Alternative to bankruptcy: Compositions and Proposals

Proposals

Proposals have a similar process as to compositions. However, a proposal occurs before adjudication and essentially provides that if a proposal is brought about and approved, unsecured creditors cannot pursue a formal bankruptcy process against the debtor. The difference between proposals and compositions is that under a proposal the debtor can avoid bankruptcy completely and the procedure is much less complex.

The proposal procedure has two basic requirements:

1. That the debtor has an interest in “being saved” from the consequences of the bankruptcy; and
2. That the creditors receive (the potential of) something more than they would receive in either a bankruptcy, or through normal execution methods.

In terms of the latter, a debtor can provide more to a creditor than would be received in a formal bankruptcy if they fund the scheme through earning income, through assets that cannot be taken by the Assignee or through a third party.

The process for a proposal involves the following steps:

1. The insolvent must formulate and make a proposal to their creditors which is filed at the nearest court to where the insolvent lives; and
2. A meeting of creditors is then held, creditors must submit a claim form and then it is up to the trustee to decide whether the claim is accepted or not. For the proposal to be accepted it must obtain the support of the majority (three quarters majority) and;
3. If accepted the trustee must as soon as possible:
4. Apply to the court for approval of the proposal; and
5. Send notice of hearing to insolvent and each creditor;
6. The court may reject the proposal under section 33 if one of the three prescribed grounds is made out.

Once approved the proposal is binding upon all creditors whose debts were provable. During the proposal, the insolvent must do everything necessary to put the proposal into effect.