Impact of the amendments to the BIA concerning Division I and II proposals in terms of dividends paid to unsecured creditors

By
Richard Archambault
Senior Economist
Office of the Superintendent of Bankruptcy of Canada
July 2003

1.  Introduction

One of the primary objectives of the BIA reforms in 1992 and 1997 was to encourage consumer and business proposals as an alternative to bankruptcy. In 1992, the Division II consumer proposal was introduced. In addition, a number of other measures were taken that helped improve the viability of business proposals and facilitated their acceptance by creditors. These measures included:

• the possibility of submitting a notice of intention to make a proposal;
• stay of proceedings of secured creditor procedures in the context of proposal proceedings;
• acceptance of the proposal by a numerical majority of those creditors who are voting, representing 2/3 of the value of the proven claims;
• complete payment of the Crown’s claims, which are considered to be deemed trusts, within 6 months of approval of the proposal;
• prohibiting creditors from cancelling an existing lease or instalment sales contract;
• prohibiting the interruption of public services; and
• the possibility for debtors to cancel commercial leases.

In 1997, the fees paid to trustees for consumer proposals were increased. This measure enabled trustees to receive fees that more truly reflected their actual costs of administering consumer proposals. Lastly, the directive on surplus income was made compulsory.

The main purpose of this report is to assess the impact of Division I and II proposals on dividends paid to unsecured creditors. To accomplish this, we have developed a simulation model based on assumptions designed to calculate the amount of dividends that would have been paid if there had been no changes to the legislation in 1992 and 1997. Section 2 of this report contains a statistical profile of the dividends paid to unsecured creditors, section 3 describes the methodology used to simulate the impact of proposals on dividends paid to unsecured creditors and section 4 presents the report’s conclusions.

2.  Statistical profile of dividends¹ paid to unsecured creditors

During the period from 1993 to 2002, $2.3 billion was paid out as dividends to unsecured creditors. From $150 million in dividends in 1993, the total value of dividends increased to $279 million in 2002, which represents an overall increase of 86% or an average of 7.1%² per year. At first glance, this growth appears to stem from the increased number of insolvency filings. However, an analysis by type of debtor (corporation, individual business or consumer) and type of file administration (bankruptcy or proposal) reveals that this increase is largely owing to proposal files.

In the following three tables, dividends paid are presented according to type of debtor and type of file administration. For the three types of debtors, we see that, since 1993, the average growth in dividends paid and number of files has been much faster for proposals than for bankruptcies. In 1993, dividends that came from proposals represented only slightly more than 4% of the total dividends paid by consumers, 37% of the total paid by corporations and 7% of the total paid by individual businesses. In 2002, the dividends paid under proposals represented approximately 50% of the total dividends paid by each type of debtor. Furthermore, on average between 1993 and 2002, the dividends paid under proposals were respectively 6.5, 4.9 and 10.2 times higher than those paid in consumer, corporation and individual business bankruptcies.

3.  Simulation

To simulate the impact of proposals on the dividends paid to unsecured creditors, we need to postulate a number of hypotheses. The first hypothesis concerns the number of proposals that would have been submitted anyway between 1993 and 2002. At the same time, this hypothesis determines the number of additional files that would have been submitted as bankruptcies. We know that Division II consumer proposals did not exist before 1993. On the other hand, Division I proposals existed before 1993 and, as a result, we need to maintain a certain number of Division I proposals for the 1993–2002 period. Thus, during the simulation, all the Division II proposals submitted between 1993 and 2002 will be treated as bankruptcy files. In the case of Division I proposals, a portion will be considered as proposals and the rest as bankruptcies. We determined the assumed number of proposals during the 1993–2002 period in the following way. First, we calculated the average share of Division I files recorded between 1990 and 1992 in relation to the total number of files submitted; we then applied this share to the total number of files submitted from 1993 to 2002; the number of files considered as bankruptcies then corresponds to the difference between the number recorded and the assumed number of Division I proposals.

The second hypothesis concerns the average value of dividends that will be used to replace the average value recorded for proposals. It is to be expected that this value will be lower than the value recorded for proposals in the 1993–2002 period. It is also to be expected that this value will be higher than the value recorded for bankruptcies because files submitted as proposals are supposed to have a higher potential for realization of assets than bankruptcy files do.

We have developed two scenarios for this hypothesis. In the first scenario, we use the average value of dividends for all files and, in the second, we use twice the average value for all files by debtor type.

The simulated values for each scenario and debtor type are calculated in the following way: Recorded value of bankruptcy file dividends + (assumed number of proposals * the average value of proposal files) + (the estimated number of bankruptcy files * the scenario value). The simulation results are presented in the following table, while the results for each year are shown in appendix.

The results of this simulation show that the legislative changes enacted in 1992 and 1997 concerning Division I and II proposals appear to have allowed for the payment of between $262 million (12.2%) and $425 million (19.8%) in additional dividends to unsecured creditors. These apparent additional dividends break down as follows: corporation files, between $99 million (10.2%) and $211 million (21.7%); consumer files, between $120 million (13.0%) and $161 million (17.5%); and individual business files, between $44 million (17.1%) and $53 million (20.7%).

The detailed results presented in the appendix show that the value of additional dividends paid rises with the increase in number of proposals. For example, around 0.3% in additional dividends was paid in 1993 to unsecured creditors in consumer files, whereas, in scenario 1, this figure rises to 10.6% in 1997 and 33.9% in 2002. Moreover, these results tend to lend greater credibility to the results produced by the average value assumed in scenario 1. On the other hand, scenario 2 produces certain aberrant results for corporations in 2000 and 2001.

4.  Conclusion

The purpose of this analysis was to assess how the legislative changes concerning the Division I and II reforms that were enacted in 1992 and 1997 have affected dividends paid to unsecured creditors. To accomplish this, we developed a simulation model based on assumptions designed to calculate the amount of dividends that would have been paid if there had been no changes to the legislation in 1992 and 1997.

The results of this simulation appear to indicate that the legislative changes have resulted in the payment of $425 million (19.8%) in additional dividends to unsecured creditors during the period from 1993 to 2002. Corporations are the type of debtor that has apparently paid the most additional dividends during this period — $211 million (21.7%), followed by consumers at $161 million (17.5 %) and individual businesses at $53 million (20.7%).

Appendix 1: Detailed results of the simulation

¹The information on dividends has been taken from IMPACT’s table on Statements of Receipts and Disbursements on May 21^st, 2003. The number of files corresponds to the number of statements of receipts and disbursements produced in each period.

²The peak recorded in 1997 is explained by the $195 million in dividends paid in the Teachers’ Investment & Housing Co-op file. This file was eliminated from the rest of this analysis.