The Covid-19 pandemic has had an unprecedented impact on businesses worldwide, and Canada has not been spared from its economic fallout. In fact, the rise of business insolvencies in Canada has increased dramatically in the post-Covid-19 era. As a business owner, what can you do if you find yourself in a similar situation? In this blog post, we will explore the options available to you, including the importance of seeking the advice of an insolvency expert, the turnaround options you can explore, and the formal restructuring options you can take advantage of, such as bankruptcy.
Get Expert Advice
The first step for any business owner facing insolvency is to seek the advice of an insolvency expert, a Licensed Insolvency Trustee (LIT). The LIT will outline the overall process and help you gain clarity on the situation. As a business owner, you need to understand the options available to you, and depending on the severity of the situation, any personal consequences that may arise.
Don’t Delay!
Early intervention is key when it comes to addressing your company’s financial problems. The sooner you take action, the more choices you have. Early intervention gives you greater flexibility, increasing your chances of stopping the business decline and affecting a positive turnaround. However, business owners are often distracted with daily operations and fail to prioritize the danger signals from creditors and mounting debt. To avert a potential financial crisis, decisive action is needed by first accepting that help is needed from an insolvency professional. An experienced LIT will walk you through your options and guide you through the process.
Liquidity is generally one of the first concerns when a business is struggling, especially when its problems aren’t necessarily chronic, but more down to poor or inconsistent cash flow. A key consideration for businesses is the liquidity of the company from both new or interim financing options and the willingness of current lenders. Business loans are often “demand loans” and can be asked to be repaid to the bank immediately if requested. Companies that wait until they are facing the “slow season” when cash requirements are at their peak often wait too long to come to an LIT.
BIA Proposal
If the company has a viable business but simply needs to reduce some of its debts or increase its ability to survive, a formal insolvency proceeding needs to be considered to keep creditors at bay, particularly if you are facing court actions, seizures, evictions or judgment creditors looking to enforce their rights.
There are several debtor-in-possession procedures that companies can avail themselves of, including proposals under the Bankruptcy and Insolvency Act of Canada (BIA) and the Companies Creditors Arrangement Act of Canada (CCAA) proceedings. Both of these options are used when the company hopes to survive the restructuring process and continue into the future.
When small-to-medium-sized companies are struggling with cash-flow and debt, they often turn to what is called a proposal under the BIA to help them restructure, instead of CCAA proceedings which are normally more court-driven and complex and are limited to companies that have greater than $5 million in debt.
A proposal allows your company to either file a proposal with your creditors immediately (i.e., the plan that has already been finalized with your LIT), or instead file a Notice of Intent to file a proposal (NOI), which provides you and your company some time to put together a proposal. Under an NOI, there is an initial 30-day “holding period” (which can be extended up to six months) where a company can begin discussions with lenders and creditors to develop a restructuring plan that will be acceptable to creditors.
During the NOI period, all of your creditors are stayed from legal proceedings against you, giving you time to develop a plan without concern about asset seizures or other legal proceedings. Importantly, filing a proposal does not mean your company is bankrupt; rather, it is:
Bankruptcy
Bankruptcy is the last resort for businesses facing financial difficulties. Once a company declares bankruptcy, it cannot continue to operate unless all creditors are paid in full. A Licensed Insolvency Trustee (LIT) will be appointed to oversee the process. This provides a controlled process for realization of assets, adjudication and ranking of claims, and payout mechanism for creditor claims in order of priority under the Bankruptcy and Insolvency Act (BIA).
The bankruptcy process involves the liquidation of the company’s assets, with the LIT responsible for maximizing returns for creditors. The trustee may opt to sell the business as a going concern or sell the company’s assets individually. The distribution ranking of creditor claims is based on the nature of the debts and individual provincial creditor registration obligations, with creditor rights in British Columbia partially based on a registration of the debt under the Provincial Property Security Act. The bankruptcy trustee may also seek direction from the court regarding the ongoing management of the bankruptcy estate.
Despite its reputation, bankruptcy can provide several benefits for businesses facing insolvency. For example, an automatic stay over creditors stops all legal court action, and certain priority claims (particularly GST) can be reversed, which could otherwise trump regular creditors. The bankruptcy option also allows directors and officers to resign and minimize their liability, provides protections from environmental liabilities that could incur post-bankruptcy, and offers finality to the company’s obligations, such as annual filings. Moreover, the trustee can exercise statutory powers to investigate the company’s affairs and examine persons of interest and transactions to potentially enhance recoveries for the estate. This could include identifying and prosecuting acts of fraud, preferences, or transfers at less than market value.
If you are a business owner experiencing financial difficulties, the first step is to understand your options. Engaging with an insolvency professional early on to devise a restructuring plan can increase the likelihood of saving your business. However, waiting too long to seek help can make the situation more complicated, and the restructuring window may narrow significantly.
It’s important to note that bankruptcy is not always the only option for businesses facing financial difficulties. For example, a proposal under the BIA or a restructuring plan under the Companies’ Creditors Arrangement Act (CCAA) may provide alternative options. An insolvency professional can help assess your situation and provide advice on the best course of action.
In summary, bankruptcy is a last resort for businesses facing insolvency. While it may provide benefits, such as an automatic stay over creditors and protections from environmental liabilities, it’s important to understand that once a company declares bankruptcy, it cannot continue to operate unless all creditors are paid in full. If you’re facing financial difficulties, seek the help of an insolvency professional as early as possible to explore your options and devise a plan to save your business.
