A Division 1 Proposal under Canada’s Bankruptcy and Insolvency Act allows struggling incorporated businesses to restructure their debt, halt creditor actions, and avoid full bankruptcy liquidation. The business can continue to operate, but the proposal must be accepted by the majority of creditors and approved by the local provincial court.
When a small or medium-sized incorporated business in Canada faces overwhelming debt, the immediate fear is usually total closure and liquidation. However, full corporate bankruptcy is not the only option. The federal Bankruptcy and Insolvency Act (BIA) provides a powerful legal mechanism for business restructuring known as a Division 1 Proposal. This process is designed to save viable businesses that are simply drowning in unmanageable debt, allowing them to renegotiate terms, reduce the principal amount owed, and keep their doors open. 🏲 Whether your company is a manufacturing plant in Ontario, a tech startup in British Columbia, or a logistics firm in Alberta, the Division 1 Proposal offers a lifeline.
A Division 1 Proposal is essentially a formal, legally binding offer made by your corporation to its unsecured creditors. The offer usually suggests paying a percentage of the debt owed, extending the time to pay, or a combination of both. Because it is legally binding under federal law, if the creditors and the court accept the proposal, all unsecured creditors are forced to comply, even those who voted against it. This is a critical advantage over informal debt settlements. However, the process is highly structured and carries significant risk: if the creditors vote to reject your proposal, your company is automatically forced into bankruptcy immediately.
Step-by-Step Restructuring Process in Canada
Filing a Division 1 Proposal is a complex legal manoeuvre that requires careful planning and the involvement of federal insolvency professionals. Although it is a federal law, the court approvals take place in your local provincial superior court, such as the Superior Court of Justice in Ontario or the Court of King’s Bench in Manitoba. Here is how the process generally unfolds.
Step 1: Hiring a Licensed Insolvency Trustee (LIT)
Your corporation cannot file a Division 1 Proposal on its own. You must engage a Licensed Insolvency Trustee, who will act as the proposal administrator. 💼 It is highly recommended that you also consult with a corporate restructuring lawyer, as the trustee acts as an impartial officer of the court, whereas a lawyer will advocate strictly for your company’s best interests. Together, they will review your corporate financials, cash flow projections, and current liabilities to determine if a proposal is feasible.
Step 2: Filing a Notice of Intention (NOI)
If your business is facing immediate threats, such as frozen bank accounts or imminent asset seizure by creditors, your LIT will file a Notice of Intention to Make a Proposal (NOI). Filing an NOI immediately triggers a federal “stay of proceedings.” This puts an instant legal wall around your business, stopping all creditor actions, lawsuits, and collection efforts. You initially receive a 30-day window to formulate your proposal, but your LIT can apply to the court for extensions up to a maximum of six months, provided the business is acting in good faith and has a reasonable chance of survival.
Step 3: Drafting and Filing the Proposal
During the NOI stay period, your management team, lawyer, and LIT will draft the actual proposal. This document details exactly how much you are offering to pay, the payment schedule, and how the business plans to restructure its operations to ensure future profitability. The offer must provide creditors with a better financial return than they would receive if the company went into immediate bankruptcy liquidation. Once drafted, the LIT files the proposal with the Office of the Superintendent of Bankruptcy (OSB).
Step 4: The Creditors’ Meeting and Voting
Within 21 days of filing the proposal, the LIT will hold a meeting of creditors. At this meeting, the creditors will vote on whether to accept or reject your offer. For the proposal to pass, you need a “double majority” of unsecured creditors: a simple majority (50% plus one) of the voting creditors in number, representing at least 66.6% (two-thirds) of the total dollar value of the debt. If the vote passes, the proposal moves forward. If it fails, the corporation is immediately placed into bankruptcy by operation of law.
Step 5: Obtaining Court Approval
If the creditors accept the proposal, the final step is court approval. Your LIT will present the accepted proposal to the local provincial bankruptcy court (e.g., the Superior Court of Justice or Court of King’s Bench). The judge will review the proposal to ensure it is reasonable, fair to all parties, and complies with the BIA. Once approved, the company simply needs to fulfill the payment terms outlined in the proposal to become completely debt-free from its past obligations.
How Much Does it Cost in Canada?
Restructuring a corporation is a significant financial undertaking. It is substantially more expensive than a personal Consumer Proposal due to the complexity of corporate law and the professionals involved.
- LIT / Administrator Fees: Trustee fees for a Division 1 Proposal are usually based on an hourly rate rather than a set tariff. For a small to medium business, these fees often range from $15,000 to $50,000 CAD, depending on the complexity of the business.
- Legal Fees: Hiring a specialized corporate insolvency lawyer is crucial. Retainers typically start around $10,000 to $20,000 CAD, and total costs can escalate if creditors challenge the proposal in court.
- Proposal Payments: The actual cost to creditors will be the compromised amount you agreed upon (e.g., agreeing to pay $300,000 CAD on a $1,000,000 CAD debt over five years).
- Operating Costs: You must have sufficient cash flow to cover your ongoing, day-to-day business operations during the restructuring phase; otherwise, the proposal will fail.
How Long Does the Process Take?
The timeline for a Division 1 Proposal has strict statutory deadlines under the BIA, but the execution phase can last several years.
- Notice of Intention (NOI) Period: Initially 30 days, but can be extended by the court up to a maximum of 6 months (180 days).
- Creditor Voting: Must occur within 21 days of the official proposal being filed.
- Proposal Term (Repayment Phase): While there is no legal maximum limit, most Division 1 Proposals dictate a payment plan lasting anywhere from 1 to 5 years.
| Feature | Division 1 Proposal (BIA) | CCAA Restructuring |
|---|---|---|
| Target Business Size | Small to Medium Enterprises (SMEs). | Large corporations. |
| Debt Threshold | Any amount of debt. | Must owe at least $5 Million CAD. |
| Consequence of Rejection | Automatic immediate bankruptcy. | No automatic bankruptcy, but loss of stay. |
| Cost and Complexity | Moderate to High. | Extremely High (Millions in fees). |
Frequently Asked Questions (FAQ)
Do I lose control of my company during a Division 1 Proposal?
No. A Division 1 Proposal is a “debtor-in-possession” restructuring process. This means the existing management team and directors remain in control of the day-to-day operations of the business. The Licensed Insolvency Trustee acts as a monitor and administrator, not a replacement for management.
What happens if we miss a payment during the proposal term?
If the corporation defaults on the payments outlined in the approved proposal, the trustee or creditors can apply to the court to have the proposal annulled. If annulled, the automatic stay of proceedings is lifted, and the company is usually placed immediately into bankruptcy liquidation.
Are Canada Revenue Agency (CRA) debts included in the proposal?
General corporate income tax arrears can be compromised in a proposal. However, “deemed trust” claims, such as unremitted employee source deductions (payroll taxes), must be paid in full within six months of court approval. The CRA will not vote to accept a proposal unless this condition is met.
Can secured creditors seize assets during the NOI period?
Generally, the stay of proceedings applies to both secured and unsecured creditors, preventing secured creditors (like a bank holding a mortgage on your equipment) from seizing assets during the NOI period. However, a proposal primarily binds unsecured creditors; secured creditors must usually be negotiated with separately outside the proposal terms.
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