Remedying a Default of a Division I Proposal under Section 62.1 of the Bankruptcy and Insolvency Act

Note: This position paper replaces the position paper entitled "Proposal under Division I: Filing of Amended Proposal Before Court Annulment of Initial Proposal", issued on March 10, 2010, on the same topic.

June 10, 2010

The Office of the Superintendent of Bankruptcy (OSB) has been asked to clarify its position regarding the process under which a default of a Division I proposal may be remedied during the period after a Notice of Default has been sent by the trustee in accordance with section 62.1 of the Bankruptcy and Insolvency Act (BIA) and before an annulment of the proposal by the court under section 63 of the BIA.

Analysis

The BIA provides that if there is a default in the performance of any provision in a proposal and it is not waived by the inspectors (or by the creditors if there are no inspectors), the insolvent person has 30 days to remedy the default (section 62.1 of the BIA and Rule 93 of the Bankruptcy and Insolvency General Rules). If the default is not remedied within that period, the trustee must inform all the creditors and the official receiver of the default by sending a Notice of Default in the Performance of a Proposal (Form 43). An application may then be made to the court to annul the proposal (subsection 63(1) of the BIA). On annulment of the proposal by the court, the debtor is deemed to have made an assignment (subsection 63(4) of the BIA).

The legislation is silent as to whether it is possible for a debtor, with a court-approved proposal, to go back to his/her creditors knowing that he/she cannot comply with the terms of the proposal to seek an amendment to the existing proposal (regardless of whether or not a Notice of Default has been sent). We are aware that in some instances trustees direct the debtor to present an "amending proposal" to the creditors that, if accepted, is then taken to court for approval under section 59 of the BIA.

The recent decision of Registrar Nettie in Re Northmore is instructive in terms of the process that ought to be followed in such circumstances. At paragraph 27, Registrar Nettie states that "a debtor who wishes to cure a default in a proposal after a Notice of Default has been issued or where a debtor realizes that she cannot continue with a proposal and requires more time to pay or a reduction in payments […] should […] move before a Registrar or Judge […], on notice to all proven creditors, the proposal trustee and the OSB for an Order permitting the curing of the default or permitting the variation of the proposal terms." Registrar Nettie goes on to indicate that, if any party were to object to the relief sought, the court could consider such an opposition in the context of the test in subsection 63(1) of the BIA, that is to say whether or not the court is satisfied that the proposal could continue without injustice or undue delay, and would be able to determine whether to grant the debtor the requested relief, or to annul the proposal entirely, and have the process move to a bankruptcy by way of a deemed assignment.

Conclusion

It is the view of the OSB that the decision in Re Northmore provides helpful guidance for a debtor who seeks to amend a proposal that is in default (regardless of whether or not a Notice of Default has been sent) or to amend a proposal to cure future anticipated defaults (before the court orders its annulment).

In these instances, the debtor should make a motion before the court, on notice to all proven creditors, the proposal trustee and the OSB for an Order permitting the curing of the default or permitting the variation of the terms of the proposal. If the court approves the variation of the terms of the proposal, the parties will be required to conduct themselves in accordance with the new terms and conditions. However, if the court refuses to grant the relief sought by the debtor, it may annul the proposal. On the annulment of the proposal, regardless of the steps taken in the interim, the debtor is deemed to have thereupon made an assignment (subsection 63(4) of the BIA).