How to Avoid Bankruptcy in Canada & Save Your Small Business
Filing a Proposal May Let You Avoid Bankruptcy
By Susan Ward, About.com
(Author's Note: This article is about bankruptcy in Canada. Bankruptcy laws differ from country to country.)
Are cash flow problems making it impossible for you to make ends meet and your business to function? Are you not able to pay your creditors on time?
Are you thinking that bankruptcy is your only option?
It's not. In Canada, you may be able to avoid bankruptcy and save your business by filing a Division 1 Proposal.
A Way to Avoid Bankruptcy
A Division I Proposal is a formal procedure governed by the Bankruptcy and Insolvency Act and is available to businesses and individuals. So you can use this method of avoiding bankruptcy whether your business is a sole proprietorship or an incorporated company. Basically, a Proposal is an offer to an individual's or company's creditors to give them a certain amount of money in exchange for forgiveness of the debts.
The Benefits of Filing a Proposal
If accepted, a Proposal gives the person or company involved a way of avoiding bankruptcy because it gives them time to do what needs to be done to keep the business solvent.
Just filing a Proposal can be beneficial because filing stops all legal actions undertaken or contemplated by secured and unsecured creditors, and, in the case of an incorporated company, creates an automatic stay of proceedings against the Director of the company.
What's in it for the creditors? It's in their best interests to help your business avoid bankruptcy. They get some money rather than none and get the chance to keep a customer.
The creditors might reject the Proposal, in which case you or your business will immediately go into bankruptcy. (See The Bankruptcy Process in Canada for more information.) Still, in terms of avoiding bankruptcy, filing a Division I Proposal is worth a shot.
How to File a Division I Proposal
1. Find a Trustee in Bankruptcy and set up a meeting.
You can find a Trustee in Bankruptcy by consulting the Yellow Pages or searching the Internet; enter 'Trustee Bankruptcy ___________ (your province)' into any search engine.
2. The trustee will file the proposal with the Office of the Superintendent of Bankruptcy.
At this point, you stop making any payments directly to your unsecured creditors, any salary garnishments will stop and lawsuits against you by creditors will be stayed. (Note that secured creditors have the option of being part of a Division I Proposal.)
3. The trustee will set up a meeting of creditors where creditors will vote to accept or reject the Proposal.
The Proposal must receive approval by at least 66 2/3% in dollars and 50% plus one in number of eligible creditors who vote, and the Proposal must be approved by the Court.
If the Proposal Is Accepted & Approved
- All your unsecured creditors and all secured creditors in respect of which the Proposal is made are bound by the Proposal; not just the creditors who voted in favour of the Proposal. Note that secured creditors not included in the Proposal are not bound; it may be necessary to get their agreement separately.
- You will have to pay either a lump sum or periodic payments to the trustee and follow any other conditions in the Proposal.
- As long as you make your payments to your secured creditors, you will retain your assets.
If you do not comply with the terms of the Proposal, the trustee or a creditor may apply to Court for the Proposal to be annulled and the company will go into bankruptcy.
When Filing a Division I Proposal Is Too Slow
If you are worried that your creditors will shut your company down and force you into bankruptcy before you get a chance to file a Division I Proposal, you can file a Notice of Intention to File a Proposal. This acts as a stay of proceedings as soon as it's filed.
1) Once again, to do this, you need to find a Trustee in Bankruptcy and set up a meeting.
2) The trustee will file the Notice of Intention to File a Proposal with the Office of the Superintendent of Bankruptcy.
3) Within five days of filing, a copy of the Notice of Intention is sent to all known creditors (including a report on the affairs of the debtor).
4) Within 10 days of filing the Intention to File a Proposal, a Cash Flow Statement, along with a report on the Cash Flow Statement by the trustee, must be filed with the Official Receiver.
5) The Proposal itself must then be filed within 30 days after the Notice of Intention, unless the Court has granted an extension.
If the Proposal is not filed within the 30 day period, or if the Cash Flow Statement is not filed within the 10 day period, then the company is adjudged to be bankrupt effective at the date of the filing of the Intention to File a Proposal.
The Bottom Line
Like an audit, filing a Proposal can be an intrusive and consuming process. But if it allows you to avoid bankruptcy and save your small business, the process is well worth it.