There are many alternative options available for a business facing financial difficulties other than bankruptcy. One alternative is to make an informal or formal proposal to the business’s creditors. Another alternative is to sell the business with or without the help of a secured creditor.
Proposal to creditors
To start, you might want to consider making a proposal or arrangement with your creditors to pay lower monthly installments over a longer period of time or perhaps even a reduced amount altogether. This is a good alternative if your business has a steady income flow plus some future prospects for further income flow. If your business has a small number of creditors, then you might want to consider making an informal proposal by calling your creditors and explaining your financial situation. If your business has a large number of creditors, then you may have to call a trustee in bankruptcy to arrange a formal proposal under the Bankruptcy and Insolvency Act.
A proposal to creditors is a legal contract between the business and its creditors. The trustee’s role is to assist in the negotiation process to create terms that work for the business and the creditors. The proposal must be approved by the court and accepted by at least two-thirds of the business creditors at a meeting of creditors. If the business creditors do not accept your proposal, your business will automatically become bankrupt.
Receivership and buyback
An alternative to making a formal proposal to your creditors is to allow a secured creditor to place your business into receivership so that secured creditors can sell it. A secured creditor is someone who lent your business money in return for your written consent to give the creditor the right to sell specific property if you fail to repay your outstanding loans. If you do not make payments on your business loan, the secured creditor may even appoint a receiver to start the process of selling the property as per your written consent. A secured creditor is legally required to give you at least 10 days notice of its intention to appoint a receiver. If you are in receipt of notice that your business assets are about to be sold, you should immediately contact a lawyer for legal information and professional legal advice. There is a possibility that you will be able to buy back your business assets, but you will have to outbid your competitors.
Division I Proposal
Another alternative to business bankruptcy is known as a Division I Proposal. Also referred to as a “commercial proposal,” this is a formal procedure that is available to businesses where there is no limit on the outstanding loans. The trustee facilitates this process by establishing an offer to pay creditors a percentage of the money that 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. The proposal can only be accepted if at least 50% of the creditors, representing 66% of the debts, approve. Once the proposal is approved, payments are made through the trustee. The trustee will then use the money to pay each creditor and to also pay his or her own service fees.
Advantages of a Division I Proposal to the debtor includes:
- the ability to retain all of your assets
- the halt in actions against you by unsecured creditors (e.g. wage garnishments)
- the ability to solve your financial issues without having to declare bankruptcy
- the payment of unsecured debts at a portion of the original amount
- the potential payment of tax debts at a portion of the original amount
Filing for bankruptcy may or may not be a good idea for your business depending on your specific circumstances. You should consult a lawyer, a trustee in bankruptcy, or an accountant for more specific information and professional advice.
Office of the Superintendent of Bankruptcy Canada