Insolvency & Financial Restructuring

Insolvency and insolvency litigation is generally understood to relate to acting for and advising lenders, other creditors, debtors, trustees in bankruptcy, receivers, and other participants in corporate insolvencies and debt enforcement, collection, and recovery, and typically involves bankruptcy, receivership or similar court-supervised insolvency proceedings or private enforcement remedies.

This may involve acting for and advising corporations, financial institutions, bondholders, distress or hedge funds, investors, purchasers, and other participants in the formulation, negotiation, and implementation of corporate financial restructurings, whether in circumstances of insolvency or solvency and whether involving debt and/or equity, and includes informal negotiated workouts and refinancings and financial restructurings implemented pursuant to insolvency statutes such as the Companies’ Creditors Arrangements Act and the Bankruptcy and Insolvency Act or corporate statutes such as the Canada Business Corporations Act or similar provincial statutes. Practitioners in this area may be involved in cross-border restructuring matters.

Increase in Insolvencies

The Office of the Superintendent of Bankruptcy Canada (OSB) reported that personal insolvencies in Canada are at their highest level for the past decade, with 13,000 bankruptcies and proposals filed in October 2019. That was a 13 per cent increase compared to October 2018.

As reported in Law Times, mining, oil & gas extraction, and the information and cultural industries were the main forerunners of the rise in corporate insolvencies over the past 12 months to September 2019, with the sectors experiencing an increase of over 40 per cent in business insolvency filings. Other sectors like finance and insurance, professional, scientific and technical services, and real estate, rental, and leasing, also struggled, going through a large increase of insolvency filings.

Canadians have become reliant on debt, with the average debt per Canadian consumer (including mortgages) reaching C$71,300 in the first quarter of 2019, an increase of 2.6 per cent over the same period in 2018. Student debt has also been a growing crisis in Canada, and “studies also show that student debt can’t be dissolved via bankruptcy or a consumer proposal until at least seven years after the debtor has left school, contributing to why the average age of insolvencies falls in the mid-30s.”1

According to Equifax Canada vice president of data & analytics Bill Johnston, consumers were opening fewer new credit products in early 2019, but they weren’t curtailing the use of their existing credit. He said, “Loans are taking longer to pay down and credit card use is on the rise. The headline numbers for non-mortgage debt had been driven by population growth for the past 18 months, but it was increased usage that drove the rise in credit during the first quarter of this year.”

Insolvencies and COVID-19

With Canada experiencing a rise in insolvency even before the COVID-19 pandemic, Canada is facing a potential unprecedented wave of insolvencies and restructurings in 2021.

In an interview with Canadian Lawyer, Robert Thornton, founder of Thornton Grout Finnigan LLP, said: “We are standing on the precipice of an unprecedented time where there is going to be, I think, an enormous number of restructuring cases that are going to affect just about every area of the economy, not just in Canada, but in the world.”2

The pandemic has “fundamentally altered” the economy, both with how we work and how we spend money, said Thornton. There are the obvious losers—retail, tourism, and the event industries—but Thornton adds the uncertainty among consumers means it is too soon to say whether the pandemic’s effect on consumer behavior will become the new normal.

In the downturn, there is room for those with capital to find opportunities. Thornton pointed to recent moves by Brookfield Asset Management, which announced a plan to invest C$5 billion in struggling retail tenants, which, prior to COVID, already faced an existential threat from e-commerce and have now been further depressed by stay-at-home orders and mandatory business closures. “I know that there are some private equity funds that are looking to deploy capital and have announced to me and others in our business that they’re looking for opportunities. This will be an interesting time ahead. If you have lots of cash, I think there will be companies in distress that will need that capital.”

  1. Edillor, Ynah. “The law amendments for Canada’s bankruptcy and insolvency laws this 2019.” Law Times. January 6, 2020.
  2. Macnab, Aidan. “Canada on verge of widespread insolvency and restructuring surge in COVID-19 new normal, says lawyer.” Canadian Lawyer. May 22, 2020.