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Division I Proposals
- What is a division I proposal and how does it affect creditors?
- Commercial leases
- Accepting or rejecting a division I proposal
- What if the debtor defaults?
- Closing the proposal
What is a division I proposal and how does it affect creditors?
A division I proposal, also known as a "Division I Proposal", is essentially a compromise between a commercial debtor and his or her creditors that, if approved by the creditors and the Court, becomes legally binding.
Proposals help resolve the financial difficulties of a business and offer creditors more than they could expect to receive in a bankruptcy.
If a business is viable but financially unsound, restoring its financial condition with a proposal may save the business, preserve jobs, give creditors the best return, provide a continuing source of business for existing and new creditors and enable the proprietors to retain an interest in the business.
The easiest way to find out if a person or a business has filed a proposal is to do an online search of bankruptcy and insolvency records. The records contain basic debtor information for all bankruptcies and proposals registered in Canada since 1978.
There is a minimum charge of $8 per search and you can pay by credit card (VISA or MasterCard).
A division I proposal may be filed by
- an insolvent person;
- a receiver appointed by a secured creditor;
- a liquidator of an insolvent person's property;
- a bankrupt; or
- a Licensed Insolvency Trustee (LIT) of the estate of a bankrupt.
After a debtor files a division I proposal or a notice of intention to file such a proposal, creditors may not begin or continue any legal action.
A proposal must be made to unsecured creditors, either as a whole or separated into classes. A proposal may also be made to secured creditors in any class. However, if a proposal is made to one or more secured creditors in a particular class, it must be made to all secured creditors in that class.
In certain circumstances, secured creditors are not affected by the proposal. For example, if, before the debtor filed the proposal, a secured creditor took possession of a secured asset, that creditor may keep the asset or sell it.
A proposal usually states that creditors' claims arising after the proposal is filed are not affected by the proposal. In these circumstances, claims will be paid in full in the ordinary course of business and will have priority over the claims of creditors affected by the proposal.
At any time between filing a notice of intention and filing a proposal, or upon filing a proposal, an insolvent person who is a commercial tenant may disclaim the lease by giving 30 days' notice to the landlord.
Within 15 days of receiving such notice, the landlord may apply to the Court for a declaration preventing the insolvent person from disclaiming the lease. However, no declaration can be made if the Court is satisfied that the insolvent person would not otherwise be able to make a viable proposal.
If an insolvent person disclaims a lease, the landlord has no claim for accelerated rent. As well, the debtor can indicate whether the landlord may file a Proof of Claim for the actual losses resulting from the disclaimer, or for an amount equal to the lesser of
- the total rent set out in the lease for one year after the disclaimer becomes effective plus 15 percent of the rent for the rest of the term of the lease; or
- three years' rent.
The process may begin with the filing of a notice of intention to make a proposal with the Office of the Superintendent of Bankruptcy (OSB). Within five days of filing, a copy is sent to all known creditors. The proposal itself must then be filed within 30 days after the notice of intention unless the Court has granted an extension.
About Licensed Insolvency Trustees
The process may also begin with the filing of the actual proposal and a notice of a meeting of creditors, which must be sent to all known creditors at least 10 days before the meeting.
A proposal must appoint an LIT whose responsibilities include reporting to the creditors and the Court, and making the payments required under the proposal.
After a proposal has been filed, the LIT must call a meeting of creditors to consider the proposal. In calling the meeting, the LIT sends each known creditor
If you are a creditor involved in a proposal, the LIT will send you information as well as form(s). To recover money owed to you, you must complete and submit a Proof of Claim to the LIT.
- a copy of the proposal;
- a statement of the debtor's assets and liabilities;
- a list of creditors;
- a Proof of Claim form; and
- a voting letter.
Accepting or rejecting a division I proposal
Creditors vote to accept or reject the proposal at the meeting of creditors. Creditors who wish to vote at the meeting must file their Proof of Claim forms with the LIT beforehand.
If you want to vote at a meeting of creditors but are unable to attend, you may appoint another person to vote on your behalf. To do this, fill out a proxy form and return it to the LIT along with your Proof of Claim, or give the form to your proxy to present to the chairperson of the meeting at any time before the vote is taken.
For a proposal made to unsecured creditors, a majority of these creditors must accept it, and this majority must represent at least two thirds of the proven claims. After the proposal is approved by the creditors and the Court, it becomes binding on all unsecured creditors. If unsecured creditors refuse to accept a division I proposal, the insolvent person is deemed to have made an assignment in bankruptcy.
For a proposal made to secured creditors, a majority of creditors in each class (a majority being creditors in that class whose combined claims make up at least two thirds of the value of all secured claims) must agree to accept it. If a particular class of secured creditors votes against a proposal, creditors within that class may proceed to take possession of the secured asset.
If the proposal is accepted by the creditors, the LIT must apply to the Court for approval. If the proposal is approved by the Court, creditors will be eligible to receive interim dividends according to the terms of the proposal. However, if the Court rejects a division I proposal, the insolvent person is deemed bankrupt.
Once a proposal is fully performed, the LIT gives a certificate to the debtor and to the OSB. The certificate results in a release from debts, giving it the same effect as a discharge from bankruptcy.
What if the debtor defaults?
A proposal normally specifies when the debtor will make payments to the LIT. If the debtor defaults, the inspectors — or, if there are no inspectors, the creditors — may waive the default provided the debtor remedies the default within 30 days.
If the debtor does not remedy the default, the LIT or the creditors may apply to the Court to annul the proposal. If the court annuls the proposal, the debtor is deemed bankrupt and the Office of the Superintendent of Bankruptcy will issue a certificate of assignment.
When a proposal or notice of intention to file a proposal is filed, a "stay of proceedings" is put in place that prevents creditors from beginning or continuing any legal action against the debtor. This stay of proceedings remains in effect after the certificate of assignment is issued.
However, if the debtor does not remedy the default, and if the LIT proceeds to his or her discharge and does not have the Court annul the proposal, the stay of proceedings is lifted and the creditors' rights against the debtor are revived.
An order annulling a proposal does not affect the sale or disposition of property, or payments made in accordance with the proposal. If a proposal has been annulled, all creditors (both pre-proposal and post-proposal) will share equally in the distribution of the bankrupt's assets.
Closing the proposal
The process of closing the administration of a division I proposal begins when the LIT sends creditors and the Office of the Superintendent of Bankruptcy (OSB) a dividend sheet, indicating the dividends paid or due to the creditors, as well as a final statement of receipts and disbursements (SRD).
The SRD must contain a complete account of all money and interest received by the LIT, all money disbursed, and expenses incurred and the remuneration claimed by the LIT. The final SRD must be approved by the inspectors.
When the LIT has completed his or her duties, he or she must apply to the Court for a discharge.
Any interested party can object to the discharge of the LIT by filing a notice with the Court outlining the reasons for the objection (a $50 fee applies). The LIT must also be advised. If the discharge is granted, the Court issues an order of discharge.
If an LIT is unable to deliver a dividend (for example, if he or she is unable to locate the rightful creditor when the dividends were distributed), then he or she is required to forward the unclaimed funds to the OSB. The money is then held in trust until the creditor comes forward to make a claim.
The unclaimed funds database is a listing of creditors who are owed dividends but who could not be located by the LIT. You can find out whether you have an unclaimed dividend owing to you by searching the database.
If you have a complaint about a division 1 proposal, contact us.
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