Where a business is viable but burdened by debt payments and suffering cash flow problems, short term measures such as acquiring additional debt, waiving owner salary and deferring payments of payroll source deductions or taxes may not be the solution. The owners may need to take steps to protect the business.
Is the continued operation of your business viable?
In considering whether your business is viable, it is important that you take a critical look at your ongoing cash flow from your operations. Cash is critical to the survival of any business.
If your cash flow from operating is generally sufficient to meet your ordinary operating expenses, pay your salary and any taxes assessed, you may be able to file a successful proposal to reduce your debts. Proposals may also be useful in other situations where a business may wish to settle unprofitable contracts, leases or business divisions.
What is a business proposal?
A business proposal under the Bankruptcy and Insolvency Act is a legal process to avoid bankruptcy. It is also known as a Division I proposal under the Bankruptcy and Insolvency Act. It must be filed with a Licensed Insolvency Trustee and is available for the following:
- Individuals who do not meet the $250,000 prescribed debt restriction under a consumer proposal;
- Self-employed businesses; and,
- Corporate businesses.
In general, the proposal is beneficial to the business or individual as it offers a way to reduce debt and obtain a fresh start while avoiding bankruptcy but it is also beneficial to the creditors as it will provide a greater recovery than estimated in a bankruptcy.
What are the steps in filing a business proposal?
- Notice of Intention to File a Proposal. Where the company is in risk of the seizure of assets or other risks that may impair the operation of the business, a Notice of Intention to File a Proposal may be filed before the proposal. This document stays the creditors from taking action on a temporary basis while the business consults with the trustee and their lawyer and prepares the proposal documents.
- Preparing documents for filing a business proposal. The owner(s) of the business will meet with the Licensed Insolvency Trustee. The trustee will assist with the compilation of the proposal documents and a cash flow for the business. In incorporated businesses and some more complex individual cases, the business may also require a lawyer specializing in insolvency to assist with drafting the proposal terms.
- Filing a proposal and/or Notice of Intention. The proposal document is a legal binding agreement between the business and the creditors that sets out the terms of the restructuring. The proposal terms are flexible and can include fixed payment terms based on a percentage recovery of total debt, lump sum payment, deferral of payments, distribution of shares or assets, or any combination of these options.
- Operating the business during the proposal. The company can continue operating during the proposal but may be subject to tightened credit terms and monitoring of its operations.
- Meeting of creditors to vote on the proposal. A meeting of creditors must be held within 21 days of filing the proposal. The creditors have the option of voting by letter or in person at the meeting. If the proposal, as filed or amended at the meeting, is not accepted by the proven creditors, the business is deemed to have made an assignment in bankruptcy. If the necessary approval is obtained, the proposal process continues with an application for court approval.
- Court approval of the proposal. Where the proposal is approved at the meeting of creditors, the trustee will make application to the court for approval of the proposal. The business and the creditors will receive notice of the hearing and, if approved by the Court, an Order will be granted. If the proposal is not approved by the court, the business is deemed to have made an assignment in bankruptcy.
- Full performance. When the terms of the proposal have been met in full by the business, the trustee will issue a Certificate of Full Performance. The business is legally no longer responsible for the debts that were included in the proposal.
Taking the first step to obtaining more information?
The assessment of the viability of your business and the terms of a business proposal is complex. At D. Kwasnicky & Associates Inc., we offer a free financial assessment where we meet with you in person. Please contact us to schedule an appointment to review your business and the options available to you.