Corporate Reorganization Pursuant to the Bankruptcy and Insolvency Act

Ever wondered how huge companies, such as Dow Chemicals or Eaton’s manage to sail through financial disaster, apparently unscathed?

Many of them do it by availing themselves of the relatively little known provisions of the Bankruptcy and Insolvency Act, or the Company Creditors Arrangement Act, two federal laws which permit companies, under some circumstances, to freeze their creditors in their tracks for a period of time, while the company, under court protection, reorganizes itself.

In contrast to an outright bankruptcy, wherein the enterprise is simply shut down by the bankruptcy trustee and the assets liquidated, usually at fire sale prices, and the meagre proceeds distributed, a proposal in bankruptcy is intended to keep the enterprise alive, after it has been restructured into a viable business.

The first step in a proposal under the B.I.A. is the filing of a Notice, called a “Notice of Intention to make a Proposal”, which freezes all court and collection activity against the company for a period of thirty days. During this period of respite the company can continue to operate, generating sales and collecting its accounts receivables, but is immune from the attacks of its creditors.

Within 10 days of the issuance of the Notice of Intention, the company must prepare and lodge, with the supervising trustee in bankruptcy, a 12 month cash flow statement, and within 30 days must present a formal proposal. This proposal will be presented to and voted upon by the creditors, and if accepted, becomes binding upon all creditors.

The terms of the proposal can be as inventive as one likes. For example a proposal might simply call for the repayment of the company debt in instalments over time, either with or without the payment of interest, and either in whole, or in part.

More frequently, a proposal involves the sale of the company’s core business to a new company, with the creditors being offered a share of the sale proceeds, equity in the new company, or an opportunity to share in the profits of the new company.

The only mandatory ingredients in a proposal is that it must provide for the payment, in full, of all governmental trust claims (un-paid GST or employee source deductions), and the overall result to the creditors must be better than the likely outcome if the business were liquidated in a bankruptcy.

Proposals under the B.I.A. are not suitable for every company. Those with insurmountable GST or employee source deduction debt, or those whose assets are fully pledged to secured creditors may find little relief from the process, and companies whose core business is not viable will likely be disappointed. Companies considering a reorganization under the protection of the Bankruptcy & Insolvency Act should seek professional advice as early as possible.

, ,

No comments yet.

Don't be shy, leave a reply!

%d bloggers like this: