Running a business in financial trouble is exhausting. You are managing staff, suppliers, creditors, and your own stress at the same time. The decisions you make now have real consequences. We understand that weight, and we are here to help you find a way through it.
What Is a Division 1 Proposal for Business?
A Division 1 Proposal is a formal legal debt restructuring plan filed under Division I of the Bankruptcy and Insolvency Act of Canada. It is different from a Consumer Proposal, which falls under Division II of the same act and is limited to personal debts under $250,000.
A Division 1 Proposal offers your creditors a deal. Instead of paying everything you owe, you propose a repayment plan they can accept. If the majority of creditors agree and the court approves it, that plan becomes legally binding on all unsecured creditors, even those who voted against it.
The formal proposal is administered by a Licensed Insolvency Trustee (LIT) under the BIA. What makes our role different: we are your legal counsel throughout the entire process. We represent your interests, not the creditors’ and not the trustee’s. Our legal duty runs entirely to you.
Key fact: A Division 1 Proposal has no upper debt limit. Any incorporated business carrying unsecured debt can use this process, regardless of how much is owed. For individuals, the threshold is $250,000 or more in unsecured debt (excluding the mortgage on a principal residence).
Division 1 Proposal vs Consumer Proposal vs Corporate Bankruptcy
Understanding how these three options compare helps you see where a Division 1 Proposal fits and why it is often the strongest path for a business with serious debt.
| Feature | Division 1 Proposal | Consumer Proposal | Corporate Bankruptcy |
|---|---|---|---|
| Who can use it | Corporations (any size); individuals with $250K+ unsecured debt | Individuals only; up to $250K unsecured debt | Corporations and individuals |
| Debt limit | No upper limit | $250,000 (excluding mortgage) | No limit |
| Business continues operating | Yes | N/A (personal tool) | Generally no |
| Court approval required | Yes | No | N/A |
| Creditor vote threshold | Majority in number + two-thirds in dollar value | Majority in number + majority in dollar value | No vote |
| Immediate stay of proceedings | Yes, upon filing Notice of Intention or proposal | Yes, upon filing | Yes, upon filing |
| Control of assets | Business retains control | Individual retains control | Trustee takes control |
| Repayment timeline | Negotiated, up to 10 years | Up to 5 years | Asset liquidation; no set timeline |
| Outcome if rejected by creditors | Deemed bankrupt automatically | Process ends; debts remain | Discharge after liquidation |
| Legal representation available | Yes | Yes | Yes |
Who Qualifies for a Division 1 Proposal in Canada?
Two groups can use a Division 1 Proposal:
1. Incorporated businesses of any size. If your business is a corporation (incorporated under federal or provincial law), it can file a Division 1 Proposal regardless of how much unsecured debt it carries. There is no minimum debt threshold for a corporation, and no upper limit.
2. Individuals with more than $250,000 in unsecured debt. If you personally owe more than $250,000 in unsecured debt (not counting the mortgage on your primary home), you are above the Consumer Proposal limit and must use Division I of the BIA instead.
The business must also be insolvent. That means it cannot meet its financial obligations as they come due, or its total debts exceed the total value of its assets.
Note for sole proprietors and partnerships: If your business is not incorporated, there is no legal separation between you and the business. In that case, your personal insolvency options apply. Speak with us to determine which path fits your specific structure.
What Types of Debt Are Included?
Typically Included
- Supplier invoices and trade debt
- Business lines of credit
- Unsecured business loans
- CRA corporate tax debt (in most cases)
- HST/GST arrears
- Lease obligations (in some cases)
- Personal guarantees on business debt
- Unsecured credit card debt
Generally Not Included
- Secured creditors (unless they agree)
- Equipment loans secured by the equipment
- Commercial mortgages secured by property
- Certain trust obligations under the BIA
- Director liability for unremitted source deductions (may attach personally)
Which Industries Does This Apply To?
A Division 1 Proposal is used across all incorporated business types. We work with businesses in a range of industries that face the kind of serious, accumulated unsecured debt this process is designed to address:
- Auto garages and repair shops carrying supplier debt, equipment financing shortfalls, or CRA arrears
- Trucking and logistics companies facing fuel credit debt, unsecured operating loans, and creditor pressure
- Restaurants and food service businesses with supplier invoices, lease disputes, and COVID-related debt still on the books
- Real estate investors and property holding companies with unsecured business lines and personal guarantees on failing developments
- Contractors and construction firms with subcontractor disputes, project losses, and trade credit arrears
- Retail businesses closing or downsizing with outstanding inventory credit and vendor obligations
If your incorporated business is under creditor pressure and you need a structured legal path to protect operations, a Division 1 Proposal may be the right tool.
How Does a Division 1 Proposal Work? Step-by-Step
The process is more involved than a Consumer Proposal. It requires more documentation, court supervision, and creditor coordination. Here is what the process looks like from your perspective as the business owner:
-
Legal consultation and strategy
Before anything is filed, we review your business’s full financial picture. We assess total unsecured debt, asset values, creditor relationships, and your business’s ability to sustain ongoing operations. This is where we determine whether a Division 1 Proposal is the right path or whether another option, such as business debt restructuring, better fits your situation. -
Filing the Notice of Intention (NOI)
The formal process begins when a Notice of Intention to Make a Proposal is filed with the Office of the Superintendent of Bankruptcy (OSB) through a Licensed Insolvency Trustee. The moment this notice is filed, an automatic Stay of Proceedings takes effect. Creditors must immediately stop all collection calls, lawsuits, garnishments, and enforcement actions. You get breathing room to negotiate from a position of stability rather than crisis. -
Preparing the proposal
Within 30 days of the NOI (with court extensions available if needed), the formal Division 1 Proposal document is prepared and filed. This document sets out what creditors will receive, over what timeline, and under what terms. We work closely with you and the trustee during this stage to ensure the proposal is structured to be credible to creditors while protecting your interests as much as possible. -
Creditor meeting and vote
A meeting of creditors must be held within 21 days of the proposal being filed. At the meeting, creditors review the terms and vote. The trustee must also present creditors with a comparison: what they would likely receive in a bankruptcy versus what the proposal offers them. For the proposal to pass, more than 50% of creditors by number who vote must approve it, and those approving creditors must represent at least two-thirds (66.6%) of the total dollar value of claims voted. -
Court approval
Even after creditors vote in favour, the proposal goes to court for approval. This typically takes 4 to 6 weeks after the creditor vote. The court reviews whether the proposal is fair and whether it was made in good faith. Once the court approves it, the proposal becomes legally binding on all unsecured creditors, including those who voted against it. -
Performing the proposal
Your business makes the payments or meets the terms set out in the approved proposal. These terms can run for up to 10 years. As long as the business honours the agreed terms, creditors cannot take further action. At the end of the proposal term, the remaining unsecured balances covered by the proposal are legally discharged.
What Happens If the Proposal Is Rejected?
This is the most important risk to understand before entering the process. Under the BIA, if a Division 1 Proposal is rejected by creditors or denied by the court, the business is deemed bankrupt automatically. That is different from a Consumer Proposal, where a rejection simply means the process ends and debts remain as they were.
This risk is exactly why legal representation matters. Going into a Division 1 Proposal without proper legal counsel increases the chance of a proposal being structured poorly, underestimating creditor resistance, or failing to comply with the procedural requirements of the BIA.
We represent your legal interests throughout every stage, from proposal design to the creditor meeting to court approval, so that you understand the risk clearly and the proposal gives you the best realistic chance of acceptance.
The Stay of Proceedings: Immediate Legal Protection
One of the most important benefits of filing a Division 1 Proposal (or even just the Notice of Intention) is the automatic Stay of Proceedings. This is a federal legal protection under the BIA that takes effect the moment the filing is made.
The stay means:
- Creditors must stop all collection calls and demand letters
- No new lawsuits can be launched against the business
- Existing legal actions are paused
- Bank account garnishments are stopped
- Asset seizures are frozen
- CRA collections are stayed
This protection gives your business the space to negotiate without the constant pressure of enforcement actions. It is not a permanent solution on its own, but it creates the legal breathing room needed to complete the proposal process.
Division 1 Proposal Advantages and Drawbacks
Advantages
- Business keeps operating throughout the process
- Immediate stay stops all collections and legal actions
- No upper limit on debt amount
- Remaining debt is legally discharged at the end
- Repayment terms up to 10 years
- Binding on all creditors once court-approved, including dissenters
- Can address CRA debt and supplier debt simultaneously
- Preserves business relationships and reputation better than bankruptcy
Drawbacks
- Court approval required (adds time and complexity)
- Rejection by creditors leads to automatic bankruptcy
- More complex and costly than a Consumer Proposal
- Requires a Licensed Insolvency Trustee to administer
- Creditor vote threshold is high: two-thirds of dollar value
- Proposal terms must be realistic enough to secure creditor approval
- Business credit history will be affected
Why Legal Representation Makes a Difference
A Licensed Insolvency Trustee is required to administer a Division 1 Proposal under the BIA. But a trustee is not your advocate. A trustee is a neutral administrator. Their legal obligation is to the process and to creditors as a group, not to you specifically.
We are your lawyers. Our legal duty runs entirely to you and your business. That distinction matters in practice:
- We review the proposal terms from your perspective before they are submitted
- We advise you on how to position the offer to maximize creditor acceptance
- We represent your interests at the creditor meeting
- We advocate for you at the court approval stage
- We help you understand your legal rights throughout, including director liability risks
We work for you, not your creditors. That is the core difference between a law firm and a trustee, and it is a difference that shows up in the result.
To understand more about how legal representation compares to working with a trustee directly, read our article on the difference between a Licensed Insolvency Trustee and a debt lawyer.
Frequently Asked Questions
Can any incorporated business file a Division 1 Proposal in Canada?
Yes. Any incorporated business that is insolvent can file a Division 1 Proposal under the BIA, regardless of how much unsecured debt it carries. There is no minimum or maximum debt amount for corporations. What is required is that the business be insolvent, meaning it cannot meet its financial obligations as they come due or its liabilities exceed its assets.
What is the difference between a Division 1 Proposal and a Consumer Proposal for a business?
A Consumer Proposal is a personal debt tool under Division II of the BIA. It is only available to individuals with up to $250,000 in unsecured debt (excluding their mortgage). A Division 1 Proposal, filed under Division I of the BIA, is the correct tool for incorporated businesses at any debt level, and for individuals whose unsecured debt exceeds $250,000. Division 1 Proposals also require court approval, while Consumer Proposals do not.
What happens if creditors reject the Division 1 Proposal?
If the creditor vote fails or the court denies the proposal, the business is automatically deemed bankrupt under the BIA. This is the most significant risk of the process and one of the main reasons having experienced legal counsel before and during the filing is so important. A well-structured proposal with realistic terms gives you the best chance of acceptance.
How long does a Division 1 Proposal take?
The initial stages move on a defined legal timeline. The formal proposal must be filed within 30 days of the Notice of Intention (extensions can be granted by the court). The creditor meeting must be held within 21 days of the proposal filing. Court approval typically follows 4 to 6 weeks after a successful creditor vote. Once approved, the proposal term can run for up to 10 years depending on what was negotiated.
Does filing a Division 1 Proposal stop CRA collections?
Yes. The automatic Stay of Proceedings that takes effect when a Notice of Intention or the proposal itself is filed applies to CRA as well. CRA collections, garnishments, and enforcement actions must stop during the proposal process. CRA is treated as an unsecured creditor in most cases and participates in the creditor vote alongside other creditors.
Can a business keep operating during a Division 1 Proposal?
Yes. One of the main purposes of a Division 1 Proposal is to let the business continue operating while the debt situation is resolved. The business’s management retains control of day-to-day operations. This is a key advantage over corporate bankruptcy, where a trustee takes control of the assets and operations typically wind down.
What is the creditor vote threshold for a Division 1 Proposal?
For the proposal to pass, more than 50% of creditors by number who vote must approve it, and those creditors must represent at least 66.6% (two-thirds) of the total dollar value of the claims voted. Both thresholds must be met. If either threshold is not reached, the proposal is rejected and the business is deemed bankrupt.
Do secured creditors vote on a Division 1 Proposal?
Generally, secured creditors are not affected by a Division 1 Proposal unless they choose to participate or the proposal specifically addresses their claims with their agreement. The proposal typically deals with unsecured creditors. Secured creditors retain their security interests and rights over the assets that secure their loans unless a separate arrangement is reached.
What is a Notice of Intention and why does it matter?
A Notice of Intention (NOI) to Make a Proposal is a preliminary filing under the BIA that gives a business immediate legal protection before the full proposal is drafted. The moment it is filed, the automatic Stay of Proceedings takes effect, stopping all creditor actions. It buys the business time (typically 30 days, extendable by court order) to prepare a credible proposal without ongoing creditor pressure. Filing the NOI is often the first step we recommend for businesses that need immediate relief while the proposal is being structured.
How is a Division 1 Proposal different from business debt restructuring?
A Division 1 Proposal is a formal insolvency process governed by the BIA that involves a creditor vote and court approval. Business debt restructuring is a broader term that can include informal negotiations with creditors, asset sales, refinancing, and other strategies that do not involve the formal insolvency process. Some businesses may benefit from restructuring strategies before considering a formal proposal. We assess both options and advise on which path fits the specific situation. You can learn more about our business debt restructuring service to understand the full range of options.
Will directors be personally liable if the business files a Division 1 Proposal?
A Division 1 Proposal addresses corporate debt, not personal debt. However, directors can face personal liability in certain situations, particularly for unremitted payroll deductions (source deductions) and unremitted HST/GST, which can attach to directors personally under the Income Tax Act and the Excise Tax Act. The proposal does not automatically eliminate these personal exposures. This is one of the specific areas where legal advice from us is critical before and during the filing.
How much does a Division 1 Proposal cost?
The costs involved include trustee fees, which are regulated and drawn from the proposal payments, as well as legal representation fees. Our fee is 33% of whatever we save you. That means our goal and your goal are exactly the same: reduce your debt as much as possible. We only make money when we save you money. The exact legal costs depend on the complexity of the business situation and the creditor landscape, which is why we start with a consultation before committing to any engagement.
Ready to Take the First Step?
If your business is under creditor pressure and you need a legal path forward, we can help you understand your options clearly and act with confidence. A confidential conversation costs nothing, and it may change everything.
