According to the Office of the Superintendent of Bankruptcy, insolvency filings in Canada overall fell in the second quarter of 2020 to 474 and remained unchanged in the third quarter. This downward movement came despite the economic and social challenges of the COVID-19 pandemic, seeming to buck an international trend of rising insolvencies. These statistics were released in January 2021 and represent the latest data.
Nonetheless, insolvency amid the pandemic remains a real concern and could continue to level off or even accelerate.
If your business is facing unmanageable debt, or your debts exceed your assets, you may want to consider restructuring under one of the two relevant Canadian laws: the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA).
If you’re operating in or around Toronto, Canada, contact Matthew R. Harris Law, P.C., for a consultation about insolvency processes.
According to the BIA, insolvency occurs when an individual or a business entity has at least $1,000 in debt, is unable to meet their obligations and has ceased paying those obligations, or whose assets would not be sufficient, if liquidated, to meet those obligations.
The Bankruptcy and Insolvency Act can be used by businesses to liquidate their assets and satisfy as many of their creditors as possible, but there is a hierarchy of who gets paid first. The government is first in line to collect any taxes or other obligations due. Next come the employees under the Wage Earner Protection Program (WEPP), then secured creditors, followed by the unsecured. Depending on the value of assets liquidated and where a creditor stands in the chain of claims, getting nothing can often be the result.
Liquidation is not the only use of the BIA, however. Businesses that seek to reorganize and survive can file what is called a Division 1 Proposal with a Licensed Insolvency Trustee (LIT). Basically, the proposal asks the business’s creditors to take less money on the dollar owed them in favor of the survival of the enterprise. Creditors might typically agree because it’s better to get a guaranteed sum than what could be literally nothing in a full liquidation bankruptcy. Plus, they get to retain a client.
For the business, the proposal route offers a few advantages in addition to potential survival:
The proposal stops all legal actions either planned or underway by creditors
The proposal gives the business some “breathing space” to work with the creditors
The filing will create an automatic stay of proceedings against the company’s director
Once the proposal is filed, within about three weeks there will be a creditors’ meeting chaired by the LIT, who will detail the dynamics of the situation and explain that the proposal means they will likely receive more compensation than they would under a pure bankruptcy. Following the meeting, there will be a vote in person or by mail of the creditors on whether to accept the terms.
Even if your enterprise has been involuntarily forced into bankruptcy by one or more creditors and your assets are about to be seized, you can still file a notice of intention to file a proposal. This will act as a stay of all proceedings against the company while you finish the process of completing all aspects of a commercial proposal.
The Companies’ Creditors Arrangement Act is specifically leveraged for businesses with at least $5 million owed to creditors. Similar to a Division 1 Proposal, the CCAA allows companies to file a formal Plan of Arrangement, which again offers creditors partial payment (25%, 50%, or other percentages) in favor of the business’s long-term survival.
Once the business files for protection under the CCAA, the court will issue a stay for 30 days, which keeps creditors and others at bay while the company prepares its Plan of Arrangement. The court will often extend the stay upon application by the company if more time is needed to prepare the plan.
Instead of a trustee, a monitor will be appointed by the court to oversee the proceeding, much of which is similar to what transpires during a BIA proposal. After the plan is finalized, a meeting of creditors will be held, and a vote will be taken. If approved, the business can move forward and fulfill the obligations it detailed in its Plan of Arrangement. If not, bankruptcy or receivership could result.
Facing insolvency is literally for most businesses like entering into uncharted waters. Suddenly, there are legal nuances, tight deadlines, innumerable details to be attended to, not to mention creditors hounding you, all of which you’ve probably never dealt with before.
When the first sign of trouble arrives — when your obligations start to get out of hand, for instance — you should seek the help of an experienced and knowledgeable insolvency lawyer.
Matthew R. Harris will work with you to arrive at the best possible route for your company to take. He is adept at litigation, mediation, and arbitration, and will fight vigorously in your best interests. If your business is Toronto, Hamilton, London, or even Ottawa, contact Matthew R. Harris Law, P.C., today to schedule a free 15-minute consultation.