What is a Proposal for a Small Business?

May 2, 2016

It is not uncommon for a small business to hit a bump in the road or to get into financial difficulties.  It could be the costs of starting up the business, the loss of a major customer, expanding too quickly, problems with an employee or not having the proper accounting system to understand costs.

Whatever the reason, the fact that a small business is having financial difficulties does not mean it has to close down or go bankrupt.

A Proposal to Creditors allows a small business to compromise a portion of its debts and avoid a bankruptcy.  By reducing the debts and allowing for a structured plan to make payments to the creditors, a proposal lifts the burdens of financial difficulties and allows a small business to move towards becoming a profitable business.

As part of the Proposal process, operations can also be restructured.  Unprofitable locations can be closed, excess assets and vehicles can be sold or returned to secured creditors; and the costs associated with the restructuring are covered by the proposal.

The authority to file a Proposal comes from the federal Bankruptcy and Insolvency Act. It’s important to understand that a Proposal is not a bankruptcy, and:

  • Under the legislation, once a Proposal is filed, creditors are prevented from starting or continuing legal actions against the business;
  • Not all creditors are required to accept the Proposal; once the required majority have accepted it, the Proposal is legally binding on all creditors.
  • In certain circumstances the liabilities of a director can also be compromised in a Proposal.

A Proposal can only be filed with a federally Licensed Insolvency Trustee.

Andy Fisher is a Partner at Farber. His practice focuses on small business and corporate restructuring, along with personal insolvency. Andy can be reached at 416.496.3414 or afisher@farbergroup.com