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Division 1 Proposal for Businesses
A Division I Proposal is a formal procedure governed by the Bankruptcy and Insolvency Act and is available to both businesses/corporations, as well as individuals.
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What is a Division 1 Proposal to Creditors?
A Division I Proposal is a formal procedure governed by the Bankruptcy and Insolvency Act and is available to both businesses/corporations, as well as individuals.
There is no limit to the amount of debt that can be included in a Division 1 Proposal but if the individual filing the Proposal owes more than $250,000 not including a mortgage on a principle residence, that individual MUST file a Division 1 Proposal and cannot file a Consumer Proposal.
Corporations must file a Division 1 Proposal and cannot file a Consumer Proposal. Consumer Proposal legislation was put in place in 1997 to allow a streamlined Proposal process for consumers who had a relatively small amount of debt – less than $250,000. (originally it was limited to $75,000 in debt but was amended in 2009 to include up to $250,000 in debt and further allowed consumers to file jointly).
A Division 1 Proposal is a proposal or an offer to your creditors to settle your debts which generally means that you propose to pay back less than the full amount that you owe to them. A Div 1 Proposal must be done with the assistance of a Licensed Insolvency Trustee (formerly a Trustee in Bankruptcy) licensed under the Bankruptcy and Insolvency Act of Canada. If your offer or Proposal is accepted by the creditors and The Court, it becomes a legally binding on all parties. Once the Proposal terms are completed, the balance of the debt is written off by your creditors.
A proposal is a good alternative to bankruptcy when there is a core business that is viable in the long run. Creditors will realize a greater recovery while the debtors company, once it has met its obligations as outlined under the proposal, sees its liabilities extinguished.
The Process
- Engage the Services of a Licensed Insolvency Trustee
- The LIT will file the proposal, or the notice of intention to file a proposal, with the Office of the Superintendent of Bankruptcy.
- Stop making payments to all unsecured creditors
- Stay of Proceeding will immediately start: all salary garnishments will stop and lawsuits against you by creditors will be stayed (stopped).
- Secured creditors have the option of being part of a Division I proposal.
- Creditors must get more in the Proposal than they would in a Bankruptcy
- Attend at a meeting of creditors where creditors will vote to accept or reject the proposal.
- If at least 66.6 percent (two thirds) in dollars and 50 percent plus one in number of eligible creditors who vote approve the proposal, the proposal is accepted by the creditors.
- If the proposal is accepted by the creditors the Court review is required. If accepted by the Court, all unsecured creditors are bound by the proposal, even if some voted NO.
- If the proposal does not receive the required votes, you are immediately declared bankrupt as of the date of the meeting of creditors
- If your Division I proposal is accepted, you must adhering to the terms under the proposal (like paying money to the Trustee) other conditions in the proposal; and you retain your assets so long as you make your payments to your secured creditors.
If you meet the conditions in the proposal in full, you will be legally released from the debts included in the proposal. If during the term of the proposal, all obligations are not met by the debtor, then the Trustee or a creditor may apply to the Court for the proposal to be annulled and you’ll be placed into bankruptcy.
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Canadian Corporate Bankruptcy vs Personal Bankruptcy: What’s the difference?
Often people are confused when the talk about owing their own business. Under Canadian law, a corporation (also called a limited company) is considered a “person”. The company is also called a ‘business”. A corporation is a separate individual for insolvency purposes. It can own its own assets and owe its own debts. A corporation is separate from the person/people that own it legally. (called shareholders)
However, many people who operate a “business” are operating as a “sole-proprietor” and do not own a corporation. For tax and insolvency purposes, a sole proprietor is the business. They are one in the same. If a person is a sole proprietor and experiencing debt issues, then they have to consider personal bankruptcy or a consumer proposal.
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