Area of Law: Credit, Debt and Bankruptcy
Answer # 0282
Division 1 Commercial ProposalRegion: Ontario Answer # 0282
What is a Division 1 Proposal?
A Division 1 Proposal is an offer made to creditors by the debtor to change the amount and/or payment terms of the debt. Also known as a Commercial or a Corporate Proposal, it is a formal procedure available to businesses with debts greater than $250,000 (excluding the mortgage on their main residence); however, there is no upper limit with respect to how much money is owed. This process is carried out through a Licensed Insolvency Trustee (LIT).
What are the terms of a Division 1 Proposal?
Your proposal must include an estimate of what the creditors would receive if the business filed for bankruptcy, and, it must offer creditors at least the same amount or better. Although Division 1 Proposals normally follow a five-year plan, they can be for a longer time-period.
The LIT will create a proposal to:
- lower the amount the business has to pay (by offering to pay creditors a percentage of what is owed to them over a specific period of time),
- extend the time the debtor has to pay off the debt, or
- a combination of both.
How to make a Division 1 Proposal
- Hire an LIT: You must provide your LIT with a complete list of all of the business assets (property) as well as its debts. The LIT will discuss your situation and work with you to develop a Division 1 Proposal.
- File the proposal: Your LIT will file your proposal or a notice of intention to file a proposal (NOI) with the Office of the Superintendent of Bankruptcy (OSB). If an NOI is filed, the proposal itself must then be filed within 30 days after the NOI, unless the Court has granted an extension.
As soon as the proposal or NOI is filed, the business is no longer required to make payments to its creditors, and the creditors must stop any actions they have taken against the business to collect the debt.
- Notify creditors: The LIT must notify the creditors that an NOI or proposal has been filed within 5 days of it being filed with the OSB.
- Mandatory meeting of creditors: The LIT will set up a meeting of the creditors. The terms of the meeting are as follows:
- it must be held within 21 days of the filing of the proposal,
- a vote must be held to decide whether to accept or reject the proposal, and
- for the proposal to be accepted, over 50% of the creditors (representing 66.6% of the debts) must approve it.
If the proposal is accepted by the creditors, it must then be approved by the Court.
If the proposal is accepted
Once creditor and court approvals are obtained, payments will then be made by the business to the LIT, who will use that money to pay each of the creditors, and also take their fee.
In addition, the debtor must continue to make payments to the LIT and meet any other conditions set out in the proposal. If the debtor defaults on any of the conditions in the proposal, the business will immediately be placed into bankruptcy and its creditors can take legal action to recover the money owed to them.
If all conditions are met, the business will be legally released from its debts.
If the proposal is rejected
If the Division 1 Proposal is rejected, the business is immediately declared bankrupt from the date of the creditors’ meeting. At that point, creditors can continue, or begin legal action against the business to collect the amount owed.
Advantages of a Division 1 Proposal
The advantages of making a proposal, include:
- the business retains all of its assets
- actions against the business by unsecured creditors will be stopped
- it allows the business to solve its financial problems without having to declare bankruptcy
- unsecured debts are paid off at a portion of the original amounts
- secured creditors cannot enforce their security agreement (by seizing and selling collateral) until the proposal is voted upon (unless the secured creditors gave notice before the proposal was presented)
- actions against the directors will be put on hold (stayed) unless the director has provided a guarantee
- often, tax debts can also be paid off at a portion of the original amount
For more information about Division 1 Proposals, refer to the Office of the Superintendent of Bankruptcy Canada.
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