formal proposal under the Bankruptcy and Insolvency Act (BIA) is a powerful alternative to bankruptcy. The benefits of a proposal for the debtor are clear: the debtor reduces its debt load and avoids bankruptcy. However, proposals are also beneficial to creditors since generally the creditor’s recovery in a proposal scenario is better than the potential recovery from a liquidation through a bankruptcy. In simple terms, upon the successful completion of a proposal, the debtor gets a “fresh start” and creditors recover more than they would in a bankruptcy. However, this “win / win” scenario falls apart where a debtor fails or is unable to make the payments contemplated under the proposal. The question of what should happen when the debtor defaults on required payments under an accepted and approved proposal was recently considered by Registrar Nettie in Re: Northmore1 .
By way of background, the Debtor had made a Proposal to his creditors under Division I of the BIA which was accepted by the requisite majority of creditors and received the approval of the Court2. A trustee was appointed as proposal trustee to oversee implementation of the Proposal. Unfortunately, the Debtor defaulted under his Proposal soon after it was approved by the Court and, consequently the Trustee issued a Formal Notice of Default to the creditors. After the Notice of Default was issued, the Debtor indicated that he would be able to bring the Proposal current and, in fact, provided the Trustee with a bank draft for not only the missed payments but also for all the remaining payment obligations under the Proposal. After the Trustee received full payment of Proposal amount, it issued and filed a Certificate of Full Performance, but the Office of the Superintendent of Bankruptcy (the “OSB”) was not satisfied that the Trustee had authority under the BIA to accept the payments and issue the Certificate of Full Performance in light of the default. The OSB directed that the matter be brought before the Court for directions.
Registrar Nettie noted that there is a gap in the legislation concerning what a trustee should do in such circumstances, and the Court recognized that trustees have struggled to appropriately bridge this gap in the law. Strangely, the BIA is silent on the process where there has been a default) under the proposal, yet no one applies to annul the proposal and the BIA provides no set process for a debtor to amend the proposal where the debtor runs into financial difficulties. Registrar Nettie found that the Court must be involved in the curative process. If a debtor wishes to cure a default in a proposal after a Notice of Default has been issued, or where a debtor needs to amend his proposal (for example, if he needs more time to pay or a reduction in payments) then the following steps should be taken:
- The Debtor should bring a motion before a Registrar or Judge on notice to all proven creditors, the Proposal Trustee and the OSB for an Order permitting the curing of the default and an amendment of the proposal terms.
- If any party objects to the proposed amendments, then the opposition can be considered in the context of the test under section 63 of the BIA (test for annulment of a proposal). It is appropriate for a defaulting debtor to be accountable to his creditors, and the onus is on the debtor to make a compelling argument in favour of curing the default and allowing the amendment. The Court could consider whether or not it is satisfied that an amendment and curing is appropriate and whether the proposal can continue without injustice or undue delay.
- On the motion, the Court should determine whether to grant the requested relief or annul the proposal entirely. An annulment of a proposal triggers a deemed assignment into bankruptcy of the debtor.
While the onus falls on the Debtor to bring a motion to address a default and a consequent amendment to cure the default, Registrar Nettie noted the benefit of a process which allows “the return to good standing and successful completion of a great number of good proposals”, and the consequent benefit to creditors. Hopefully, defaulting debtors who have been caught in the “gap” will use this decision as a springboard to cure any defaults and restore order to proposal process. Better the proposal that is paid, even on amended terms, than a debtor caught in the limbo between bankruptcy and discharge.