A consumer proposal is a contractual obligation to repay a part of the debt to the creditors regulated by s.66 of the BIA. The advantages of the consumer proposal are that the bankrupt does not have to go through bankruptcy process and suffer from negative consequences described in chapter I (D). The consumer proposals are usually made, where a discharge is likely to be contentious or substantial conditions are imposed, the debtor is willing to repay debts, the debtor is willing to retain key assets, the debtor is previously bankrupt, the debtor is not ready to cut living standards before been discharged, the debtor has significant surplus income.
Making a consumer proposal must be a seriously considered decision, because of significant negative consequences of default and costs of trustee’s services associated with the proposal. First, the debtor must ask himself whether the creditors have sufficient indicia to accept the proposal rather than pushing the debtor into bankruptcy. The creditors are likely to accept the proposal where the creditors are convinced that they would be better off under the terms of the proposal than if the debtor went bankrupt. Second, there must be reasonable likelihood that the debtor would be able to carry out the terms of the proposal. The default on the debtor’s obligations under the proposal would automatically push the debtor into deemed assignment in bankruptcy and trigger other negative consequences (“default on consumer proposal”, chapter III (C)).
Only consumer debtors are allowed to make a consumer proposal under s.66 of the BIA. Section 66.11 defines “consumer debtor” as a natural person who is bankrupt or insolvent and whose aggregate debts excluding debts on principal residence do not exceed $75,000.
The term of obligation to repay the debts under the consumer proposal must be of no longer than 5 years.
Under s.66.12(6) a consumer proposal must provide:
1. for full payment to the secured creditors and to the creditors whose claims are given priority either by s.136(1) or other sections of the BIA
2. for full payment of all fees and expenses pertinent to administration of consumer proposal and counseling related to consumer proposal
3. for the manner of distributing interest and dividends.
To make a proposal, a consumer debtor must obtain the assistance of an “administrator”, who is normally a trustee in bankruptcy or trustee’s agent (s.66.11 of the BIA), to provide the administrator with information of the consumer debtor’s financial situation that would allow the administrator to prepare and file the proposal (s.66.13(1)(a) of the BIA).
The administrator who agrees to assist a consumer debtor must comply with duties set in s.66.13(2):
(a) to investigate the consumer debtor’s property and financial affairs to assess the consumer debtor’s financial situation and the cause of insolvency
(b) to provide the debtor with counseling
(c) to prepare a consumer proposal
(d) to file a copy of consumer proposal, signed by the consumer debtor, with the official receiver
Under s.66.14 of the BIA, the administrator must, within 10 days after filing a consumer proposal with the official receiver:
(a) prepare and file with he official receiver a report with the result of the investigation under s.66.13(2)(a) and administrator’s opinion as to whether the consumer proposal is “reasonable and fair to the consumer debtor and the creditors, and whether the consumer debtor will be able to perform it
(b) send the consumer proposal accompanied by certain documents to every known creditor.
The consumer proposal must be approved by both the creditors and the court, however unlike the commercial proposal, if the creditors, after have been given a notice of proposal, don’t hold a meeting to vote, the proposal is deemed approved. Similarly, if no party applies to the court for approval, the court is deemed to approve the proposal.
The trustee in bankruptcy must file the proposal with the court and send a copy of proposal to every proved creditor (s.66.14(b) of the BIA). Any creditor who has proved a claim may indicate assent or dissent to the consumer proposal within 45 days of the proposal being filed. The effect of the dissent is deemed to be a request for a meeting of the creditors (s.66.17 of the BIA). If 25% of the creditors in value of the proven claims have dissented to the proposal or the official receiver requests the meeting, the administrator must call a meeting that must be held within 21 day after being called (s.66.15).
At the meeting of creditors, the creditors may by ordinary resolution, voting all as one class, accept or refuse the consumer proposal.
Where, at the expiration of the 45 day period following the filing of the consumer proposal, no dissent was indicated by creditors or the official receiver, the creditors are deemed to accept the proposal (s.66.18 of the BIA).
After the proposal is approved by the creditors, if no application requesting the approval of the proposal is filed with the court, the court is deemed to approve the proposal (s.66.22(2)). The court shall not approve the proposal where, in the opinion of the court, the terms of the proposal are not “reasonable or are not fair” (s.66.24(2). The court must refuse the proposal if the consumer debtor has committed an offence under the BIA or was not eligible to make a consumer proposal when the consumer proposal was filed with the official receiver, or the consumer proposal does not comply with consumer proposal requirements under s.66.12(5) and (6) of the BIA (s.66.24 of the BIA).
Stay of Proceedings.
Similarly to bankruptcy, where the debtor has filed an intention to make a proposal (s.50.4), no creditor has any remedy against the insolvent person or the insolvent persons property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim (s.69(1) of the BIA).
Prohibition from Refusal to provide services.
Unlike the assignment in bankruptcy, consumer proposals do not trigger ipso facto clauses allowing the creditors to rescind the contracts (s.66.34(5). No person may terminate, amend the provisions or demand accelerated payment under an agreement with the consumer debtor only because the consumer debtor is insolvent or has filed a consumer proposal. Similarly, no public utility may discontinue service to the consumer debtor just because he is insolvent of because he has filed a consumer proposal (s.66.34). Further, no employer may dismiss, suspend, lay off or otherwise discipline a consumer debtor on the sole ground that he filed a consumer proposal (s.66.36). The latter is especially important, where the employee is in position of trust and would be laid of in case of the bankruptcy. Similarly, s.448.1(1) of the Bank Act prevents a bank from refusing a bankrupt to open an account for reason of bankruptcy.
On the other hand, where a consumer proposal is filed, nothing prevents the contractors from requiring payments to be made in cash for goods, services, use of leased property or other valuable consideration provided after the consumer proposal has been filed and to refuse to provide a debtor with further line of credit (s.66.34(4).
A consumer proposal that is accepted or deemed to be accepted by the creditors and approved or deemed to be approved by the court is binding on the creditors in respect of all unsecured claims and secured claims of the secured creditors who have filed the proofs of claim under ss.124-134, however the consumer proposal does not release the consumer debtor from the debts and liabilities referred in section 178(1) (s.66.28 of the BIA).
The court can allow the application requesting an annulment of the consumer proposal where the consumer debtor has defaulted on its terms or where it appears to the court:
(a) that the debtor was not eligible to make a consumer proposal when the consumer proposal was filed;
(b) that the consumer proposal cannot continue without injustice or undue delay;
(c) that the approval of the court was obtained by fraud (s.66.3 of the BIA).
Independently of section 66.3, unless the court has ordered otherwise or unless the amendment to the proposal has been filed, the consumer proposal is deemed to be annulled where the consumer bankrupt is in default to the extent of three months payments (s.66.31(1)).
The effect of the annulment of the proposal is significant, the consumer proposal is:
- deemed to have made an assignment and the order annulling the proposal shall so state (s.66.3(5) of the BIA).
- unless the court orders otherwise, the consumer debtor may not make another consumer proposal, and
- is not entitled to stay of the proceedings relief in ss.69 to 69.2
- the claims of the creditors are revived subject to benefits received by the creditors under proposal (s.66.32 of the BIA).
In conclusion, the consumer debtors must seriously consider the legislative requirements as to the eligibility to make a consumer proposal (“consumer proposal requirements”, chapter III(A)) and ability to comply with obligations under proposal. The failure to meet either of them would trigger the annulment of the proposal provisions of the BIA.
s.66 of the BIA.