Strategies for drafting a business proposal explained by a Licensed Insolvency Trustee.

It has been said that a proposal is only limited by the imagination of the person drafting it.

Consider whether any of the following techniques that have been used in drafting proposals would work for your situation:

* Lump sum proposal: In this type of proposal, a third party puts up a sum of money to be paid to the creditors only if the proposal is accepted by the creditors and approved by the court.

The funds are given to the trustee who puts the funds into his or her trust account.

If the proposal is not accepted by the creditors or approved by the court, the trustee returns the funds.

This is a very effective proposal as invariably the creditors are faced with either getting nothing in a bankruptcy or the lump sum in a proposal.

* Basket proposal: This type of proposal sets the amount of money to be paid as a specific amount (e.g., $50,000) rather than as a percentage (e.g., 30 cents on the dollar).

It is better to state a specific amount, as that sum will not change.

Setting a percentage is dangerous, especially if there are unaccounted for debts that might increase the amount that has to be paid.

* Paying 100 percent of small debts within a specified period of the court approval of the proposal.

This strategy has two advantages.

First, it almost guarantees that the proposal will achieve its goal of having more than 50 percent of the votes being in favour of the proposal.

Second, it pays off a large number of the claims so the trustee does not have to deal with those creditors in the future.

* Having the owners of the business give up their claim to payment in the proposal.

This is a good strategy as it shows in a tangible way that the owners are making a sacrifice.

It also makes the proposal more attractive as the owners’ claims will not be given up in the bankruptcy.

* Have the proposal call for the moratorium on payments for a number of months.

This can be a good strategy if a business is seasonal, for example, and is going into its slow season;

* Have the proposal deal with any potentially fraudulent claims that the owner may have been party to.

This can be dealt with by bringing something to the attention of the creditors and then including a clause in the proposal to have the creditors overlook the issue.

This issue can also be dealt with by having a clause or clauses in the proposal that specifically prevent the trustee from pursuing any action.

* Liquidation proposal.

This type of proposal calls for the business to be liquidated by the owners.

This can work if the business owner has a good reputation with his or her creditors.

It will often get more money for the creditors than a bankruptcy sale.

* Downsizing Proposal.

This type of proposal calls for the business to be downsized, resulting in a smaller viable entity.

A very important aspect of proposals is that they allow leases with landlords to be cancelled.

The landlord would be entitled to file a proof of claim as follows:

* Actual losses resulting from the cancellation, or:

* The lesser of three years’ rent or the aggregate of the rent provided for in the lease for the first year of the lease following the date on which the cancellation becomes effective and 15 percent of the rent for the remained of the term of the lease after that year

* Have the owners include a letter in the proposal material that the trustee will send to the creditors.

It is often a good idea to have a letter to the creditors explaining how the business got into trouble and asking for the creditors’ support and vote in favour of accepting the proposal.

* Have the business owners call the creditors asking for support for the proposal.

This is an expansion of the point above.

It may be a good strategy to telephone the largest creditors and give them the courtesy of an explanation of how the business got into trouble, as well as ask for their support and votes.

*Have the owners kept up to date by the trustee as to the voting letters received.

This is always a good strategy.

It will let the owners know which creditors to call to thank for their votes, ask to change their votes, or ask to vote in favour of the proposal.