How Does a Commercial Proposal Work?

More businesses “go under” or fail than is necessary! Even if a business is insolvent, it may be possible to save it by using a provision under the Bankruptcy and Insolvency Act to file a proposal with the creditors of the business. A commercial proposal is an agreement filed through a Licensed Insolvency Trustee (acting as a proposal administrator) that asks the business’s creditors to accept less than the monies they are owed in order that the business might survive. Typically, the creditors are asked to give up rights to the monies they are owed in exchange for an offer by the business to pay a certain number of cents on the dollar (say, 25, 50, or 75 cents) over time. Sometimes the business pays back 100 percent of what it owes, but is granted a period of time in which it makes no payments. In a successful proposal, the business wins because it survives. The creditors win because they retain a customer and also because they got some of their money – whereas in a bankruptcy they would probably get nothing.

Note that this is also called a Division I Proposal and can be used for consumers in general and for consumers who cannot file a consumer proposal because their debt is more than the $250,000 limit.

Advantages of Filing a Proposal

Once the proposal is filed, there are a number of immediate advantages to a small business: * The proposal stops all legal actions undertaken or contemplated by secured and unsecured creditors; * It gives the business some “breathing space” to approach the creditors and explain the business’s financial situation to them and ask for support for the proposal; * If the business has not received a notice to enforce security under the Bankruptcy and Insolvency Act then a stay of proceedings will be effective against the secured creditor; * The filing of a proposal will create an automatic stay of proceedings against the director of the business. This stay will not, however, affect any claim against the director granted by way of a guarantee.

Intention to File a Proposal

Sometimes there is not enough time to file a proposal before creditors step in to shut the business down. For example, your creditors may have secured a judgement and appointed a sheriff or bailiff to seize your business assets. The Canada Revenue Agency may have made a third-party demand for employee remittances, GST, or taxes. In this case, a business can file a notice of intention to file a proposal. This is a simple document and acts as a stay of proceedings as soon as it is filed:

The filing must include the following:

* The prescribed form stating the business’s intention to make a proposal; * The name and address of a licensed trustee who has consented in writing to act as the trustee under the proposal; * Names and addresses of creditors, along with amounts owed.

Within ten days of filing the notice, the following must be filed with the official receiver:

* A cash-flow statement; * A report on the reasonableness of the cash-flow statement, prepared and signed by the trustee; * A representation by the business in writing that the cash-flow statement is reasonable. The trustee must notify all the creditors within five days after the filing of the notice. You must file a proposal within 30 days of the filing of the notice. If a proposal is not filed within the 30-day period or if a cash-flow statement is not filed within the ten-day period, then the business is adjudged to be bankrupt effective at the date of the filing of the notice. If you need more time than the Act allows, the business can make an application to the court for an extension of time. During the period between the filing of the notice of intention to file a proposal and the filing of the actual proposal, it is the trustee’s duty to monitor the business and have access to and examine the property and books and other financial documents to the extent necessary to adequately assess the business’s financial affairs. It is also the duty of the trustee to file a report on the state of the business’s financial affairs for the information of the creditors.

Meeting of Creditors

Once a business has filed a proposal, the next hurdle that is faced is the creditors’ meeting to consider the proposal. Creditors vote on the commercial 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 business and causes of the financial difficulties. The trustee must also present to the creditors his or her estimate of what the creditors would realize under a bankruptcy as compared with the amount they are being offered under the proposal. It is a good idea for the trustee to keep the owners up to date as to the voting letters received. This will give the owners a good idea if the proposal is going to be accepted or refused at the creditors meeting. The creditors’ meeting is always stressful as so much is riding on the outcome of the vote. The trustee usually chairs the meeting although a representative from the Office of the Superintendent of Bankruptcy could char the meeting. The purpose of the meeting is to consider the proposal and vote on its acceptance or refusal. Before the meeting, the trustee will have checked the claims of all the people attending to ensure they all have valid claims. Voting letters received by mail and fax will also have been checked and recorded by the trustee’s office. Everyone attending the meeting will be asked to sign an attendance form. The chair calls the meeting to order. The trustee will summarize the proposal and inform the meeting of his or her review of the records of the business and whether any transactions could be overturned, such as payments to relatives out of the ordinary course of business, or payments to some creditors in preference to others. The trustee will also inform the meeting that he or she is recommending the creditors accept the proposal because they will receive more money than if the business is placed into bankruptcy.

The chair will then ask the meeting if there are any questions.

This is the opportunity for the creditors to ask questions of the owners. The questions could cover the following: * How the business got into financial difficulty; * A review of the budget and the chances of the projected outcomes being met; * Key personnel and staff available to operate the business. Occasionally, the creditors will say that they are not prepared to vote in favour of the proposal unless it is amended to provide more money for the creditors.

Be very careful about how you deal with this situation and ask yourself:

* Are the creditors bluffing? * How much more money do the creditors want? * If you say that the business cannot provide any more funds, will the creditors really refuse the proposal, thus potentially placing the business in bankruptcy; * Can the business afford to pay more money? and * If the business can afford to pay more money, how much can it afford? Ask the trustee for a short adjournment to consider the offer. If the decision is going to be very difficult to make, you can request an adjournment of the meeting to another date.

We have seen all sorts of answers and results:

* The business owners explained how they arrived at the proposal amount and why they could not increase that amount. The creditors voted in favour of the proposal; * The business owners explained how they arrived at the proposal amount and why they could not increase that amount. The creditors voted against acceptance of the proposal; * The business owners explained how they arrived at the proposal amount and offered a small increase in the proposal amount. Creditors vote to accept the proposal; * The business owners explained how they arrived at the proposal amount and seen them accept the additional payments the creditors wanted. The creditors voted in favour of the proposal and it was successfully completed; * The owners of the business explained how they arrived at the proposal amount and accepted the additional payments the creditors wanted. While the proposal was accepted, the proposal was not successfully completed because the business could not afford the additional payments. If the owners know their creditors and know their business and what it can afford, it will be easier to make the right decision.

Proposal Conditions That Must be Met

The Bankruptcy and Insolvency Act specifies the following conditions that must be met in a proposal: * Creditors must be better off under the proposal than they would be under a bankruptcy; * In order to be accepted the proposal must receive votes approving the proposal terms by 66.67% in dollars in addition to 50 percent plus one in eligible voters accepting the proposal; * The court must approve the proposal. Note that the trustee is required to monitor the business until the court approves the proposal (minimum six weeks).

The proposal must also make a note about paying:

* Employee source deductions that are outstanding for six months after the court gives approval for the proposal, and * Wages and vacation pay that is owed to both former and current employees up to a maximum amount of $2,000 upon court approval. If the proposal is accepted by the creditors and approved by the court, then all unsecured and secured creditors in respect of which the proposal was made are bound by the proposal – not just the creditors who voted in favour of the proposal. Secured creditors included in the proposal who vote in favour are bound by the proposal. Secured creditors not included in the proposal are not bound and it may be necessary to get their agreement if the proposal is to succeed.

How to Decide if Your Business is a Candidate for Filing a Proposal

If the answer is yes to all the following questions, then filing a business proposal may allow your business to survive:

* Is the business insolvent or not financially viable? * Could the business survive if either: * Part of its debt was forgiven? or * It had a moratorium on debt repayment for some months? * Do the owners of the business have the competence, desire, and energy to work to save the business? * If you intend to make a proposal to secured creditors, will they support the proposal? * If you intend to end your lease in the current premises or other premises, do you have other arrangements for the continuing operations of the business? * Will the unsecured creditors be better off under the terms of the proposal than if the business becomes bankrupt?

What Will Happen if the Proposal Terms Cannot be Met?

The best thing to do is to make sure you keep the trustee up to date. If the proposal terms cannot be met temporarily, you may be able to get permission to miss a payment or two. If there is a serious problem you should contact the trustee, who will set up a meeting of inspectors. It may be that the business needs a revision to the proposal. It may also mean that the business is not viable and should be liquidated. If it is the latter, you may have to admit it is time to move on to other pursuits. A legally binding agreement with your creditors, a commercial proposal allows you to make proposal payments over a period of time and is a great way of avoiding bankruptcy. The monthly payments you make into your proposal plan allow you to get out of debt and keep all of your assets. A proposal is also better on your credit report than a bankruptcy filing.