Your company may not need to go into bankruptcy. There is a provision under the Bankruptcy and Insolvency Act which allows you to make an arrangement with your creditors. This is called a proposal.
In a proposal, the creditors may be asked to accept less than the amount owed to them in order to allow the company to continue operations, or provide for and orderly liquidation of the company's assets over time. The trustee works with the company to draft a proposal which would work for both the company and the creditors. Because the only other option may be bankruptcy - with no monies available to the creditors, the creditors are often open to accepting a proposal.
The immediate advantage to filing a proposal is that all legal actions are stopped. This allows the company some tome to prepare the proposal and gain support.
If a company fears that a creditor is going to take action, and there is not enough time to file a proposal, the company can file a Notice of Intention to File a Proposal. When the Notice is filed the stay of proceedings is in effect but there are strict guidelines laid down as to what must be filed and when. Between the time of filing the Notice of Intention and the filing of the proposal, the trustee must monitor the business and have access to all financial information.
After the proposal is filed a meeting of creditors is held approximately three weeks after the filing date. At the meeting the trustee will report to the creditors and give a comparison between a proposal and a bankruptcy. To be accepted, the proposal must be approved by at least two thirds in dollar value and by 50% plus one in number of eligible creditors who vote. The proposal must then be approved by the Court.
If the proposal is not approved by the creditors, the company is deemed bankrupt.
Proposals may be a very effective tool if done early enough and may provide a means for a company to refinance and re-structure.
Corporate Bankruptcy
As a voluntary step to wind-up the company, the directors may assign the company into bankruptcy. The first step is to consult with a trustee to confirm that this is the best course of action. This action may be taken if:
- there are unencumbered assets which are available to the unsecured creditors
- the company wishes a final and full accounting provided to the creditors
- a stay of proceedings is necessary to stop a landlord or judgement creditor distraint.
- the company wishes to rearrange the priority of statutory creditors.
A bankruptcy has the following advantages where a company cannot continue its operations:
- It takes the “pressure” and responsibility away from the owners.
- It provides for an orderly liquidation and collection of the company’s assets.
- It allows for an orderly distribution and determination of creditors’ claims.
The Trustee acts in a fiduciary capacity between the company and the creditors to maximize the recovery of the unsecured creditors.
