Division 1 Proposal: What You Need to Know About “Corporate Proposals”

A Division One Proposal under the Bankruptcy and Insolvency Act of Canada, is a debt repayment plan similar to a Consumer Proposal, where you offer to repay your creditors either in full or a percentage of the amount owing.  A proposal under Division One applies to consumers who owe more than $250,000.00 (not including a mortgage on a principle residence).  A Division One proposal is sometimes referred to a Corporate proposal as a business and/or corporation can file a proposal, or restructuring plan, under this section of the Act.

Protection from Creditors Before and During the Proposal

If you file a Division One proposal there is an automatic Stay of Proceedings that goes into place. This stops all collection practices while the proposal is in place. The Stay also goes into place should you file a Notice of Intention (NOI).   Before filing a Division One proposal, one has the ability to file a NOI that you intend to file a proposal but need a little bit more time to put the details into place.  Yes, this does buy you time and protects you from your creditors, but you have to be serious about wanting to file.  If you do not follow the rules and the prescribed time lines you can end up being put automatically into bankruptcy.

Some Details to Consider Carefully

Because you generally owe a substantial amount of money in a Division One proposal, or you have business that you believe to be viable, the rules are stricter than in a Consumer proposal.  In a Division One proposal there is automatically a Meeting of Creditors as well as a Court hearing to approve the proposal.  If the Proposal is not approved, it results in an immediate bankruptcy. Further should you default on payments, you could end up in a bankruptcy.  There can also be income tax implications associated with any debt that is written off in the proposal. CRA often considered the written off debt to be equivalent to income. LCTaylor, your local LIT would discuss the details of this type of proposal with you so that you are well informed of the details.

What Information is Required before Filing?

A Division One proposal is definitely an alternative if you have a viable business that has come upon some tough times, but which you think has a bright future.  It all starts with a cash flow statement. That is something that LCTaylor can help you prepare.  Both a cash flow statement as well as a cash flow projection are required under this type of proposal.  This will also help to figure out if the business is viable and thus worth salvaging.

Director Liability

When a business or corporation is no longer viable, the directors will need to look at which corporate debts they are liable for.  If the directors are not in a position financially to pay the debts of the corporation that they are responsible for, the directors may be need to speak with LCTaylor about their personal situation.  Sometimes the personal guarantees and director liability are too much to handle and a personal bankruptcy or a Consumer Proposal may be the result of a failed business.

Another Option

Many small businesses are sole proprietorships or partnerships. In those situations, the debts are actually personal to the owners, and so a Consumer Proposal or bankruptcy might be the best course of action. Other sole proprietorships may have incorporated their business, but still personally guaranteed the debts.  In those situations, it might be possible to simply shut down the corporation, and deal with the personal guarantees through a Bankruptcy or Consumer Proposal.

The only way to know if a Division One Proposal might be something that could help your business is to come in to meet with one of our experienced Trustees. They will be able to give you all of the options available. If you are determined to save the business, they will help you figure out how to do that, if it is possible. If you are just plain tired of the whole thing and want to wrap it up, they will also be able to give you options on how to do that with the least personal cost possible.  Give us a call for a free, confidential consultation.


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