Why Consumer Proposals are so Effective

Consumer proposal (def’n): A contract established pursuant to Part 3, Division 2 of the Bankruptcy and Insolvency Act (the “BIA”) between a debtor and his creditors providing for the settlement of unsecured debts. Also known as a “CP”.

What is it that Releases a Debtor From Their Debts?

The CP is a process under the BIA whereby an offer is made to unsecured creditors who vote to determine whether it is acceptable and, if accepted by a majority, the terms of the proposal are forced on all unsecured creditors. But what is it, in a legal sense, that actually results in the debtor being released from their unsecured debts?  Is it because of a clause in the BIA, a statement in the proposal with which creditors have agreed, or is it prima facie (e.g. obvious) within the Canadian insolvency system?

Discharge from Bankruptcy Compared to Full Performance of Proposal

It is clear that a bankrupt is released from their unsecured debts when they receive their discharge.  This is because of subsection 178(2)  of the BIA which states “… an order of discharge releases the bankrupt from all claims provable in bankruptcy.”.   What does the BIA say occurs when a person has completed their proposal?

For Part 3, Division 2 consumer proposals, subsection 66.38(1) of the BIA states “If a consumer proposal is fully performed, the administrator (i.e. the Licensed Insolvency Trustee) shall issue a certificate to that effect, in the prescribed form, to the consumer debtor and to the official receiver.”  The certificate is Form 46  in Schedule 1 of the Bankruptcy and Insolvency General Rules and says “I, Licensed Insolvency Trustee, … certify that the consumer proposal … has been fully performed …”.

For Part 3, Division 1 proposals, section 65.3 states “Where a proposal is fully performed, the trustee shall give a certificate to that effect, in the prescribed form, to the debtor and to the official receiver.”  As it turns out, the prescribed form is the same form with slight modifications.  When a Division 1 proposal is completed, the trustee is to issue Form 46 stating “I, Licensed Insolvency Trustee, … certify that the proposal … has been fully performed …”.

That’s it – the BIA says that when a person has completed their proposal the administrator or trustee is to sign a declaration that the CP has been fully performed.  There is no smoking gun in the BIA stating that if you make a proposal and pay everything you said you would, you are released from your debts.

Mutatis mutandis provisions

There are mutatis mutandis provisions in both Divisions 1 and 2, in subsections 66(1) and 66.4(1), which state: “All the provisions of this Act, except (those in the other Division) of this Part, in so far as they are applicable, apply, with such modifications as the circumstances require… .”  Following this, perhaps we could find in the BIA, outside Part 3, a provision dealing with the release from debts and argue that such a clause must also apply to proposals.

The only apparent relevant clause would be subsection 178(2).  Can we interpret subsection 178(2) which refers to bankruptcies as dealing with proposals?  Is it possible that a clause stating roughly “when discharged, a bankrupt is released from their debts” also means “having completed their consumer proposal, a consumer debtor is released from their debts.”?  Is this provision also applicable to consumer proposals because it merely requires “modifications as the circumstances require”?

In a 2008 decision of the Supreme Court of Nova Scotia (Re Roach 2008 NSSC 15), the Registrar considered whether subsection 178(1.1) was applicable to a person that made a consumer proposal and decided that it was.  In 2004 the Ontario Superior Court of Justice (in Canada (Attorney General) v. Snopko [2004] O.J. No. 562) had disagreed, stating it wasn’t applicable to CPs.  And there are other decisions from 1995, 1998, and 2006 and perhaps more.  Even the Courts seem to interpret section 178 differently.  At a minimum, there is some vagueness as to whether the mutatis mutandis provisions are applicable in this regard.

If there is nothing in the BIA that discusses release from debt through a proposal perhaps there is some applicable wording in the proposal itself.  Let’s check.

The Prescribed Form of Proposals

The BIA, in paragraph 66.13(2)(c ) regarding Division 2 consumer proposals states “An administrator who agrees to assist a consumer debtor shall …  prepare a consumer proposal in the prescribed form.”  For Division 1 proposals there is no prescribed form – their content is left to one’s creativity and imagination.

The prescribed form of a consumer proposal is Form 47 in Schedule 1 of the Bankruptcy and Insolvency General Rules.  This is what it says: “I, , … hereby make the following consumer proposal under the Act: … (4) That the following payments be made to the Administrator for the benefit of the unsecured creditors: (set out the schedule of payments); and …(6) That the proposal may include the following additional terms: …. .

There is, once again, no clarifying statement in the prescribed form of CPs that says when a CP is completed, one is relieved from their debts.

So, How Does a Proposal Settle Debt?

The BIA establishes a code for how a proposal needs to be assembled, filed, served, and determined but fails to consider the release or forgiveness of debt following completion of a proposal. There is no legal certainty in the BIA and neither is it in the prescribed form of consumer proposals that one is released from their debts when they complete their proposal.  And nevertheless, it is a clear intention of the BIA that one can settle their debts through a proposal to creditors as an alternative to bankruptcy.

We recommend the prudent insolvency practitioner consider adding a clause to proposals they craft such as: “When I have completed this proposal unsecured creditors will have no further claim against me.”  This should alleviate any questions by the debtor after they receive a notice stating their proposal has been fulfilled.

If you have a proposal and it excludes a phrase such as this, do not be alarmed.  Rehabilitation from debt is the intention of the Bankruptcy and Insolvency Act.  The fact that the Court has approved a BIA proposal should be sufficient to allow one to infer that when the proposal is completed the debtor will be released from their unsecured debt.


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