy. The duties of the OR, among others, is to accept documents filed in proposals and bankruptcies, examine bankrupts under oath and chair meetings of creditors
Office of the Superintendent of Bankruptcy (OSB): is a Special Operating Agency Industry Canada which supervises the administration of the Bankruptcy and Insolvency Act. The OSB has Division Offices throughout Canada.
Bankruptcy: the action whereby the property of a debtor is taken over by a receiver or trustee in bankruptcy for liquidation and for the benefit of the creditors. This action is conducted as prescribed by the Bankruptcy and Insolvency Act (BIA) in Canada, and may be voluntary or involuntary.
Insolvency or Insolvent: The condition of being unable to pay debts as they become due or having liabilities that exceed the total value of assets.
Secured Creditor: is a person or company (e.g. bank) holding an instrument such as a mortgage or a lien on or against the whole or part of the property of a debtor as security for a debt due from the debtor.
Trustee: is person licensed by the Superintendent of Bankruptcy to administer bankruptcy and proposal estates.
Office of the Superintendent of Bankruptcy (OSB)
http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/home
Canadian Bankruptcy and Insolvency Act (BIA)
http://laws-lois.justice.gc.ca/eng/acts/B-3/
Trustee Directory- Finding a trustee for a particular jurisdiction
http://www.ic.gc.ca/app/osb/tds/search.html?lang=eng
Bankruptcy and Insolvency Records Search
https://www.ic.gc.ca/app/scr/bsf-osb/ins/login.html?lang=eng
Adapted from an article written by:
Puru Grover
General Manager
Credit Guru Inc.