Newsletter - October 2010

Factors for a successful proposal

At Ginsberg, Gingras & Associates, we offer to individuals or companies in financial distress the possibility to make an evaluation of their situation. During the evaluation, an insolvency professional will examine the assets, liabilities, income, expenditures, causes of financial distress and any other relevant information. This evaluation is made in order to identify all the options available to the insolvent person in order to avoid bankruptcy.

Subsection 173(1) of the Bankruptcy and Insolvency Act (BIA) prescribes that if bankruptcy is chosen by a debtor who had the capacity to make a viable proposal; the application for discharge may be refused, suspended or granted conditionally.

WHO CAN MAKE A PROPOSAL?

Consumer debtor (division II)

• An individual who is bankrupt or insolvent and whose aggregate debts, excluding any debts secured by the individual's principal residence, are not more than $250,000.

Other debtors (division I; division II – corporations and cases where no proposal can be made)

• An insolvent individual;
• a receiver, within the meaning of subsection 243(2), but only in relation to an insolvent person;
• a liquidator of an insolvent person's property;
• a bankrupt; and
• a trustee of the estate of a bankrupt.

FACTORS TO TAKE INTO CONSIDERATION FOR A SUCCESSFUL PROPOSAL

Consumer debtor (division II)

• Causes of the financial distress
  • Was the problem identified and solved?
  • Has the debtor already made payment agreements with its creditors? Did he respect those?
• Debtor's reputation
  • Has the debtor already been bankrupt or made a proposal?
  • Does the debtor have a good reputation?
• Nature and number of creditors, and the probability of the proposal being accepted
  • Are the creditors from the debtor's locality or outside?
  • Are the creditors numerous?
  • Do these creditors typically vote for or against proposals?
• Origins of the liquidity to make the proposal
  • Will the funds be coming from the selling of assets, a refinancing, a loan from a third party or an income surplus?
• Dividend for the creditors – quantum and schedule
  • What will be the percentage of the dividend and on what time period? Generally, creditors will not be interested in accepting a low dividend over a long period of time.
• Final result
  • Will the creditors receive a higher dividend than they would get with the debtor being bankrupt?
  • Will the debtor be able to respect its proposal?

Other debtors (division I)

• Origins of the insolvency
  • Is it a problem related to the industry, mismanagement, legislative amendment, loss of an important customer, supply?
• Implementation of a detailed business continuity plan
  • Is the company's purchase book full?
  • Is the statement of cash flows positive?
  • Do the budgeted statements show the company's profitability?
  • Will the company self-generate sufficient liquidity to make an offer to its creditors or will it have to find other funds?
• Relationship between the different groups of interested parties
  • Do the labor union, suppliers, secured creditors, shareholders and management believe in the restructuring of the company and are they ready to work together to that effect?
• Trust regarding the skills and integrity of the managers
  • Do all the interested parties have faith in the capacity of management to deal with this crisis.
• Communication and relationship with the interested parties
  • During the process, it is essential to maintain good communication with all the interested parties and also to involve them in the preparation of the proposal.
• Access to new funds
  • Can the company have access to new funds to insure its working capital or to make an offer to its creditors?
  • The BIA prescribes the possibility to make a bridging finance in order to have access to new funds more easily.
• Dividend for the creditors – quantum and schedule
  • What will be the percentage of the dividend and on what time period?
• Final result
  • Will the creditors receive a higher dividend than they would get with the company being bankrupt?
  • Will the company be able to respect its proposal?
  • Will employment be maintained?

CREDITORS VOTE

Consumer debtor (division II)

The proposal is deemed accepted within 45 days following the day it has been filed, unless a creditor representing 25% in value of the proven claims or the official receiver asks the trustee to call a meeting. During the meeting, vote is made by ordinary resolution ($1 = 1 vote), and is accepted by 50% plus 1 of the proven claims.

Other debtors (division I)

In the case of a commercial debtor, vote is held during the meeting of creditors. To be accepted, the proposal must gain approval by a majority in number (50% plus 1) and by the two-thirds in value (66.66%) of the creditors who have proven their claims.

CONCLUSION

Our firm's professionals have the experience and the skills required to maximize the chances of making a successful proposal. We have a good understanding of the success factors and are able to guide any individual or company into its restructuring process and thus help them avoid bankruptcy.

BRIAN FISET, CIRP

Bankruptcy trustee, city of Quebec

Mr. Brian Fiset is trustee in bankruptcy in our office located in Quebec city at 686 Grande-Allée east, suite 300, Quebec (Quebec) G1R 2K5, 418-649-0767.

For additional information on this topic or any other insolvency matter, please contact one of our trustees. The contact information and e-mail addresses of our professionals are available on our Web site at www.ginsberg-gingras.com.

Ginsberg Gingras & Associates Inc. is a member of the DFK Canada Inc., DFK International and is associated with the accounting firm of Ginsberg Gluzman Fage & Levitz, LLP Chartered Accountants.

** This article does not constitute any legal advice. It is offered for information purposes only. Since every case is different, the advice of a qualified professional should be sought in each situation. **