Contrary to what some media have reported, women’s fashion retailer Jacob is not bankrupt. Rather, the company has filed a notice of intention to make a proposal to its creditors.
The notice of intention is an expedient step that gives a debtor company 30 days of breathing room to stay normal business proceedings in order to prepare a proposal for its creditors. However, Jacob only filed its notice on May 5 and has therefore until June 4 to prepare its proposal. In fact, the retailer can even apply to the courts for one or more 45-day extensions up to a maximum of five months.
The proposal in such circumstances consists of a settlement offer to repay an agreed-upon portion of the company’s debts in exchange for release from all its debts. At the same time, the proposal needs to be accepted by the creditors concerned before taking effect. In other words, Jacob will only become bankrupt if its creditors reject its settlement offer.
Jacob founder and president Joseph Basmaji makes no bones about it: he wants to close up shop. So, why has he decided to make a proposal rather than file for bankruptcy? Here are a few probable explanations for why Jacob has chosen the proposal route:
- The company’s directors are released from paying certain obligations, e.g. unpaid salaries and government dues like GST and TVQ;
- Under certain conditions, the commercial leases of the company’s stores can be resiliated, which could prove to be very useful for Jacob and its 92 outlets in Canada;
- The proposal allows Jacob to keep control over its inventory and thus proceed with a structured liquidation that will generate the maximum proceeds for repaying its creditors.
While the proposal route can be a solution for companies interested in an ordered restructuring of their operations in order to continue, this is not Jacob’s intention.
Bottom line: While it is untrue that Jacob is now bankrupt, it is totally accurate to say that the company will be wound up in the foreseeable future.
Like Jacob, a total of 528 stores in the retail sector in Canada made proposals to their creditors or filed for bankruptcy in 2013 – the third highest total of insolvency filings for any economic sector after construction (748) and accommodation and food services (660).