How to save a company (even if it is insolvent)
More companies than necessary fail financially! Too often, a company can be saved if one intervenes in time. Even if a company is insolvent, it can be saved using the procedures put in place by the Bankruptcy and Insolvency Act, to make a proposal (settlement) to the company’s creditors.
These procedures project that a company, with a bankruptcy trustee as intermediary, can make a proposal to the creditors asking them to accept less than the amount due so that the company can survive.
The trustee works with the directors of the company to draw up an offer that represents the best alternative for the creditors as well as the company. Usually the creditors loose part of the amount due, the company offering to pay a certain percentage of its debt (say 25, 50, or 75%) over a certain period of time. Sometimes the company reimburses the total debt, but asks for a moratorium (a period of time in which the company makes no payments).
In a successful proposal, the company wins because it survives. The creditors also win because they keep a client and also recover part of their money where as in a bankruptcy they probably would have lost everything.
- Making a proposal gives a company immediate advantages when threatened by creditors :
- Making a proposal stays all legal procedures taken or planned by the unsecured creditors.
- Making a proposal gives a company a margin of manoeuvrability giving it time to explain its financial situation to the creditors and to ask for their support with respect to the proposal.
- If the company has not received a default order notice pursuant to the Bankruptcy and Insolvency Act more than ten (10) days before deposition of the proposal, then the stay of all procedures also applies to the secured creditors for not having given notice.
- Making a proposal also protects the directors of the company with regards to legal responsibilities, but not their contractual obligations, such as a guarantee.
Intent to make a proposal
If a company is worried that a creditor is about to take legal actions that would disrupt business operations, like for example, a garnishment before a judgement, the appointment of a receiver or the garnishment of the company’s client accounts by Revenue Canada or Revenue Quebec; then there is a good possibility the said company may not have the time to make a proposal to the creditors before these take legal actions such as described above. In such cases, the company may file a notice of intention which indicates:
- An official form declaring the company’s intention to make a proposal;
- The name and address of the trustee in bankruptcy who has consented in writing to act on behalf of the company in the proposal;
- The names and addresses of the creditors and the amounts owing.
Within 10 days of the deposition of the notice of intention to make an offer, the following documents must be sent to the Official Receiver :
- A cash flow statement (a statement of foreseeable receipts and expenses);
- A report from the trustee on the validity of the statement mentioned in the above paragraph;
- A written declaration by the company to the effect that this is a fair statement.
The trustee must notify the creditors of the company within 5 days of the deposition of notice of intent.
A proposal must be made within 30 days of the deposition of the notice of intent. This period may be extended up to 6 months. If the offer is not made within this period, or the cash flow statement is not presented within 10 days, then the company is automatically put into bankruptcy from the date of the deposition of the notice of intention.
During the period between the deposition of the notice of intent and deposition of the proposal, the trustee must monitor the company and have access to the inventory, books and other documents in order to correctly assess its financial situation.
The meeting of the creditors to consider the proposal
The creditors vote on the proposal in person or by mail during a meeting held about 3 weeks after the deposition of the proposal. The trustee must produce a report on the company’s affairs and the reasons for its financial difficulties. The trustee must also provide an estimation of the amount the creditors could receive in a bankruptcy as compared to that in the offer. For the offer to be justified, it must favour the creditors more than a bankruptcy.
The offer must receive the approval of at least 2/3 of the value of the debts and 50% plus one of the votes, and be approved by the court. If the offer is accepted by the creditors and approved by the court, then all the unsecured and secured creditors, to whom the proposal was made, are bound by the proposal. This also applies to those who did not vote in favour of the proposal.
If the offer does not receive the required number of votes, then the company is put into bankruptcy from the date of the meeting of the creditors.
- A proposal can only be made through a trustee in bankruptcy.
- A proposal is basically an agreement between a company and its creditors.
- Once a proposal is made, all legal procedures in process or in the making by the creditors, whether unsecured or secured, are stayed.
- The secured creditors directly affected by the proposal who voted in favour of it, are bound by the proposal. Those secured creditors not affected, are not bound by the proposal and their approval may be needed for the proposal to be accepted.
- The merchandise delivered within 30 days of the deposition of the offer, or deposition of intent, does not have to be returned if the offer is accepted, but might be if the offer is refused or a receiver is appointed.
- A commercial lease may be rescinded.
The offer must provide for payment in full :
- Deductions at sources on salaries, not to exceed 6 months from the date of the court approval.
- The salaries of all employees present and ex, including vacation pay, up to a maximum of $2000 per employee upon approval of the proposal.
Approval (Refusal) of the proposal
- The trustee must file a report for the creditors on the affairs of the company and the reasons for their financial difficulties.
- The creditors vote on the proposal, by mail or in person, at a meeting held about 3 weeks after the filing of the proposal.
- To be accepted by the creditors, the proposal must be approved by at least 2/3 of the debt value and by 50% plus one of the creditors that vote. The proposal must also be approved by the court.
- If the proposal does not receive the required number of votes, the company is put into bankruptcy.
- Once the proposal is approved by the court, all unsecured and secured creditors are bound by the proposal, not only the creditors who voted in favour.
- If the conditions of the proposal are not honoured, the trustee or the creditor may address the court to have the proposal annulled, and therefore put the company into bankruptcy.
A verification list that decides if a company qualifies for the submission of a proposal
If the answer is YES to all the following questions, then the submission might be the answer to the company’s survival :
- Is the company insolvent or not financially viable ?
- Could the company survive if : a) part of their debt was annulled or b) a moratorium on the payment of debt was approved for a few months?
- Do the directors of the company have the competence, the desire and the energy required to save the company.
- If you intend to make an offer to a secured creditor, will they approve the proposal?
- If you intend to rescind your commercial lease, do you have any plans for the continuation of operations of your company?
- Would the unsecured creditors be better off with an offer rather than a bankruptcy?