Division 1 Proposals for Business Debt

A common misconception among business owners is that the only option to deal with a struggling business is bankruptcy or receivership, nothing in between. Business owners often feel they are at the mercy of their creditors or bank. The reality is that a Division 1 Proposal can be used to avoid business bankruptcy, stop a receivership and halt escalating collection action, lawsuits or bailiffs.

Read on to learn more about how Division 1 Proposals can help to save a business. 

What is a Division 1 Proposal?

Debt settlement proposals for businesses are officially called Division 1 Proposals, which are an effective and flexible tool that can be used to eliminate business debt and save your business. 

A Division 1 Proposal can only be filed through a Licensed Insolvency Trustee and is a binding agreement with the company’s creditors to restructure their debts owing, usually by reducing amounts and/or adjusting interest charges and timing of required payments. 

• A key theme of a Division 1 Proposal is that it must offer creditors more than what they would receive if the business were to file a bankruptcy. The percentage of debt forgiveness and amount of debt repayment required under a Proposal often depends directly on the company’s cashflow.

How Does a Division 1 Business Proposal Work for Businesses?

The Licensed Insolvency Trustee works with the owners of the company to draft a Proposal that presents a “win-win” situation for both the business and its creditors. Typically, the creditors are asked to give up rights to the monies they are owed, in exchange for an offer by the company to pay a percentage of the total debt (i.e. so many cents on the dollar) over time or sometimes as a lump sum payment.

• In a successful Proposal, the company wins because it survives, free from the burden of its debts.
• The creditors win because they retain a customer and get some of their money repaid, whereas in a bankruptcy they are likely to receive very little.

If you are a business owner having difficulty paying yourself a salary from your business or are falling behind in debt payments or tax obligations such as GST, employee source deductions, or income tax remittances, a Division 1 Proposal could be an option for your business.

How is a Division 1 Business Proposal Structured?

Division 1 Business Proposals are normally structured as a payment plan over a set period of time, or sometimes as a one-time lump sum payment, however, Proposals can be flexible and as creative as needed – no one size fits all! Since one of the few requirements is that the business’ Proposal must offer more to creditors than a bankruptcy, this allows for a wide range of Proposal terms to be considered.

As a Proposal is a transparent, legally-supervised process, there may be other circumstances where a Proposal can make sense, beyond solely helping a business continue as a going concern. For example:

• A Proposal could be used to wind down a company with the business owner in control, or to conclude non-profitable arms of a business.
• A Proposal could also be used to sell non-performing assets in an asset-rich, cash-flow poor scenario.

Before eroding your personal assets or net worth to finance your company obligations, talk with a local Licensed Insolvency Trustee confidentially at no cost to discuss your situation and business debt solutions.

What Does a Licensed Insolvency Trustee Know about Saving a Business?

Many Licensed Insolvency Trustees are also designated accountants (CA/CGA/CMA), Management Consultants (CMC), and Chartered Insolvency and Restructuring Professionals (CIRP) with years of professional experience assisting businesses in financial difficulty.

Does it Cost Money to Talk to a Licensed Insolvency Trustee? 

A Licensed Insolvency Trustee can offer a fresh perspective, experience, and a full toolbox of options to solve your business’ debt challenges. Confidential initial consultations are offered at no cost or obligation.

What Would be Discussed in the Initial Meeting? 

The first goal when speaking with a Licensed Insolvency Trustee is often to determine if the business is worth saving. 

• In assessing the viability of a business, together we’ll review the operations of the company, its financial statements and its ability to generate cash flow.
  • The amount of cash-flow a company can generate, and the value of its assets is a key factor in determining the options business owners have.
• In order to provide you as much assistance as possible, we suggest that you prepare a list of your business creditors and most recent company financial statements for your initial consultation.

When Should a Business File a Division 1 Proposal?

Generally, a company might consider filing a Proposal when it becomes difficult to pay its trade accounts, payroll or other bills. The sooner the business’ financial standing can be professionally assessed, the greater its chances of survival.

Some common business owner reactions to a shortage of business funds are to:

• Apply for more credit.
• Inject personal equity (cash or assets) to fund or support the business.
• Make the mistake of delaying payment to Canada Revenue Agency (“CRA”) for GST or employee source deductions.

Rather than solving the debt problem on a long-term basis, all three of these actions tend to increase the business owner’s personal liability associated with the company.  

Learn More About Business Debt Mistakes to Avoid

What Creditors Should Every Business Owner be Aware of?

Business owners should be aware of all the company’s creditors, including those that give rise to director liability and/or personal liability. Common examples are:

• GST/source deduction debts to Canada Revenue Agency.
• Personal guarantees, whether to a bank, credit card, landlord, or trade creditor.
• Wages owed to employees.

When Would a Business Not be Worth Saving? 

Usually, a business is not worth saving through restructuring if the company is suffering continual losses and there are no apparent solutions to return it to profitability. In this situation, a voluntary business bankruptcy may be an option to write-off the business debts. 

Key Steps in a Division 1 Business Proposal

1. Notice of Intention to Make a Proposal

If a company fears that a creditor is going to take some action to shut the company down, such as obtaining a judgment or seizing assets, the company can file a Notice of Intention to Make a Proposal with the assistance of a Licensed Insolvency Trustee.

• The Notice of Intention to Make a Proposal is a legal document and upon its filing a “Stay of Proceedings” is started.
  • A Stay of Proceedings is essentially a “timeout” and protects the company by preventing creditors from taking any further collection action against your company.

2. File a Proposal

The company works with a Licensed Insolvency Trustee to formulate a Proposal. Once the Proposal is finalized it will be sent to your creditors by the Licensed Insolvency Trustee so they can consider the offer and vote in favour of or against the Proposal.

3. Meeting of Creditors to Consider the Proposal

Creditors vote on the Proposal by mail or in person at a meeting of creditors, which is held approximately three weeks after the initial Proposal is officially filed.

• The Licensed Insolvency Trustee must file a report to the creditors about the affairs of the company and causes of the company’s financial difficulties.
• The Licensed Insolvency Trustee must also present to the creditors his or her estimate comparing how much money the creditors would receive under both the Proposal and a bankruptcy. (Remember, the Proposal must provide creditors with more money than a bankruptcy.)

If the Proposal is accepted by the creditors and subsequently approved by the Court then all unsecured and secured creditors to whom the Proposal was made are legally bound by the terms of the Proposal – this includes any creditors who did not vote in favour of accepting the Proposal.

• For a Division 1 Proposal to succeed, a majority in number of creditors, and two-thirds in value of debt, must vote to accept the Proposal.
• In the event that the Proposal does not receive the required votes to pass the Proposal then the company is entered into bankruptcy, effective the date of the creditors’ meeting.

4. Complete Proposal

Once accepted, all creditors and the business must adhere to and complete the terms of the Proposal. The business has now achieved a ‘second chance’ at success. 

Still not sure if a Division 1 Proposal is the right solution for your business? Talk to a Licensed Insolvency Trustee today to explore your options.