A Division 1 Proposal halts creditor actions for an initial 30 days, giving a Canadian business a chance to restructure its debts. If the creditors reject the proposal, the company is instantly forced into formal bankruptcy (liquidation), with Licensed Insolvency Trustee fees typically starting around $10,000 CAD.
When a Canadian company is drowning in debt and facing aggressive action from suppliers or the Canada Revenue Agency (CRA), the directors must make a critical decision. The Bankruptcy and Insolvency Act (BIA) provides two main options for corporate debt management: attempt to save the business through a Division 1 Proposal, or shut the doors completely via Formal Liquidation (Corporate Bankruptcy). Understanding the strict statutory timelines between these two paths is the difference between saving your life’s work and losing everything.
Operating a business in Halifax, Montreal, or Edmonton involves the exact same federal insolvency laws overseen by the Office of the Superintendent of Bankruptcy (OSB). 📈 A Division 1 Proposal allows you to keep running the business while you negotiate a deal to pay back a fraction of what you owe over time. However, this is a high-stakes gamble. If the proposal fails the strict timelines or is voted down, the law triggers an automatic, immediate liquidation. This guide outlines the timeline you will face.
Step-by-Step Process for Canadian Corporate Restructuring
A Division 1 Proposal is a highly complex legal manoeuvre. You cannot do this alone; you must hire a commercial Licensed Insolvency Trustee (LIT) to guide you through these unyielding deadlines.
Step 1: Filing a Notice of Intention (NOI)
The process begins by filing a Notice of Intention to Make a Proposal (NOI) with the OSB. 🔒 The exact second the NOI is filed, a “stay of proceedings” is activated. This legal shield stops all creditors, including the CRA, from seizing your bank accounts, suing you, or cutting off critical supplies. From this day, you have exactly 30 days to draft a comprehensive restructuring plan.
Step 2: Drafting the Division 1 Proposal
During this 30-day window, your LIT and your law firm will review cash flows, negotiate with key stakeholders, and draft the formal offer. If 30 days is not enough time, your lawyer must apply to the local Superior Court (or Court of King’s Bench in some provinces) for a 45-day extension. You can apply for multiple extensions, but the absolute maximum time allowed from the NOI to filing the proposal is six months.
Step 3: The Creditors’ Meeting and Vote
Once the formal proposal is filed, the LIT will call a meeting of your creditors within 21 days. 🖹 For the proposal to pass, you need a “double majority.” This means more than 50% of the creditors who vote must say yes, and those who say yes must represent at least two-thirds (66.7%) of the dollar value of the proven claims of creditors who are present and voting on the resolution. If you owe a massive debt to the CRA, their vote alone might control the outcome.
Step 4: Court Approval or Automatic Liquidation
If the creditors vote yes, the local court must formally approve the deal, and you continue operating your business under the new payment terms. However, if the creditors vote no, or if you miss any of the strict deadlines during the NOI period, the company is instantly deemed bankrupt. The LIT immediately seizes all corporate assets, changes the locks, and begins formal liquidation to pay off whatever is left.
How Much Does it Cost in Canada?
Corporate insolvency is significantly more expensive than personal bankruptcy due to the complexity of the legal work. Here is what a business can generally expect to pay in CAD: 💵
| Service / Expense | Estimated Cost (CAD) |
|---|---|
| Licensed Insolvency Trustee Retainer | $10,000 – $25,000+ upfront |
| Corporate Insolvency Lawyer Fees | $500 – $900+ per hour |
| OSB Official Filing Fees | $150+ (varies by stage) |
| Court Application for Extensions | $2,000 – $5,000 per application |
How Long Does the Process Take?
A Division 1 Proposal operates on a knife’s edge. The initial breathing room is only 30 days. 🕓 If you successfully navigate the voting and court approvals (usually taking 2 to 3 months), the actual repayment period typically lasts between 1 to 5 years. If it fails, the subsequent formal liquidation of the company’s assets can take anywhere from 9 to 24 months depending on how hard it is to sell the equipment or real estate.
Frequently Asked Questions (FAQ)
Can the CRA reject my Division 1 Proposal?
Yes. If the CRA holds more than 33.3% of your total debt, they effectively have a veto power. However, the CRA usually prefers a proposal over a bankruptcy because a successful business will pay more in the long run than a liquidated one.
Who runs the company during the restructuring?
During a Division 1 Proposal, the existing directors continue to run the daily operations. This is called “debtor-in-possession.” The LIT monitors the cash flow but does not take over the company unless it fails and becomes a bankruptcy.
Does a Division 1 clear unpaid employee source deductions?
No. By law, any restructuring proposal must include a plan to pay 100% of outstanding employee source deductions (CPP, EI, and income tax withholdings) within six months of court approval. You cannot discount trust claims.
What happens to my personal assets if the company liquidates?
If the company is incorporated, your personal assets (like your house) are generally safe due to the corporate veil. However, if you signed personal guarantees for business loans or owe CRA source deductions, creditors can pursue you personally.
Can I just close the business and start a new one?
Liquidating a company and immediately starting the same business under a new name to avoid debts is called a “phoenix operation.” The OSB and CRA heavily scrutinize this and can penalize directors who engage in bad-faith asset transfers.
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