Now more than ever, Canadian businesses are seeking protection from creditors.
The number of large Canadian companies seeking protection from creditors hit its highest point in more than ten years during May and June, and the trend is only likely to continue as a result of COVID-19.
Under the Companies’ Creditors Arrangement Act (CCAA), companies that owe at least $5 million can file for protection from their creditors to either restructure their business financially or supervise an orderly wind-down and sell assets to pay back those they owe money to. CCAA proceedings are typically used as a last resort for companies that have run out of options and time. Companies had to adapt quickly when the COVID-19 lockdown hit, yet businesses that were in strong health before the pandemic were generally able to do so. Unsurprisingly, the economic toll of COVID-19 has been heaviest on companies with pre-existing problems.
A record ten companies began CCAA proceedings in May, followed by another twelve in June. The number fell back to four in July but that’s still above the 10-year average of about three per month. Many of these restructurings involve faceless numbered companies, but a slew of high-profile insolvencies and bankruptcies in Canada have made headlines during the course of the pandemic, including Reitmans, Frank & Oak, Aldo, DavidsTea, Cirque Du Soleil, FlightHub, and several oil companies.
The storm to come
COVID-19 is undoubtedly the catalyst for the sudden surge of proceedings, but many of the victims in question already had financial issues. CCAA filings are generally driven by lenders saying “enough is enough,” causing the company to run to the CCAA in favor of other even worse options. If they do nothing at all, lenders often have the power to take drastic measures, such as locking an insolvent company out of its premises or even seizing assets and inventory. Yet some observers have noted the phenomenon of “opportunistic” filings by companies trying to blame unrelated problems on COVID-19. Retailers, real estate, and the energy sector have been particularly guilty of this, according to some experts consulted by CEO Magazine.
Let’s take real estate. Government initiatives intended to help pay rents to commercial landlords, along with bank programs allowing tens of thousands of Canadians to defer paying their mortgages, are set to expire in the coming months.
There’s certainly evidence that government bailouts are having their desired effect of keeping ordinary people solvent during the pandemic, but on the corporate side it’s quite a different story.