A. Consumer Proposals
| Author | Roderick J. Wood |
| Profession | Faculty of Law. University of Alberta |
| Pages | 515-525 |
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This chapter covers three different insolvency regimes. The consumer proposal provisions and the orderly payment of debts provisions of the BIA both deal with consumer debtors. The Farm Debt Mediation Act1 covers farmers. All of them operate as alternatives to bankruptcy. By invoking these regimes, the consumer or farm debtor will avoid a bankruptcy and will be entitled to keep his or her assets.
The consumer proposal provisions permit a consumer to make a proposal to his or her creditors. The provisions differ from the commercial proposal under the BIA in that the process is quicker and simpler and the voting rules make it easier for the debtor to obtain the approval of the creditors. The orderly payment of debts provisions, which operate in only four of the provinces, do not require the approval of creditors. They merely create a process through which the various debts of the consumer debtor may be consolidated into a single sum. The farm debt mediation statute provides a process through which a voluntary arrangement can be concluded between a farmer and his or her creditors. Unlike commercial restructuring proceedings, there is no mechanism to bind a dissenting creditor.
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A consumer proposal differs from a consumer bankruptcy in several respects. First, the property of the debtor does not vest in an insolvency administrator. A consumer debtor may consider a consumer proposal to be a better option since the debtor is able to keep his or her house, vehicle, and other property. Payments to the creditors are generally made from the future income or other earnings of the debtor over the course of the consumer proposal. A consumer may also choose a consumer proposal to avoid the stigma of bankruptcy or in the hope of procuring a more favourable credit history. Second, the insolvency process does not involve a liquidation of the debtor’s assets. Instead, the process involves the preparation of a proposal and its acceptance or rejection through a vote of the creditors. The proposal binds creditors even if they have voted against it, so long as a majority of the creditors have approved of it. The voting rules are heavily skewed towards obtaining approval of a consumer proposal, since silence is taken as consent to the proposal.2The choice between making a consumer proposal and making an assignment in bankruptcy is generally done in consultation with a trustee, since both bankruptcies and consumer proposals require the services of a licensed trustee. However, the BIA attempts to dissuade debtors from choosing bankruptcy if a consumer proposal is a viable option. A court is not permitted to grant an absolute discharge if the bankrupt could have made a viable proposal but chose to proceed to bankruptcy as the means to resolve the indebtedness.3
A consumer proposal is a voluntary process that can be initiated only by a debtor.4In order to be eligible to make a consumer proposal, the debtor must fall within the Division II definition of a "consumer debtor."5To qualify as a consumer debtor, the debtor must:
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· be an individual;
· be bankrupt or insolvent; and
· have aggregate debts, excluding any debts secured by the person’s principal residence, that are not more than $250,000.6All secured obligations, other than the debt secured against the debtor’s principal residence, must be included in the calculation of the $250,000 monetary limit. Two or more consumer proposals may be dealt with as one consumer proposal where the debts of the individuals making the joint proposal are substantially the same.7However, the $250,000 monetary limit also applies to a joint proposal. A consumer cannot make a consumer proposal if an earlier one has been annulled or is deemed to be annulled, unless a court orders otherwise.8A bankrupt must obtain the approval of the inspectors, if any, before making a consumer proposal.9The ineligibility of the debtor does not result in the invalidity of a consumer proposal. If it is later discovered that the debtor is ineligible, the creditors and the official receiver must be notified.10This gives them the ability to object to the proposal or seek to have it annulled.11
In order to make a consumer proposal, the consumer debtor must obtain the assistance of an administrator.12Licensed trustees are qualified to act as administrators.13The administrator conducts an investigation of the financial affairs of the debtor, provides the debtor with financial counselling, prepares the consumer proposal and statement of affairs, and files it with the official receiver.14The administrator must prepare a report that sets out the result of the investigation and the administrator’s opinion as to whether the consumer proposal is reasonable and fair to the consumer debtor and the creditors, and whether the con-
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sumer debtor will be able to perform it.15The administrator is required to send the report together with the consumer proposal, statement of affairs, and a proof of claim form to every known creditor.16
An automatic stay of proceedings comes into effect upon the filing of a consumer proposal with the official receiver and continues until the consumer proposal is withdrawn, refused, annulled, or deemed annulled or the administrator has been discharged.17A stay of proceedings does not come into effect if a consumer proposal has been made within six months of the filing of a previous consumer proposal.18The stay of proceedings is very similar in effect to that which arises upon a bankruptcy of the debtor.19It prevents a creditor from commencing or continuing any action against the debtor or exercising any remedy. Like the automatic bankruptcy stay, it does not apply to a secured creditor.20The filing of a consumer proposal renders a wage assignment ineffective in respect of any wages earned after the filing of the consumer proposal.21An employer is prohibited from dismissing an employee by reason only that a consumer proposal has been filed in respect of the employee.22Upon the filing of a consumer proposal, parties who have entered contracts with the debtor are not permitted to invoke clauses that permit the other contracting party to exercise ipso facto clauses. These are contractual provisions that permit the other contracting party to terminate or amend the contract or to claim an accelerated payment or forfeiture of the term by reason of the insolvency of the debtor or the filing of a con-
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sumer proposal.23However, contractual provisions that permit termination, amendment, or acceleration may be invoked if some other event of default is triggered. For example, a secured consumer-loan agreement may provide that a term loan is accelerated and immediately payable if the debtor fails to repay an instalment when it is due. Although a secured creditor cannot accelerate the loan because of the debtor’s insolvency, it may do so because of the debtor’s failure to repay. However, the applicable provincial law may provide the consumer debtor with a right to reinstate a security agreement and thereby deactivate the effect of an acceleration clause.24
If the consumer debtor has leased property, the lessor is not permitted to terminate the agreement for default so long as post-filing lease payments are made when they are due.25Similarly, a public utility is not permitted to discontinue service so long as post-filing payments amounts are paid as they become due.26A court may declare the provision inapplicable if the contracting party applies to the court and convinces it that the operation of the provision would likely cause significant financial hardship.27
A consumer proposal must be made to the creditors generally and must provide that its performance is to be completed within five years.28The consumer proposal must provide for payment of preferred claims in priority to the payment of other claims and must provide for payment of the costs of administration and counselling.29It must also specify the manner of distributing dividends. All amounts payable under the consumer proposal must be paid to the administrator, who in turn must distribute these funds to the creditors in accordance with the terms of the consumer proposal after payment of the relevant fees and expenses.30The consumer proposal will typically specify the frequency of payments and the time period over which they are to occur. A con-
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sumer proposal may include provisions or terms that provide for the supervision of the affairs of the consumer debtor.31
There is no requirement for a meeting of creditors, and in most consumer proposals a meeting is not convened. The administrator must call a meeting of creditors if, within the forty-five-day period following the filing of the consumer proposal, the administrator is directed to do so by the official receiver or requested to do so by creditors together holding at least 25 percent of the value of the proven claims.32The creditors may appoint up to three inspectors of the estate of the consumer debtor. The inspectors have the same powers as inspectors in a bankruptcy, unless these powers are extended or restricted by the consumer proposal.33The reality in most consumer proposals is that a meeting of creditors is not called, no inspectors are appointed, and hence the administrator is the only conduit between the consumer debtor and the creditors.34
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