Early diagnostics is key: chair of the Canadian Association of Restructuring Professionals
Business insolvency filings in Canada rose 33.8 percent in the first quarter of 2022 compared to the same quarter last year – the highest year-over-year increase in 31 years, according to records from the Office of the Superintendent of Bankruptcy. The COVID-19 pandemic is the primary reason behind the increase, while inflationary pressures and rising interest rates could also push the number of insolvency filings up further, warns the Canadian Association of Insolvency and Restructuring Professionals.
In the first quarter of this year, 807 business insolvency proceedings were filed under the Bankruptcy and Insolvency Act – up 10.1 percent compared to the previous quarter and catching up to levels seen at the onset of the pandemic in the first quarter of 2020. For the 12-month period ending March 31, 2022, business insolvencies are up 7.1 percent compared with the 12-month period ending March 31, 2021.
This growth can, in part, be attributed to the fact that the number of insolvencies declined significantly during the pandemic due to creditor support and government support, so we are now seeing a return of the pendulum as support subsides, according to Jean-Daniel Breton, chair of CAIRP.
“What we are seeing now is a return to something a bit more normal in terms of insolvency rates,” says Breton. Current economic conditions, high inflation rates and supply chain issues are also contributing to the rise in insolvencies, he adds.
With inflation now at a 30-year high, the conditions are ripe for further business insolvencies, so business owners and in-house counsel should prepare by consulting with an insolvency professional as early as possible, according to Breton.
“To the extent that you are concerned about cash flow pressures or financial difficulties, early diagnostics is important,” he says. “An insolvency professional may have a great deal of impact in resolving financial difficulties or thinking through how to avoid them altogether. You might get additional perspective on how to remodel your operations or make changes to the business model, or undertake some key negotiations with certain stakeholders or certain creditors.” With early intervention, restructuring to preserve the business may be a viable option, instead of insolvency.
Breton says businesses in sectors affected by fluctuations in costs and supply chain pressures, as well as high energy users, are most vulnerable in the current environment. The latest insolvency data revealed that the sectors registering the biggest increase in the number of insolvencies for the 12-month period ending March 31, 2022 compared to the previous period were the construction and the transportation and warehousing sectors. The biggest decreases were seen in the retail trade and the real estate and rental leasing sectors.
Breton predicts that numbers of insolvency cases in Canada will return approximately to pre-pandemic rates, or may even exceed pre-pandemic levels if interest rates continue to climb and supply chain issues are ongoing.
“It is healthy to have some level of insolvency in an economy because that tells you that people are taking risks and making investments,” says Breton.
CAIRP is the national professional association representing nearly 1,500 members and associates.
