You often hear on the news when a large company has filed for bankruptcy or bankruptcy protection, but rarely when one seeks debt relief through filing a Division 1 corporate proposal (also known as a commercial proposal).

Usually, when a business owner who has a company in financial trouble visits my office for advice, they’re looking for a viable debt relief solution that will allow them to keep their business open while they pay their debts under modified terms. This is at the very heart of what a Division 1 corporate proposal is designed to do, and also why it’s a much preferable alternative to corporate insolvency (bankruptcy).

It’s important to note that Division 1 proposals are intended for corporations, not sole proprietors who haven’t incorporated their business. This is because debt under a sole proprietorship is considered part of the owner’s personal debt, whereas an incorporated business is considered a separate entity from its owners. Sole proprietors with $250,000 or less in debt need to seek out a debt consolidation or consumer proposal solution instead.

What is a Division 1 Proposal?

In simple terms, a Division 1 proposal is an offer that businesses (or individuals with debts exceeding $250,000) make to their creditors for modified, affordable repayments of their debt. This way, they can still operate and/or reorganize their business and keep it earning money.

There are several benefits to filing a Division 1 corporate proposal, such as:

• As soon as we file the proposal, or a Notice of Intent to Make a Proposal, you can stop making payments to your creditors
• Unwanted contact from these creditors will immediately cease, as will any legal action taken against you on their behalf
• By filing a proposal, you’re showing a willingness to reorganize your company and pay your bills, which may help your business secure further credit down the road

Filing a proposal involves much more than filing out and submitting a form. It’s a complicated process that by law requires the services of a licensed insolvency trustee.

Your trustee will first discuss your options with you and answer all of your questions.

If you decide to file a Division 1 corporate proposal, your trustee will manage the entire process for you, including working with you to develop a repayment plan, filing the proposal and presenting it to your creditors, and ensuring that everyone involved acts in compliance with the Bankruptcy and Insolvency Act.

Your Division 1 proposal is subject to approval by both your creditors at a credit meeting and the Court. If accepted, the proposal becomes legally binding to your creditors, and you can then begin making your payments under the terms of the proposal. Once completed, you will be completely absolved of those debts.

At this point in explaining the process to clients, the most-asked question I get is, “What happens if my proposal is rejected?” If this happens, your business is immediately considered insolvent and placed into bankruptcy. The notion of becoming bankrupt is jarring for most business owners, but it’s important to note that this prospect actually improves the chances of your proposal being accepted.

We make sure that your creditors understand what kind of repayment they will receive under a proposal vs. bankruptcy. In most cases, they will receive more money under the proposal, which increases the chances of them voting in your proposal’s favour.

You can also borrow money from a friend or family member to help fund your proposal. This cash advance provides added incentive for your creditors to approve the proposal, but should they still vote to reject, this money can be refunded. Be sure to discuss these details with your trustee prior to the creditor meeting.

What Happens at the Proposal Creditor Meeting?

The creditor meeting can be stressful. All, or at least several, of your creditors will be in attendance, and the future of your company (and, by extension, you) is completely in their hands.

Your trustee will be there to help facilitate the meeting, make sure everything proceeds fairly, and answer any questions. Your creditors may have questions for you, but your trustee can suggest beforehand what might be asked of you so you can be prepared.

After the proposal is presented to your creditors, your trustee will call for the vote. To be successful, your proposal must represent more than 66.67% of the dollars voting and more than 50% in number of the creditors voting.

For example, if your business owes $100,000 to 7 creditors, your proposal will be accepted if:

• More than 4 creditors vote to accept your proposal
• Those creditors who vote to accept your proposal represent at least $66,670 of the total debt

The votes are tallied in this way to ensure the most balanced decision possible. It prevents two possible scenarios from occurring:

• Several creditors who are owed small amounts dominating the number of creditor votes
• One large creditor who is owed the lion’s share of the debt from deciding for all creditors if the proposal is accepted

In addition, the 3 creditors who voted against your proposal will still be legally bound to the terms of the proposal. This way, you don’t have to negotiate with these creditors separately and only have to worry about fulfilling the terms of your proposal.

If your business is in financial trouble, a Division 1 corporate proposal might be a way to get things back on track. As always, I’m happy to answer any questions about how I can help your business get into a better financial situation.

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: If your Division 1 corporate proposal is accepted, be sure to make every payment and fulfill its terms. Failing to do so even once can result in your company being placed immediately into insolvency.