Insolvency often carries a negative connotation, but it can help people and businesses regain financial stability. This article explains what happens when you claim insolvency in Canada. For tailored advice, consult a Lexpert-ranked insolvency and bankruptcy lawyer.
What happens when you claim insolvency in Canada?
If you or your business is insolvent, Canadian law provides several remedies under the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA). These are:
- Commercial or Corporate Proposal (Division I Proposal)
- Consumer Proposal (Division II Proposal)
- CCAA Filing or Proceeding
We'll discuss these remedies below.
1. Commercial or Corporate Proposal (Division I Proposal)
Under the BIA, a Commercial or Corporate Proposal, also called a Division I Proposal, may be filed by an individual or a business. Individuals with total debts exceeding $250,000 (excluding a mortgage on a principal residence) must use a Division I Proposal.
When you claim insolvency under a Division I Proposal, a proposal will be filed by your Licensed Insolvency Trustee (LIT) before the Office of the Superintendent of Bankruptcy (OSB). Only Licensed Insolvency Trustees (LITs) may administer BIA proceedings, including proposals and bankruptcies.
Learn more about Consumer or Division I Proposals in this video:
Consult these Lexpert-ranked best insolvency & financial restructuring lawyers in Canada for more information about the BIA's Consumer or Division I Proposal.
Filing your proposal
The proposal will contain your plans for paying off debts to creditors, subject to their approval and the court in some cases. Through this proposal, you may suggest:
- paying your creditors only a percentage of the debt
- extending the payment terms to a longer period
Filing a proposal typically triggers a stay of proceedings against unsecured creditors. You generally retain your assets while the proposal is considered. Ongoing obligations may still need to be met. Your LIT will advise on payments that should continue.
Notices of intention will then be sent to your creditors to call for a creditors' meeting. In a Division 1 Proposal, secured creditors also have the option to be included in the proposal.
Conducting the creditors' meeting
Next, a creditors' meeting will be held by your LIT, where your proposal will be put to a vote:
- to be approved: creditors must vote in favour by a majority in number and two‑thirds in value of proven claims (in each class, if classes are used)
- when it is rejected: if rejected or not approved by the court, a debtor may be deemed bankrupt (especially for individuals), subject to the specifics of the filing
Discharge from the debts
When claiming for insolvency in Canada, it is important to follow the terms of the approved proposal for you to be discharged of your debts. If you violate any of the terms, your proposal will be cancelled, and your creditor or LIT may apply for a court to declare you bankrupt.
Read more about the role of LITs and how much to pay them in this guide.
2. Consumer Proposal (Division II Proposal)
Another remedy for insolvents under the BIA is the Consumer Proposal, also called a Division II Proposal. This may be filed by an individual whose total debts (excluding a mortgage on a principal residence) are less than $250,000.
This follows the same process as claiming insolvency through a Division I Proposal, but with some differences. In a Consumer or Division II Proposal, you are not automatically declared bankrupt if your proposal is rejected. You are given the chance to amend the proposal and have it approved again by your creditors.
3. CCAA Filing or Proceeding
CCAA Filing or Proceeding is only available to debtor companies with claims exceeding $5 million. This is what happens when you claim insolvency in Canada through a CCAA Filing or Proceeding:
- your business or company will be protected, allowing you to continue normal operations
- your business may be restructured, or any other necessary action, so that it can recover from debt
- you will be negotiating with your creditors on how to pay off your debts
Applying for an Initial Order and the Comeback Hearing
A CCAA proceeding begins with an initial order from the court, followed by a comeback hearing where creditors may challenge or seek relief. A plan of compromise or arrangement may then be negotiated and voted on.
Coming up with a plan or compromise agreement
After negotiating with your creditors on your proposed plan or compromise agreement to pay off your debts, you may ask the court to order a creditors' meeting. At this meeting, your compromise plan or agreement will be put to a vote:
- if accepted: you will be paying your creditors according to the approved plan or compromise agreement
- if rejected: you will not automatically be declared bankrupt, but your creditors may ask the court for your company to be put in a receivership or be declared bankrupt
As an example of how the CCAA Filing or Proceeding works, here's a video explaining what happened when Sears Canada filed for a CCAA creditor protection in 2017:
Check out our directory of the best law firms for insolvency & financial restructuring in Canada for more details about how to file a CCAA creditor protection.
Who are considered insolvent under Canadian laws?
While the remedies and proposals above are great ways to deal with debt and financial stress, not everybody can use them without complying with the law. As such, one must be insolvent as defined by an applicable statute to avail these remedies.
Generally, insolvency happens when you cannot pay off your debts on time. In claiming for insolvency under Canadian laws, you must satisfy certain qualifications to become legally insolvent:
Insolvency under the BIA
You will be considered an insolvent person under the BIA if:
- you are not bankrupt (bankruptcy and insolvency are different in the legal sense)
- your total debts are more than $1,000
- any of these situations apply to you:
- you cannot pay off your debts or other financial obligations as they fall due
- you stopped paying off your debts after they have become due
- your assets cannot satisfy all your debts (both due and not yet due) if sold at a sale on a fair valuation
If you're considered insolvent as defined by the BIA, you can use either of the following remedies:
- Commercial or Corporate Proposal (Division I Proposal)
- Consumer Proposal (Division II Proposal)
Debtor company under the CCAA
On the other hand, you can use the CCAA Filing or Proceeding if your business falls under the CCAA's definition of a "debtor company," which is if any of the following applies:
- it is considered legally bankrupt or insolvent
- it has committed an act of bankruptcy within the BIA's meaning
- it is deemed insolvent under the WURA (if applicable)
- it has made an authorized assignment
- a bankruptcy order under BIA has been made against it
- it is in the process of being wound up under the WURA
Insolvency under the WURA
Your business will be considered insolvent under the WURA if either:
- it cannot pay its debts as they become due and demandable, as evidenced either by a statement showing this inability or through its own admission
- it calls for a meeting with its creditors for the purpose of coming up with a different agreement regarding its debts
- it sells, assigns, removes, or executes a levy on its properties and assets (including stocks), or attempts to do any of these acts, with the intent to defraud its creditors
When this happens, the business is liquidated, and its assets are distributed in favour of its creditors. However, note that the WURA only applies to certain corporations, most of which are outside the BIA's scope.
What are the laws that govern insolvency in Canada?
These laws outline what happens when you claim insolvency in Canada:
- Bankruptcy and Insolvency Act (BIA): describes the process of declaring bankruptcy and the different options available to an insolvent individual and their creditors
- Companies' Creditors Arrangement Act (CCAA): describes the process of coming up with a compromise or arrangement between the insolvent business and its creditors
- Winding-up and Restructuring Act (WURA): covers the winding-up or liquidation of certain corporations and financial institutions (e.g., banks, insurance companies, loan companies, etc.)
These statutes can be complex. An insolvency lawyer can help determine the most appropriate option.
How can lawyers help clients when it comes to insolvency proceedings?
There are several ways that lawyers for insolvency and financial restructuring proceedings can help you or your business regain financial stability, such as:
- providing legal advice to debtor companies, individuals, LITs, and creditors
- providing legal representation, especially when the courts are already involved in an insolvency case
Check out this article to learn more about what insolvency lawyers do.
What happens when you claim insolvency: Your business's road to recovery
With the help of an insolvency and bankruptcy lawyer, you and your business can understand what happens when you claim insolvency under Canadian laws. Far from what most people perceive it to be, insolvency processes are there to help you move toward financial recovery.
For other information about what happens when you claim insolvency under Canadian laws, head over to our Special Edition on Insolvency and Restructuring.