by Florian Meyer

Hard as you try, does it feel like your business always has more debt than it can pay off? You’ve spoken to your banker, your family and friends, and no one is able to offer you any financial help. Does the constant debt pressure make you wonder whether it would be better to just throw in the towel and bankrupt the business? No … not yet!!!

There is a solution that could provide you with the breathing room you need to help you recover. And it’s legal.

Within the Canadian Bankruptcy & Insolvency Act (BIA), you are allowed to make a proposal to deal with your creditor debt and remain in business.

How To Start

First, you need to engage a Chief Restructuring Officer (CRO) and a Trustee. The CRO works inside the business with you to develop and monitor a clear plan for moving the business into a more positive financial position and to encourage you to make some of the hard strategic decisions.

The Trustee works with you for the benefit of the creditors. The Trustee begins by preparing a Notice of Intention to File a Proposal (NOI) that is filed with the courts. That stays all creditor actions against you. In other words, creditors are legally prevented from doing anything to collect on the existing outstanding debts.

After the NOI is filed, you have to ensure that all obligations incurred in the future are paid as they become due. Within ten days of filing the NOI, you have to file a Cash Flow Plan with your Trustee and the courts. The Cash Flow Plan shows how you expect the company to generate enough cash flow to cover any new debts plus a portion of the historical debts that were stayed by the courts. Your CRO will help you prepare the Cash Flow Plan and will help present it to your Trustee.

The Creditor Proposal Meeting

With the cash flow filed, you have 20 days to develop a plan for the business and a plan to repay a portion of the historical debts before you are required to have the Creditor Proposal Meeting. It’s often possible to get extensions of up to six months for having the Creditor Proposal Meeting as long as the creditors are not disadvantaged. An extension requires court approval and needs a reasonable justification, such as:

1. You have not negotiated a settlement with the secured creditors, or
2. Another activity that needs to be completed before the proposal is ready to be presented to the creditors.

Payments

Generally, you will offer to repay 15% to 20% of the existing, unsecured debt over a three to four year period. You send a cheque monthly to the Trustee who annually distributes the payment among all the creditors included in the NOI. The Trustee’s fees to administer the process are paid out of the pool allotted to pay the creditors, with no additional cost to you.

Bear in mind that a Creditor Proposal will not reduce your obligation to pay off any bank loans or other secured debts. By obtaining a secured interest for their loans, the secured creditors have acquired a legal interest in some or all of your company’s assets. You and your CRO will have to negotiate with them to arrange a repayment plan that eventually pays those debts in full.

After the Cash Flow has been filed and a repayment plan has been negotiated with your secured creditors, the CRO will work with your unsecured creditors to obtain their verbal agreement to the plan. Finally, the Trustee will hold an official Creditor Proposal Meeting to receive legal and court approval of the process.

Benefits

The Creditor Proposal Process gives you a legal avenue for reducing your unsecured debt to a more manageable range of 15% to 20% with a defined schedule of how it will eventually be paid off. With the assistance of your CRO, you will develop a go-forward plan to bring your finances back to a much healthier position. Your CRO will help you negotiate an achievable repayment plan with your secured creditors and help you look for additional sources of financing, if needed. And, your time can be more effectively devoted to managing and improving the business to ensure that the plan works.

Resolution

Now you can move the business forward with a much improved cash flow. The creditors are no longer calling to collect, and you have a new plan that allows you to move forward with the historical issues resolved.

Example

As an example, I worked with a client that was behind in payments to the landlords and other vendors. It owed a large debt to the Canada Revenue Agency (CRA) which was primarily unpaid payroll source deductions for which the owner was personally liable. At first glance, there simply seemed to be no way to move forward.

I stepped in as the CRO, connected the client with a Trustee, and introduced an accountant who could effectively manage the financial reporting. By helping the client work through and obtain approval of its Creditor Proposal we accomplished the following:

1. Developed a go-forward plan that realistically gave the company a chance to succeed.
2. Engaged a lawyer and obtained court approval to eliminate an obligation to a creditor who had inappropriately attempted to declare its claim as a secured debt.
3. Established a six-month payment plan with CRA. They would no longer continue to chase for collection, and the accrued penalties and interest were stopped as of the date of the Notice of Intention to File a Proposal (NOI).
4. We renegotiated with the landlords to have rent reduced to a level that the company could afford. The accountant worked with the internal staff to ensure that informative and timely monthly financial Statements were now being produced.
5. After the six-month payment plan with CRA was completed, the plan began paying the unsecured creditors at 15% of the original obligation over the next four years.

Although it may feel as though there is no hope of keeping your business afloat, our legal system provides a life raft to give you a second chance.

Florian Meyer is resourceful and imaginative Chief Restructuring Officer (CRO) who maximizes the benefits of restructuring for the business. As a client recently said, “You never give up until a great solution has been developed and implemented.”

Florian has an MBA and CPA, CA and is a Principal of Newhouse Partners Inc. He has been consulting as interim CFO and CRO to a number of private and public companies since 1996, You can reach Florian at fmeyer@newhousepartners.com or 416-873-8684.
You will find more details on www.newhousepartners.com .