What is a Proposal for a Small Business?

With all the dreary economic news, it’s not unusual for businesses to hit a bump in the road, something astute professional advisors should watch closely as our guest columist, Andy Fisher, of the Small Business Restructuring practice at Farber Financial Group explains.

It is not uncommon for a small business to hit a bump in the road or to get into financial difficulties.  It could be the costs of starting up the business, the loss of a major customer, expanding too quickly, problems with an employee or not having the proper accounting system to understand costs.

Whatever the reason, the fact that a small business is having financial difficulties does not mean it has to close down or go bankrupt.

A Proposal to Creditors allows a small business to compromise a portion of its debts and avoid a bankruptcy.  By reducing the debts and allowing for a structured plan to make payments to the creditors, a proposal lifts the burdens of financial difficulties and allows a small business to move towards becoming a profitable business.

As part of the Proposal process, operations can also be restructured.  Unprofitable locations can be closed, excess assets and vehicles can be sold or returned to secured creditors; and the costs associated with the restructuring are covered by the proposal.

The authority to file a Proposal comes from the federal Bankruptcy and Insolvency Act. It’s important to understand that a Proposal is not a bankruptcy, and:

• Under the legislation, once a Proposal is filed, creditors are prevented from starting or continuing legal actions against the business;
• Not all creditors are required to accept the Proposal; once the required majority have accepted it, the Proposal is legally binding on all creditors.
• In certain circumstances the liabilities of a director can also be compromised in a Proposal.

A Proposal can only be filed with a federally Licensed Insolvency Trustee.

Andy Fisher, Michael Baigel, Noah Litwack, and Michael Litwack are the members of the Small Business Restructuring practice at Farber Financial Group.

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