Davies notes prolonged COVID-19 restrictions have taken toll on business who have managed to hang on
Filings under the Companies’ Creditors Arrangement Act in the first quarter of 2021 increased significantly, reversing the declining trend that had persisted during the second half of 2020, says a new report by Davies Ward Phillips & Vineberg LLP.
“This reversal was likely a consequence of the prolonged pandemic restrictions, which forced businesses that had previously managed on provisional arrangements to re-evaluate their financial viability and seek formal court protection to work out longer-term solutions,” the report says.
The overall number of CCAA filings doubled to 12 in the most recent quarter from six in Q4 of 2020. Ontario led the pack with six filings, while Alberta dropped to the bottom with only one filing in the first quarter of 2021.
Nevertheless, the report points out that Canada’s economy continues to “fare surprisingly well” since Davies published its first 2021 Restructuring Review in March, despite continuing COVID-19 related restrictions.
“Things are still a bit murky,” says Davies’ partner Natasha MacParland, one of the report's authors. “The trends are not strong yet - they are still emerging.
“However, I am cautiously optimistic that things are going to normalize sometime around Q1 of 2022.
Among the positives, the report notes the Bank of Canada and the U.S. Federal Reserve have indicated that they will continue with lenient monetary conditions and “ultra-low” interest rates. MacParland also notes the country has seen “remarkable progress” in the ramp-up in COVID-19 vaccination programs across the country. At least two-thirds of Canadians have received one dose, and about a third fully vaccinated with two doses.
Despite these positives, the Davies report says several insolvency-related issues need to be addressed. Long-term unemployment is a significant concern given that the number of Canadians out of work for more than six months has been consistently between 1.4 and 1.6 million over the last year – about two-thirds more than when the pandemic started. Companies receiving subsidies also need to be able to survive without government assistance.
The struggles of locked-down industries also persist – with employment down 17 per cent in sectors as diverse as restaurants and tourism. At the same time, the report says pent-up demand for travel and hospitality is likely to surge when the economy reopens, matched with Canadian savings at an all-time high.
However, there are also supply chain issues that could hamper companies from returning to “something more normal,” MacParland says. It’s not just COVID-19, she says, it’s a more complex situation, going back to the resource sector and rippling through manufacturing and logistics. Even the cost of shipping products via a container has increased, a reflection of supply chain issues.
While restructurings under CCAA increased, the report notes the number of business bankruptcies and proposals was below or at 2020 figures and still well below 2019 figures.
The lower number of filings since the onset of COVID-19 at first blush appears counter-intuitive. However, the report suggests it reflects, in part, the effectiveness of government support programs in response to the pandemic.
The number of court filings and official statistics could underestimate the actual number of business insolvencies on the ground. Many businesses that have failed due to pandemic restrictions delay their insolvency filings even if they have permanently shut their doors. One example the report mentions is Toronto’s Prairie Girl Bakery, which closed its doors in January 2021 but had not filed for insolvency by end of Q1.
“Time will tell if the downward trend in bankruptcies as well as the stagnancy in business proposals will ultimately be reversed.”
According to Statistics Canada’s recent Canadian Survey on Business Conditions, 39.9 per cent of businesses reported that they were unable to take on more debt in the first quarter of 2021. Only 10.3 per cent said that they could continue at their current level of revenue and expenditure for the next year before considering closing or filing for bankruptcy.
MacParland says that “returning to normal” will naturally mean an increase in bankruptcies and insolvency filings. It is not unusual that some businesses will fail and either need to cease business or reinvent themselves. “A robust, efficient and ethical insolvency system is part of a normal economy.”
The Davies report also notes an “emerging trend” of corporate debtors under the Business Insolvency Act seeking an order authorizing a switch to continue proceedings under the CCAA.
MacParland notes that three debtor companies have recently opted to move from the BIA process to the CCAA regime for flexibility and efficiency. One “speculative answer” as to why they started with the BIA is the initial desire to avoid the new 10-day stay under the CCAA, down from 30 days, and a mandate for a more frequent set of court appearances. There are also cost considerations that make the BIA initially more attractive.
However, given the impact of COVID-19, MacParland says CCAA can provide more flexibility in solutions and timelines than the BIA, and the new CCAA rules are now not seen as much of a problem as first perceived.
The report concludes with a section discussing a trend noted in Canada and the U.S. over the past quarter-century – governments moving from a more traditional role in bankruptcy proceedings to a more “activist” stance. Governments have gradually moved from a defensive stance to an activist posture in the bankruptcy context “in order to exploit analogous opportunities to pursue their policies and political objectives.”
“Our review has shown how Canadian governments have leveraged their financial and political weight to inject themselves into the restructuring processes of numerous large corporations and organizations since the 1990s,” the report states. Against this historical backdrop, the extensive governmental intervention and financial spending of governments worldwide during the global financial crisis and [currently] the COVID-19 pandemic “are not isolated phenomena” witnessed only in times of national emergency.
MacParland describes the trend as “governments being more pro-active, getting involved in a more non-traditional way.”
The report adds the Canadian insolvency system has a key role to play as governments and other stakeholders take actions to prevent economic and financial instability as our country begins to reopen.
