Filing a corporate proposal (also know as a Division 1 proposal) is a great strategy for business owners who fall behind on their corporate debt, especially if they can’t see the situation getting any better in the foreseeable future.

A corporate proposal is a formal legal proceeding that is governed by the Bankruptcy and Insolvency Act of Canada. It’s designed to help businesses negotiate repayment of their debts to avoid filing for bankruptcy. Upon filing a corporate proposal, all unwanted contact from unsecured creditors will cease, as will any legal action against the business on the creditors’ behalf.

Filing a corporate proposal is a complex process for which you need a licensed insolvency trustee. Trustees represent you and your business to the court as well as to your creditors, and can keep you advised on your rights and responsibilities under relevant government guidelines. Depending on your situation, they can also present several options available to you, and help you develop strategies to keep your company operating during the corporate proposal process.

One strategy to help your proposal succeed is maintaining cash flow. For most companies, maintaining cash flow is a top priority. But while the money is coming in, we might be too busy to think about what could happen if that cash flow was suddenly interrupted, leading to financial crisis.

That’s what happened to one thriving business owner who was struck by sudden illness, took the time to recover, and returned to a company in shambles.

Corporate Restructuring to Avoid Insolvency

Richard L.* owned a manufacturing firm that had four major customers. After expenses, he was earning approximately $10,000 per month.

Then suddenly, Richard suffered a heart attack. Thankfully, he survived, but was compelled to take 10 weeks off from work so he could recover. But once he returned, his company was in financial trouble due to the following issues:

• Work completed had not been billed
• Payroll deductions and HST had not been remitted
• One of his major customers had left, reducing his company’s revenue

Richard didn’t know where to start to make things right, and began to worry that the stress of putting his business back on the right path would threaten his health even further. He needed to time to catch up on everything and restructure his company.

Corporate restructuring is a great strategy when a company gets into financial trouble. It allows you to keep your business afloat, reallocate resources more efficiently, and avoid insolvency.

In the meantime, what could Richard do to settle his debts? Needing assistance, he wisely sought help from the trustees here at Charles Advisory Services.

Proceeding with a Corporate Proposal

We sat down with Richard for a full review of the company’s financial position. There was good news: orders were still coming in and his other three customers were still happy. By analyzing his revenue streams vs. the company debts, we were able to create an affordable repayment plan that demonstrated the company’s ability to catch up and return to good financial health.

We presented this information to Richard, reviewed his options, and answered all of his questions, after which he decided to proceed with filing his corporate proposal.

With the proposal process underway, Richard could still operate his business, demonstrating his willingness to pay. We also encouraged him to show that he wanted to pay his debts by proactively reaching out to his customers and suppliers, explaining his situation, and getting their support.

This is a key strategy when filing a corporate proposal, as your request for modified payments is subject to approval by your creditors at a creditor meeting. This can be stressful, because if the creditors see no honest intent to repay debts, chances are they will reject your proposal, at which point your company will be immediately placed into bankruptcy.

The Importance of a Cash Flow Projection

In our practice, we most often find that creditors are willing to negotiate modified payments if there is a good reason you fell behind, if you are willing to pay, and that you have reliable cash flow coming in.

However, it should be noted that cash flow, above all others, is the single most important component of a successful proposal. In short, if your customers stop paying you, the proposal will fail.

In addition, corporate proposals require all amounts owing with respect to payroll be remitted to the Canada Revenue Agency (CRA) within six months, unless CRA is willing to grant an extension. Without the cash flow needed to pay CRA, your proposal will likely be rejected.

This is why we always include a cash flow projection within the proposal, so your creditors know how much they will receive under the proposal vs. bankruptcy. In most cases, creditors will receive a bigger repayment under a proposal, giving them the incentive to vote in your favour.

To be approved, at least 66.6% in dollars and 50% plus one in number of eligible creditors must vote in favour of your proposal. This way, weight is given to the creditors with the most to lose if your company should fall into insolvency upon rejection of the proposal.

Fortunately, after presenting the proposal to Richard’s creditors, they voted to accept it. Richard could then make his repayments under the terms of the proposal, concentrate on corporate restructure, and search for a buyer while continuing to monitor his long-term personal health.

The moral of the story: protect your cash flow at all costs. As always, I’m here to answer any of your questions.

Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.

For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped individuals, families, and businesses in Toronto move beyond debt towards financial health. Contact us today for a free consultation.

TIP: Buying critical illness insurance is a wise idea to cover not just personal expenses due to temporary loss of income, but also pay operating expenses of your company in the event you’re unable to work. However, you should also have someone responsible and trustworthy to oversee your company’s operations while you’re recovering.

*Not a real person, but this scenario is based on real cases.