Many businesses are facing financial challenges, making it difficult for them to repay their loans. Creditors want their money back and will use the resources and tools available to seek repayment. Three of these are: Receivership, a Division 1 Proposal and Bankruptcy. People sometimes think these terms mean the same thing. They have some similarities, but it’s important to understand how they differ. This knowledge can help you make informed decisions about your business’s financial future.
All three options – Receivership, a Division 1 Proposal, and Bankruptcy, are responses to a business’s inability to meet its financial obligations. However, each has unique implications for a company and its operations. Given how complex these situations can be, seeking professional advice from a Licensed Insolvency Trustee is crucial to ensure you choose the most suitable option for your circumstances. Let’s review how these options differ.
How Creditors Recover Their Money
A business that’s doing well financially will repay its loans according to its loan agreement. However, companies can run into financial difficulty for many reasons, leaving them unable to pay back their debts. When this happens, the company may go into receivership, file a Division 1 Proposal, or file for Bankruptcy.
What is Receivership?
If your business has secured debt and cannot make the loan payments, it can end up in receivership. This process is initiated by the secured creditor and involves selling the secured assets to repay the lender. Receivership in Canada must be administered by a Licensed Insolvency Trustee (LIT).
The LIT can be privately appointed by the creditor to be the receiver or a court-appointed receiver. In each case, the receiver must be an LIT. If the LIT is privately appointed, they are responsible to the creditor. If the LIT is appointed by the court, they are officers of the court and must update the court regarding their activities.
Lenders typically try to work with the business to find mutually acceptable repayment methods. If this fails, they can issue a Notice of Intent (NOI) to enforce their Security. If your business receives a NOI, you’ll have ten days to contact a lawyer and/or LIT to review your options. Your creditor can appoint a receiver to take control of your assets and sell them if the deadline expires before you find a resolution.
Receivership vs Division 1 Proposal
Receivership involves selling your business’s assets to pay off secured loans. A Division 1 Proposal is also known as a Corporate Proposal. It is an agreement that your LIT negotiates with creditors to pay off your unsecured debt.
It can reduce the amount you owe or extend the time you have to repay your creditors. To file a Division 1 Proposal, you must owe more than $250,000 in unsecured debt. It also allows your business to keep its assets.
If you are carrying less than $250,000 in unsecured debt, a Division 2 (known as Consumer Proposal) may be an option you can consider. Like a Corporate Proposal, it can reduce your unsecured debt or extend the time you need to repay it.
Filing a Consumer Proposal or Corporate Proposal can be a lifeline for your business, helping you avoid small business Bankruptcy. These options can allow you to continue operations and may restructure your finances, offering some hope that you can make the required payments to your secured creditors and bounce back from the financial difficulties you’re experiencing.
Receivership vs Bankruptcy
A company can be in receivership, in Bankruptcy, or both. Some similarities between Receivership and Bankruptcy are:
* Both are legally binding.
* Each process requires an LIT.
* They are both methods of dealing with debt when a business can’t repay its loans.
Some of the differences are:
| Receivership | Bankruptcy |
| Initiated by the lender | Initiated by the borrower |
| Deals with secured debt | Deals with unsecured debt |
| The creditor or court appoints the LIT, and the LIT works on their behalf | The debtor chooses the LIT, and the LIT works on the debtor’s behalf |
| The sale of assets may pay off the debt | The sale of assets is not enough to pay off the debt, and the business can’t meet its financial obligations |
| The business can sometimes continue, mainly if it is sold | The business will close |
Businesses that file for Bankruptcy can’t meet their financial obligations, sometimes including payroll. If your business files for bankruptcy in Canada, your employees can apply to the Wage Earner Protection Program. The federal government helps employees who won’t receive their wages due to their employer’s Bankruptcy.
Getting The Right Advice
Running a business can be overwhelming, especially when facing financial problems. Our Licensed Insolvency Trustees at Allan Marshall and Associates are debt experts. Call us today at 1-888-371-8900 or use our online contact form for a free consultation. We’ll review your situation and work with you to come up with the right strategy to deal with your debt. Your business may need advice on restructuring operations to become more profitable or benefit from a Consumer Proposal, Division 1 Proposal or Bankruptcy.
