In-house counsel should seek creative alternatives to insolvency with pre-emptive strike
The COVID-19 pandemic dealt the final blow to many already struggling businesses, forcing some into insolvency, while others have stayed afloat by negotiating restructuring deals. The energy and mining sectors, in particular, saw many restructuring projects last year due to existing financial problems that the pandemic crisis exacerbated.
“Businesses that have never given any thought to what an insolvency or bankruptcy might mean are unfortunately having to pay more attention to it now — not just because of global COVID issues, but other international issues that are beyond the control of businesses,” says Peter Rubin, a partner in the Vancouver office of Blake Cassels & Graydon LLP.
As the largest independent producer of diamonds in Canada, Calgary-based Dominion Diamonds employed approximately 1,000 people — including Indigenous employees — when it had to file for creditor protection last year after the pandemic caused significant disruption to the global diamond industry.
“It was the largest non-governmental employer in the north-west territory, so when a business like that goes insolvent, there are serious ramifications for a variety of stakeholders,” says Rubin. “When you look at a business like that that is so ingrained in the fabric of the community, insolvency has a dramatic impact on virtually every facet of the economy and people’s lives.” Dominion’s potential insolvency would touch not only employees but contractors and other businesses that work with Dominion and the government and Indigenous groups that were receiving impact benefits.
Blakes assisted Dominion by obtaining insolvency protection, allowing time to find a solution to restructure and save the business. Finding a going concern transaction was the main goal of the filing to avoid shutting down or liquidating the company.
“The social consequences of not finding a going concern solution were enormous,” says Rubin. “We needed to save the business — not just for the benefit of current employees and contractors, but also for the benefit of former employees that had pensions, for the benefit of the government and Indigenous groups.”
While an organization can sometimes find a solution outside of an insolvency filing, in-house counsel should not avoid talking about the consequences of a potential insolvency, Rubin says.
“Don’t try to bury the problem or pretend that it will go away, as that can be a recipe for disaster,” Rubin says. “You need to understand what an insolvency filing might look like and to consider alternatives in terms of restructuring.”
In the current economic downturn, many companies are treading water and avoiding filing for bankruptcy as they hope for more lucrative times ahead, according to Rob Chadwick, a partner at the Toronto office of Goodmans LLP.
“The key to having options for general counsel and for a company is to ensure that you have liquidity, so that is the fundamental driving factor for many companies,” says Chadwick.
Chadwick favours a pre-emptive approach, so he regularly talks to general counsel, CEOs and CFOs at companies with a difficult capital structure to determine alternatives well in advance of potential insolvency.
“We spend a lot of time looking at liquidity and looking at the long-term documents and making sure that as you project your cash flows, you can see far enough ahead if you’ll run into a problem,” he says.
The vast restructuring practice at Goodmans has been busy across the country. In Quebec last year, Goodmans assisted Cirque du Soleil in filing to restructure under CCAA in response to continued closures caused by the pandemic. In Ontario, Chadwick and his team also worked with nickel and cobalt mining company Sherritt International to restructure the business.
“That was a pre-emptive transaction,” says Chadwick. “We spent a lot of time with Sherritt a couple of years in advance, looking at our options and alternatives, so we were able to do a very creative and constructive transaction to allow that company to continue.” The capital restructuring plan allowed the company to reduce its debt obligations by about $305 million.
The team at Goodmans has also been busy working with energy and natural gas companies out west, including oil and gas company Bellatrix Exploration Ltd. This was impacted by the downturn in the economy before the pandemic, resulting in a sale transaction to Return Energy Inc.
“For any Canadian company that has options available, make sure you have a good handle on your liquidity because, without that liquidity, that’s where companies are forced into a court filing to get emergency financing,” says Chadwick.
Rubin anticipates an upswing in insolvencies as the pandemic continues.
“It may be a bad time to try and sell a business or restructure a business in this current environment, so I think what we’re seeing is creditors being very careful to avoid being too aggressive because the outcome may not be good for the company or its creditors or other stakeholders,” says Rubin.
Chadwick notes that many businesses are trying to defer insolvency as they reduce expenses and hope for better times ahead.
“We will continue to be busy in the second half of the year, and we’ll continue to look at alternatives for our clients,” he says.