A Proposal by a corporation is simply an arrangement between the company and its creditors which allows the business to continue operating in exchange for a compromise of the debts outstanding and in most cases, a deferral in the timing of the repayment. The trustee works with the owners of the company in drafting a corporate proposal that presents a better result for both the company and the creditors than if the company is forced into a bankruptcy.

Key considerations in filing a corporate proposal

The first thing to consider when faced with a financially troubled corporation or business, is whether or not the business can be saved by filing a Proposal under the Bankruptcy and Insolvency Act.

Some key factors to consider in determining whether or not a Corporate Proposal is the right option are as follows:

  1. Is the company insolvent and unable to continue without a compromise or deferral of unsecured or other debt payments?
  2. Is the company expected to produce a positive operating cash flow once the unsecured debts have been deferred and/or compromised?
  3. Can the company continue to make full payments to its secured creditors? If not, would the secured creditors support a Proposal involving those debts as well?
  4. Do owners wish to continue operating and supporting the business?

Steps to be taken in filing a corporate proposal

Filing a corporate proposal involves the following steps:

  1. Owners and management should meet with a licensed trustee in order to assess the company’s financial affairs, including its assets, debts and operating prospects. (Note: It is helpful if the books and records of the business are brought reasonably up to date such that an accurate assessment of the financial affairs can be made.)
  2. The trustee will work with company owners/management to assist in formulating Proposal terms that the creditors are likely to accept and that the company can maintain.
  3. The company will then file the Proposal through the trustee. This step freezes collections and legal actions by creditors, including those of secured creditors in some cases. (Note: An alternative to filing the actual Proposal is to file a “Notice of Intention to File a Proposal”. This also provides for a freeze of creditor actions but allows more time for the company to formulate the terms of Proposal and forward it to the creditors.)
  4. The trustee will file a report to the creditors on the affairs of the company and the causes of financial difficulty.
  5. The company prepares a Cash Flow Statement the period following the date of filing the Proposal. This Statement is reviewed by the trustee and is forwarded to the creditors.
  6. A meeting of creditors is held within three weeks of the date of the Proposal. At that meeting the Proposal will require the support of at least two thirds of the dollar value of voting creditors plus a majority in number of voting creditors in order for the Proposal to be accepted.
  7. If the required dollar value and number of votes is not received, and acceptable amendments to the Proposal to gain voting support can not be made, the company is immediately bankrupt.
  8. Assuming the Proposal is accepted, it will then require approval by the court.
  9. Once the Proposal is approved by the Court, all creditors included in the Proposal are bound by the Proposal terms, even those who may have voted against the Proposal.
  10. Following court approval, if the Proposal terms are not met by the company, then the Proposal will be in default and either the Trustee or a creditor may apply to Court for the Proposal to be annulled and the company placed into bankruptcy.

Summary of benefits in filing a corporate proposal

A few of the key benefits in filing a Corporate Proposal are as follows:

  • The filing of a Proposal stops all legal actions by unsecured creditors.
  • The stay of proceedings against creditors will also be effective against secured creditors as long as the company has not yet received a “Notice to Enforce Security” under the Bankruptcy and Insolvency Act.
  • The filing of a Proposal allows the company some time to approach the creditors and explain the company’s financial situation and ask for support for the financial restructuring on fixed terms as set out in the Proposal.
  • The filing of a Proposal allows the company to negotiate a compromise with all creditors at the same time.
  • Not all of the creditors of a given class of creditors (e.g. unsecured) must agree with the plan in order for it to be accepted.
  • Subject to the availability of funds, once the Proposal has been approved, the company can make larger or more frequent payments than originally agreed to in the Proposal in order for it to be completed ahead of schedule.