Decision to File a Proposal Should be Carefully Considered

A debtor company filed a proposal to its creditors but the proposal was turned down resulting in the bankruptcy of the company. The company asked the court to set aside the decision of the creditors and annul the bankruptcy but the court refused to do so.

The company in question was likely in very difficult financial situation and sought protection from its creditors by filing a proposal with a licensed insolvency trustee under Division I of the Bankruptcy and Insolvency Act. This option can be a very effective and powerful tool in getting immediate protection from creditors but it also brings with it a chain of events and possible consequences that can not be reversed.

Division I Proposal versus Consumer Proposal

It should be noted here that filing a Division I Proposal, which is the only option under the Bankruptcy and Insolvency Act for a limited company, is different from filing a Consumer Proposal that is only available to individuals. In a Division I Proposal the voting threshold for creditor approval is higher – two thirds in dollar value of votes and a majority in number of votes – versus a Consumer Proposal that only needs a majority in dollar value of claims voting in favour. Also, there is no automatic bankruptcy if a Consumer Proposal is turned down or is defaulted on.

In this case, the creditors voted down the proposal and thus caused an automatic deemed assignment into bankruptcy of the company. This was obviously not the plan of the company but it certainly was a risk of starting the proposal process. The company asked the court to disallow one or more claims, remove the votes from the record and annul the deemed bankruptcy. The company felt that the Trustee at the meeting of creditors should have set aside the claims in question as being disputed and not included their no votes in the final count.

The court ruled that the Trustee was correct in allowing the claims and the votes to counted. The correct procedure in many cases where claims are in question is to allow the creditor to vote but to mark the claim as “disputed”. The trustee can later review the basis for the claim in more detail and the correct vote outcome can be determined. There is often simply not enough time to deal with disputed claims at the time of the meeting where many creditors have made the effort to attend and a vote must be taken.

The court found that the Trustee acted correctly but noted that even if the particular claims had been disallowed, there were still enough votes to defeat the proposal.

Key considerations in filing a proposal

Although filing a proposal is often a preferable option to filing for bankruptcy and there are many benefits to doing so, it is still a serious decision. A few things should be considered and kept in mind:

  • A Division I proposal is not reversible. A consumer proposal is much better for individuals since it can be withdrawn if it looks like creditors will not support it and there is no automatic bankruptcy if a default occurs.
  • Although a Division I proposal can not be withdrawn and could lead to a bankruptcy, this fact can sometimes work in the debtors favour. By starting an irreversible process, it drives home the fact that the debtor means business and that it is a serious proposal, not just a stalling tactic.
  • For most proposals involving consumer debts, the trustee should have some idea as to how a proposal will be viewed by the major creditors. It is a basic fact that some consumer lenders are much more flexible and favourable toward proposals than others.
  • If you a filing a corporate proposal or have any large less common creditors or debts owed to other individuals or non-institutional lenders, it may be a good idea to first make informal inquiries to determine their view on a possible proposal.
  • The whole basis for any proposal is that it is intended to get the creditors a better return that if the debtor is forced to file for bankruptcy. The licensed insolvency trustee is obligated to prepare a report that compares those two options. Obviously, the trustee would not recommend the proposal option to a debtor unless he could support that proposal in his report to the creditors.

Clearly, filing a proposal requires getting sound advice on your options and the pros and cons of the choices. Experience in these matters is essential. Call us today for a no charge consultation.