Many, if not most, businesses in Canada have been affected by the COVID-19 pandemic. Some major businesses are already looking at restructuring options. Many of these will be hoping that they are “too big to fail”. They may be right.
What if your business is not “too big to fail”? The Government of Canada tells us that:
As of December 2017, there were 1.18 million employer businesses in Canada. Of these, 1.15 million (97.9 percent) were small businesses, 21,926 (1.9 percent) were medium-sized businesses and 2,939 (0.2 percent) were large businesses1.
Clearly, small business is the backbone of the Canadian economy, and what is true for the country is true for Atlantic Canada.
As we emerge from the immediate affects of the pandemic, businesses may be left with a legacy of accrued and unpaid expenses for rent, vehicle and equipment leases, supplier invoices, HST, property taxes, mortgage payments and loan payments, amongst other things. A decision needs to be made as to whether to “soldier on”, or simply give up and walk away. For many small business owners, walking away will not only take away their livelihood, but also threaten their personal financial wellness. Most lenders will have personal guarantees of the business debt, and eventually we can expect those lenders to call on such guarantees.
A first step may be to approach creditors on an informal basis seeking to either compromise the amount of debt, or delay payments, or both. The problem with this approach is that it is informal, and it will be difficult to get all creditors on the same page accepting the same terms.
In terms of a formal restructuring, the Canadian restructuring regime is one of the most advanced in the developed world. If your business has debts of $5,000,000 or more, the Companies‘ Creditors Arrangement Act provides a flexible process for corporations. For businesses with less debt, the Bankruptcy and Insolvency Act provides more rule driven processes, including a simple process for individuals (but not corporations) having total debt (excluding the mortgage on the family home) of $250,000 or less.
If you are considering a formal restructuring, you should start by engaging a trustee. A trustee holds the designation of LIT (Licensed Insolvency Trustee) and will be required for any restructuring filing. You should also consider engaging legal counsel familiar with restructuring. In many instances, several court applications will be required. In addition, your legal counsel will be acting and advising you alone, whereas the trustee has a duty to consider and balance the interests of your creditors against your interests.
The objects of a formal restructuring can vary greatly. In simple terms:
- It may be truly “rehabilitative”, in that it will end with a payment proposal satisfactory to your creditors allowing your business to go forward and prosper.
- It may be a “liquidating” process, in which you with the assistance of the trustee seek to maximize the value of the business assets in a sale.
- It may be a combination of the two basic approaches.
In a formal restructuring, your business will have the benefit of a stay of proceedings (all actions against your business will be stayed while the restructuring proceeds, and during the process you will not be required to pay any debts existing on the date the restructuring began). In some circumstances the business will be able to repudiate real property and equipment leases. While this is happening, your suppliers cannot terminate existing agreements (although they can insist on payment on delivery for supplies after the date the restructuring began).
If you are contemplating restructuring, there are a series of questions you might want to consider:
- Is there something to save? In other words, given the foreseeable future, can this business be viable after a restructuring?
- While the restructuring process goes forward, will there be sufficient cashflow to keep the business afloat and pay the restructuring advisors? If there is not, is there a source of financing for these costs?
- Will you be able to get your secured creditors “onside”? Their support may be crucial.
- Will you be able to develop a proposal for creditors that nets the creditors more than they would receive in a bankruptcy liquidation? If not, they are unlikely to approve your proposal.
- Will you be able to get your key suppliers “onside” to ensure ongoing supply?
These are challenging times, and clearly a large number of businesses have been and continue to be affected by the pandemic. However, there may be light at the end of this particular tunnel. Be honest and forthright with your creditors, and particularly your secured creditors, and start planning now for the future of your business.
If you wish to review and analyse your unique situation and the options available to you and your business, please reach out to a member of our team to request a consultation.
This blog is not intended to convey legal advice and merely provides an overview of some of the options available to businesses in these troubled times. Your circumstances are unique. That being the case, you should seek the advice of a legal professional and/or a licensed insolvency trustee who may give advice tailored to the circumstances of your business.
1 Key Small Business Statistics, https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03090.html#point1-1; Note that a small business is defined to have 1 to 99 paid employees and a medium-sized business to have 100 to 499 paid employees.