My Business is in Trouble – Will Filing a Division 1 Proposal Help?

Financial troubles can be a significant hurdle for any business, big or small. But before you consider bankruptcy, there’s another option that might help turn the tide in your favor. This option is known as a Division 1 Proposal, a legal process under the Bankruptcy & Insolvency Act of Canada, designed to help businesses regain their financial stability.

Understanding Division 1 Proposal

The Division 1 Proposal, also known as a Corporate Proposal, allows businesses to repay a fraction of their unsecured debt, thereby helping them avoid bankruptcy. This formal procedure can considerably cut down the amount owed to unsecured creditors such as credit card companies, payday loans, Canadian Revenue Agency, and more.

This proposal gives businesses the opportunity to repay their debt, regain their financial strength, and set the company back on the path to profitability.

Who Can File a Division 1 Proposal?

To be eligible for a Division 1 Proposal, a business must meet the following criteria:


  • The business is insolvent, i.e., it cannot pay its debt as they come due.
  • The business owes more than $250,000 in unsecured debt.
  • The business owes less than $250,000, but its structure is complex, for example, a multinational corporation.
  • Also, individuals can file a Division 1 Proposal if they owe more than $250,000, excluding the mortgage on their primary residence.


Important Note for Individuals:

While the language in this article refers primarily to businesses, individuals filing a Division 1 Proposal are subject to the same provisions outlined here.


Who Should Not File a Division 1 Proposal?

Primarily, Division 1 Proposals are intended for corporations. If you run a sole proprietorship or partnership, i.e., your business is not incorporated, you are considered the business. In this case, you should consult a Licensed Insolvency Trustee about a Consumer Proposal or other alternatives that may be suitable for your situation.

Moreover, individuals owing less than $250,000 can also file a Consumer Proposal.

Is Division 1 Proposal Same as Corporate Restructuring?

Corporate restructuring doesn’t always come under the Division 1 Proposal. Companies may restructure to enhance their competitive performance, improve earnings, or gain cost efficiencies. The restructuring process may involve revising the company’s:


  • Operations.
  • Management structure.
  • Assets.
  • Cash flow.
  • Capital management, and more.


Informal restructuring lacks legal protection against collection activity and is merely a negotiated arrangement between the business and its creditors. If a single creditor decides to go to court, the company might have no legal defense.

On the contrary, formal corporate restructuring can involve similar activities as the informal process but within the framework of a Division 1 Proposal. The rules of this process are clearly outlined in the Bankruptcy & Insolvency Act (BIA). Hence, it’s crucial to understand the protections and advantages offered by Division 1.

What are the Benefits of Division 1 Proposal?

Division 1 Proposal offers protection for the debtor and allows the resumption of normal cash flows. The main advantages include:


  • Halting adverse creditor actions.
  • Assignment of a Licensed Insolvency Trustee to assist in preparing the proposal.
  • Reduction in the amount owed to unsecured creditors.
  • Extension of repayment terms.
  • Prevention of bankruptcy.


The BIA also protects creditors, ensuring they are treated fairly.

Are there any Drawbacks?

Division 1 Proposal is more complex than a Consumer Proposal due to the intricate nature of business finances. However, Consumer Proposals are not available to corporations. In the case of a solvent but viable business, a Division 1 Proposal may be the best option.

The Division 1 Proposal Process

The Division 1 Proposal process follows clear steps outlined in the BIA:


  • Meeting with a Licensed Insolvency Trustee (LIT) to review options and provide information about the company’s assets and debts. The LIT then develops a cash flow statement.
  • Preparation of a proposal or an NOI (Notice of Intention to Make a Proposal) with the LIT, deciding on repayment amounts and terms.
  • Filing the Division 1 Proposal or the NOI with the Office of the Superintendent of Bankruptcy (OSB).
  • Notification of creditors by the LIT. All adverse actions against the business or individual must cease.
  • Creditors vote during a meeting. The proposal passes if more than 50% of the creditors, representing more than two-thirds of the total dollar amount, vote to approve.
  • The Division 1 Proposal or NOI must also be approved by the Court.
  • Once accepted, the business or individual begins making payments to the LIT.


What if the Division 1 Proposal is Rejected?

Your LIT will work closely with you to make your Division 1 Proposal as attractive as possible. If the proposal is rejected, the company will immediately enter into Bankruptcy.

What is an NOI?

An NOI gives the LIT additional time to prepare the Division 1 Proposal. It offers the business the same protections from legal action as a Division 1 filing. The Division 1 Proposal must be filed within 30 days of the NOI, but the court may grant an extension.

Your Responsibilities

After filing a Division 1 Proposal or an NOI, your responsibilities include making payments to the LIT, attending the creditor meeting, assisting the LIT by disclosing required information, and meeting all obligations agreed in the Division 1 Proposal.

Post Division 1 Proposal Scenario

Once the Division 1 Proposal requirements are completed, usually within five years, the business gets a clean slate and can rebuild its credit and financial health.

Can Bankruptcy be Avoided?

A viable business generates enough cash to cover operating expenses, pay salaries, meet tax obligations, and more. By reducing your unsecured debt via a Division 1 Proposal, you’ll have the best chance to create a profitable business.

If you see potential in your business despite the current financial challenges, and the stress of running a debt-ridden business is taking a toll on you, consider reaching out to Bankruptcy Canada. They can help you explore the best solution for your situation, and a Division 1 Proposal may just be the answer.

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