Proposals Under the BIA

AuthorStephanie Ben-Ishai; Thomas G. W. Telfer
Proposals Under the BIA
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.
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
Advisory Committee on Bankruptcy and Insolvency, Proposed Bankruptcy Act Amendments: Report of
the Advisory Committee on Bankruptcy and Insolvency (Ottawa: Supply and Services Canada, ).

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