Canadian Business Bankruptcy Filings Reach a 10-Year High

Business Bankruptcy in Canada is primarily governed by the Bankruptcy and Insolvency Act (BIA), a federal statute that provides the legal framework for Bankruptcies and insolvencies in the country. The BIA outlines various options for businesses facing financial distress, with Bankruptcy being one of them.

When an incorporated business faces Bankruptcy, it’s distinct from personal Bankruptcy. Corporate Bankruptcy is designed for any incorporated business, regardless of its size.

Canadian Business Insolvencies Surged in Quarter 2

Canadian business insolvencies reached their highest level in the past decade during the second quarter, indicating that the impact of elevated inflation and rising interest rates is starting to affect businesses.

The federal Office of the Superintendent of Bankruptcy reported 1,090 commercial Bankruptcies and proposals in the quarter ending on June 30. This figure represents a 37% increase from the same quarter in the previous year, marking the highest level since the fourth quarter of 2014.

For several years, business insolvencies had been on a downward trend and reached a low point in 2021 due to federal covid-pandemic support programs and historically low interest rates, which helped prevent many businesses from failing. However, the situation took a turn in 2022 and 2023 as interest rates began to rise, and government assistance programs ended.

Businesses are facing increased pressure

The Canadian Association of Insolvency and Restructuring Professionals has pointed out that rising interest rates are intensifying pressure on businesses by driving up their expenses and dampening consumer demand.

A survey conducted by the Canadian Chamber of Commerce in partnership with Statistics Canada revealed that 56% of businesses in the second quarter considered inflation to be a significant challenge, followed by input costs (40%) and interest rate/debt costs (38%). This survey was based on responses from 15,401 businesses collected in April and May.

Interestingly, the number of proposals grew faster than the number of Bankruptcies, increasing by 53% year over year. Proposals offer creditors the option of a partial debt repayment or an extended timeline for repayment, making them a legal mechanism for businesses to restructure and make necessary changes to remain viable.

“Rather than opting to abruptly shut down their businesses and abandon them, certain business owners who face insolvency should consider seeking professional guidance regarding potential debt relief solutions to restructure or wind down their operations,” advises Jean-Daniel Breton, the chair of the Canadian Association of Insolvency and Restructuring Professionals. “Licensed Insolvency Trustees are the sole professionals authorized to administer government-regulated insolvency options. Seeking their expertise can provide valuable insights and assistance in navigating the available avenues for debt resolution.”

Implications of Business Bankruptcy

While the specific implications may vary depending on the type of Bankruptcy filed, it generally has several common consequences that impact various aspects of the business. Here are some key implications:

• Impact on Credit Rating: One of the most significant consequences of business Bankruptcy is its adverse effect on the business owner’s credit rating. A Bankruptcy filing can remain on a credit report for several years, making it challenging to access credit or loans in the future.
• Asset Liquidation or Restructuring: The nature of the Bankruptcy, whether it’s liquidation or restructuring, significantly impacts the fate of the business’s assets.
• Employee Implications: Bankruptcy often has significant implications for employees. Job security may be at risk, and employees may experience job loss or restructuring as part of the Bankruptcy process.
• Stakeholder Interactions: Bankruptcy involves interactions with various stakeholders, including creditors, shareholders, employees, and suppliers. These interactions can be complex, requiring negotiations and decisions that impact multiple parties.
• Legal Implications: Bankruptcy comes with legal implications and requirements that must be adhered to. Violations of Bankruptcy regulations can result in legal actions and penalties.

What is receivership?

When declaring Bankruptcy, you may encounter the term “receivership,” which is distinct from Bankruptcy itself. In consumer Bankruptcy, receivership involves a receiver taking control of the debtor’s assets and distributing them to creditors under Canada’s Bankruptcy and Insolvency Act. This occurs when dealing with secured debts and asset liquidation.

Receivership is part of consumer Bankruptcies but not Consumer Proposals. While receivership and Bankruptcy are occasionally confused, they represent separate aspects of the Bankruptcy process under Canadian law.

Alternatives to Bankruptcy

A small business Bankruptcy can be costly but it’s not the only option. There are alternatives that businesses can explore before resorting to Bankruptcy:

1. Consumer Proposal (for under $250,000 debt): A Consumer Proposal is a legal agreement that allows a business to negotiate with its creditors to repay a portion of its debts over time. This alternative may help the business avoid Bankruptcy.
2. Division 1 Proposal (for over $250,000 debt): A Division 1 Proposal, also referred to as a Corporate Proposal, is a formal legal process that aims to assist businesses in averting Bankruptcy when they find it challenging to handle their debt with their existing income. The Division 1 Proposal reduces debt to unsecured creditors, aiding businesses in repaying debts, restoring stability, and pursuing profitability.
3. Debt Consolidation: Debt consolidation involves combining multiple debts into a single, more manageable debt with lower interest rates. This strategy can help businesses better handle their financial obligations.
4. Financial Restructuring: Financial restructuring involves working with creditors to create a new payment plan that allows the business to meet its obligations without resorting to Bankruptcy.

Do You Need a Licensed Insolvency Trustee?

In Canada, a Licensed Insolvency Trustee (LIT) is essential for Bankruptcy due to its legal nature. However, Bankruptcy isn’t the sole option. Your LIT guides you, protecting your interests and ensuring fair creditor treatment.

For more information, contact Adamson Trustee at 519-310-JOHN (5646) for a free consultation.