It often involves a compromise of the debts such that the creditors agree to accept less than 100 cents on the dollar, frequently with payments happening over several months or years. Filing a Proposal can be a viable alternative to bankruptcy. Ownership of assets and management of the business remain with the shareholders and directors with day-to-day operations usually continuing.
The benefit is that the creditors realize a greater recovery than they would in a bankruptcy and the company, having met its obligations as defined in the Proposal, sees its liabilities extinguished.
A Proposal must be filed with the help of a Trustee and, if accepted by the creditors and the Court, becomes a legally binding agreement between the company and its creditors.
In order to encourage directors of an insolvent corporation to remain in office and assist the company to reorganize, the Bankruptcy and Insolvency Act was amended in 1997 to allow a stay of proceedings in respect of claims against directors of a company filing a Division I Proposal. The amendment shields the directors against claims that occurred prior to the Proposal filings which may include their director’s liability for Employee Source Deductions and Goods and Services Tax.