Proposals Under the BIA

• Author: Stephanie Ben-Ishai; Thomas G. W. Telfer
• Pages: 707-732



CHAPTER 16

Proposals Under the BIA

I. INTRODUC TION

This chapter examines the two restructuring processes contained in the Bankruptcy and

Insolvency Act, RSC , c B- (BIA). These are Division I, or commercial proposals, and

Division II, or consumer proposals. This chapter will describe the history of restructuring

proceedings in the BIA and explain the key features of the two types of proposals. Commer-

cial proposals can be used by corporations, other business entities, or individuals. Part III

of this chapter describes key features of the commercial proposal provisions by highlight-

ing the similarities and dierences between commercial proposals and Companies’ Credit-

ors Arrangement Act, RSC , c C- (CCAA) proceedings. This approach builds on the

material covered in chapters – and helps explain why a business may choose to restruc-

ture using a commercial proposal rather than the CCAA or vice versa. A consumer proposal

can only be made by an individual with a limited amount of debt (see Part IV(B) on eligibility

below). Part IV of this chapter describes key features of the consumer proposal process by

contrasting them with the commercial proposal process, thereby helping to explain why an

individual may prefer one to the other.

Commercial and consumer proposals are both restructuring regimes, as contrasted

with the bankruptcy liquidation regime. Recall that in bankruptcy, all of the debtor’s non-ex-

empt property is transferred to the trustee, in exchange for which the debtor may be able to

discharge its debts. In a proposal process, the debtor makes an oer to its creditors with

respect to the debts the debtor owes. The oer can take many dierent forms. Often the

debtor oers to repay a portion of their debts. The debtor might oer to repay all of the debt,

but over a longer period of time than was originally agreed to. Alternatively, where the debtor

is a corporation, it may oer the creditors shares in the corporation in lieu of paying its debts.

If the proposal becomes binding and the debtor fullls the terms, it will have some or all of

its debts forgiven as contemplated in the proposal. For example, imagine the debtor oers

to repay  percent of the debt owed to each creditor; once it makes those payments, the

remaining  percent of the debt is released.

Commercial and consumer proposals are built on a model similar to CCAA proceedings:

a debtor makes a proposal to its creditors, the creditors vote on the proposal, and a court

evaluates the proposal. If a sucient number of creditors vote in favour of the proposal and

a court approves it, it becomes binding on all the creditors to whom the proposal was made.

In other words, creditors can be bound by a proposal even if they did not vote for it.

 BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS

II. HISTORY OF THE PROPOSAL PROVISIONS

The Bankruptcy Act,  contained skeletal provisions, copied from the British Bankruptcy

Act, enabling insolvent debtors, not restricted to particular types of debtors, to make a pro-

posal to their creditors for the payment of their debts and thereby avoid bankruptcy. How-

ever, the  Act’s commitment to a rescue philosophy was weak for the following reasons:

()a proposal could only be made to unsecured creditors; ()no interim period was allowed

between initiating the proceedings and ling the proposal; and ()ling the proposal did not

entitle the debtor to repudiate executory contracts or preclude creditors from terminating

their contracts with the debtor. Not surprisingly, therefore, proposals did not play an import-

ant role in Canada’s bankruptcy regime in the interwar period, as the law did not enable a

workout unless most of the major creditors of a debtor were willing to cooperate in devising

a going-forward nancial arrangement with the debtor.

In the post-World War II period, there was a strong revival of interest in strengthening

the restructuring options available to insolvent debtors. The Tassé Report, discussed in

chapters  and , contained ambitious recommendations for recasting the proposal provi-

sions and replacing the CCAA. These recommendations were incorporated in varying forms

in successive bills introduced in Parliament between  and . However, none of the

bills was enacted — for reasons that had less to do with the merits of the bills than with

lack of political will by successive governments to secure the bills’ adoption. To resolve the

deadlock, the  Colter Committee (see Chapter ) was given the mandate to recommend

changes to the bankruptcy regime that they deemed to be most urgent.

The Colter Committee’s  Report singled out commercial and consumer proposals

as two of the areas deserving prompt remedial action. As far as commercial proposals were

concerned, the report recommended the following changes: ()the debtor should be allowed

an interim period to give notice of intention to le a proposal before having to le the pro-

posal itself; ()proposals should be allowed to target secured as well as unsecured creditors,

thereby also giving the debtor the protection of a stay of proceedings against secured as well

as unsecured creditors; and ()the debtor should be allowed to disclaim executory contracts

and realty leases, and third parties should be restrained from terminating contracts that were

important for the debtor’s economic survival. The report also recommended that consumer

debtors should be provided with an expedited restructuring process. The Colter Committee

recommendations involving proposals were adopted in the BIA  amendments.

Commercial proposals have proved popular with debtors from the beginning of the

new regime. Their number increased steadily between  and , from , to ,

respectively, and from .percent of the number of business lings in  to .percent in

. Their use decreased over the following years as the Canadian economy boomed and

the number of distressed businesses declined. Another rise occurred during the height of

the – global nancial crisis, leveling o in recent years. From  to , business

proposals as a percentage of all business insolvency lings increased from . percent to

 Bankruptcy Act, SC , c .

 Bankruptcy Act, ,  &  Geo , c .

 Canada, Study Committee on Bankruptcy and Insolvency Legislation, Report of the Study Committee on

Bankruptcy and Insolvency Legislation (Ottawa: Information Canada, ) (Chair: Roger Tassé) [Tassé

Report].

 Advisory Committee on Bankruptcy and Insolvency, Proposed Bankruptcy Act Amendments: Report of

the Advisory Committee on Bankruptcy and Insolvency (Ottawa: Supply and Services Canada, ).