2020 saw major restructurings, notably in the energy and oil and gas sectors
Canadian insolvency filings reportedly hit a 20-year low in 2020, although those figures may not tell the whole story.
“That’s what the data is suggesting, and I think that is very counterintuitive,” says Robert Thornton, an insolvency partner in Thornton Grout Finnegan LLP in Toronto. “I think what is going on in the economy is that the government’s support programs [during the COVID-19 pandemic] are working, maybe even a little too vigorously, and that that is depressing the number of filings that we’re seeing.”
The pandemic’s impact on the economy — and insolvencies — has yet to be played out, with the full effects not likely to be seen for a while.
At some point, says Thornton, government programs that have been supporting businesses affected by the pandemic are going to stop or be reduced, which will cause an increase in the number of corporate insolvencies.
Also, he says, “I think there is a buildup of cases happening now, in 2021, and I’m starting to see quite a bit more activity on the restructuring front, including … judicial availability on the commercial lists across the country starting to get a little tighter. So, I think it’s becoming busier.”
Businesses that received government loans are also expected to repay them eventually, which could result in more insolvencies. (Thornton quotes retired Ontario Superior Court of Justice judge Frank Newbould, now counsel at Thornton Grout Finnigan, as saying “In a tsunami, first the water goes out.”)
But while consumer filings, bankruptcy filings and proposal filings were down, filings under the Companies’ Creditors Arrangement Act and court-appointed receiverships were up last year, says David Bish, head of Torys LLP’s Corporate Restructuring and Advisory Practice and a member of the firm’s Finance Committee.
The decline in filings for smaller businesses is in part due to government support of small businesses and individuals during the pandemic, he says; but a lot of smaller businesses that have failed haven’t made insolvency filings, but have just closed their doors. When pandemic restrictions killed their businesses, “they literally just turned out the lights and they locked up and left.”
Failures of small businesses such as Toronto’s Prairie Girl bakery, which specialized in cupcakes and shuttered its business permanently in January, are examples of businesses that have failed but without insolvency filings, he notes. Prairie Girl joined a long list of restaurants, cafés and bakeries that closed in 2020 and 2021 as a direct result of pandemic restrictions, though the failures haven’t registered on the insolvency charts.
Robert Chadwick, an insolvency partner at Goodmans LLP in Toronto, found 2020 to be a busy year; many companies carried too much debt, and with a change in their revenues they had to balance their capital structures. As well, he said, at least the first three months of 2020 dealt with work from companies that were either restructuring or had to restructure before the pandemic.
“In 2020, most practitioners would say that it was a very challenging and unpredictable year for many companies.”
Overall, the large restructurings were active in 2020, he agrees, with companies completing their restructurings under the CCAA and the Canada Business Corporations Act. The energy and oil and gas sectors were active, with Bonavista Energy, Calfrac Well Services, Source Energy, Just Energy, Bellatrix Exploration and Delphi Energy all completing major recapitalization transactions last year. In mining, Sherritt International, Nemaska Lithium and Dominion Diamond also completed major restructuring transactions.
In the retail and consumer areas, Comark Inc., Hertz Corp. and Cirque de Soleil also completed major transactions, while the cannabis sector saw several restructurings and transfers of business operations to new owners.
There were also more appeals in restructuring transactions, Chadwick says. “We were in the Alberta and Ontario court of appeals on various restructuring issues in approximately 12 situations,” with — during the COVID-19 pandemic — easy access to the courts via video conferences and no need to travel.
“We see 2021 developing more over time,” he says, “as the credit markets are open and there is significant liquidity available for companies from a variety of sources. Lack of revenue and earnings and high debt levels will defer some situations into mid-to-late 2021.”
