How the Consumer Proposal Voting Process Works
Debtors in Canada who are struggling to repay their debts may ask their creditors to reduce the amount they must repay by making a Consumer Proposal to their creditors. A Licensed Insolvency Trustee (the only debt professional who can file a consumer proposal with a debtor’s unsecured creditors) will review your financial situation and make an attractive consumer proposal for your creditors.
While almost all consumer proposals (over 98%) are accepted by your unsecured creditors it is important to be aware that there is a voting process before a consumer proposal will be deemed accepted and legally binding.
While you might not want to go bankrupt, your unsecured creditors are unlikely to be happy if you declare bankruptcy as well. Your creditors will generally accept your proposal as the rule of a consumer proposal is that your creditors must be “better off” than if you were to file bankruptcy. “Better off” simply means your creditors must receive more money in your proposal than they would if you went bankrupt.
Although a consumer proposal is often attractive for creditors it is important that you know that your creditors will vote on the consumer process.
How Does The Consumer Proposal Voting Process Work in Canada?
Once you and your Trustee have worked out an attractive proposal plan, your Trustee will submit the proposal to the Office of the Superintendent of Bankruptcy and your unsecured creditors. Once the creditors have received a copy of your proposal they will have 45 days to place their vote on whether to accept or reject your consumer proposal.
The creditors can also vote to modify the proposal before accepting it; that is, they will accept the consumer proposal if you modify it to include more payments to the unsecured creditors.
Each creditor included in your consumer proposal will get one vote for every dollar you owe them. For example, if you owe $5,000 on an RBC credit card, $20,000 on a TD Bank credit card, and $40,000 to the CRA, RBC will have 5,000 votes, TD will have 20,000 votes and the CRA has 40,000 votes.
Your creditors (in this case the CRA, RBC and TD) must submit a valid proof of claim in order to vote for the consumer proposal.
If RBC and TD vote to accept the proposal but the CRA votes to reject the proposal, your proposal will not be accepted even though more creditors voted to accept the proposal because the CRA has the most votes (40,000).
All unsecured creditors will be bound by the outcome of the consumer proposal vote, regardless of how they voted. In this case, RBC and TD won’t be allowed to accept the proposal. Alternatively, if CRA votes to accept the proposal and RBC and TD votes to reject the proposal, the proposal will be deemed accepted as the CRA carries more votes than RBC and TD combined. In this case, TD and RBC must accept the terms of the proposal even though they voted to reject the proposal.
If your creditors do not vote within the 45 day period the consumer proposal will be deemed accepted by your unsecured creditors and you will be bound by the terms of the proposal. Creditors that do not object to the proposal do not have to vote at all as a non-vote will count towards accepting the consumer proposal.
What Happens If The Creditors Vote to Reject The Consumer Proposal?
Your creditors can request that your consumer proposal administrator holds a meeting of creditors. At this meeting your creditors can question you about your consumer proposal, or more likely, the votes will simply be counted; most creditors do not show up to a meeting of creditors.
In order for a meeting to discuss your consumer proposal or count the votes to be held, more than 25% of your unsecured creditors must request a meeting. The 25% threshold is based on the value of debt; for example if you owe $40,000 creditors holding at least $10,000 of unsecured debt must request the meeting of creditors.
If less than 25% request a meeting of creditors no vote on the consumer proposal will occur and the proposal will be deemed automatically accepted regardless of any votes received by your administrator.
Meeting of Creditors in the Consumer Proposal Voting Process
Your unsecured creditors often do not show up to the meeting of creditors, although they have the right to do so. Mostly, the “meeting of creditors” is a technical term to describe a process to count the votes.
In order for your consumer proposal administrator to call a meeting of creditors, more than 25% of your creditors must vote for the meeting of creditors.
If enough creditors request the meeting to occur then the administrator will review each voting letter received from your unsecured creditors. In rare cases, your unsecured creditors could send a representative to the meeting of creditors to question you further about your consumer proposal and the financial situation that caused you to become insolvent.
If a meeting of creditors is called and 50% or more of the votes are counted as accepting of the proposal, all creditors will be bound by the terms of the proposal.
If 50% or more of the creditors vote to reject the proposal, you might need to resubmit the proposal after modifying it to make a larger offer to your creditors. This will be negotiated at the creditors’ meeting, or even possibly before the creditors’ meeting occurs.
However, almost all consumer proposals are accepted by the creditors, as they know they will be better off with your proposal offer than if you were to declare bankruptcy. Your unsecured creditors do not want to reject your proposal offer and scare you into a bankruptcy.