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.