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Introduction
For businesses having a hard time enduring the Toronto coronavirus pandemic, insolvency may very well be the outcome. General insolvency filings were down in April, this is mainly because everyone has a built-in stay of proceedings right now.
Banks, credit card companies and collection agencies are not making a name for themselves right now during the Toronto coronavirus lockdown by harassing people who cannot afford to pay their regular monthly payment. However, that will not last too long.
In this Brandon’s Blog, I discuss options available to the entrepreneur if the Toronto coronavirus lockdown and quarantine wreaks havoc on your business.
Telltale signs from the United States
We have already seen the variety of companies that submitted to Chapter 11 insolvency. They did so in order to attempt to reorganize their financial obligations while trying to stay in business. This has been especially true for the large retail business sector. Their business problems were not caused by COVID-19. However, the pandemic merely accelerated where they were heading anyway.
The American Bankruptcy Institute reported that Chapter 11 filings in April 2020 represent a 26% boost from April 2019.
I have previously written about Modell’s Sporting Goods and Pier 1. Now we can add Neiman Marcus, JCPenney and J.Crew. Outside of the retail sector, Hertz Car Rental, Gold’s Gym, Foodora and Virgin Australia are also recent restructuring filings. I also really believe that it won’t be long before the floodgates open up to subject an excess of small firms looking for relief from their financial problems, in North America and the rest of the world. That is probably obvious to you, it really can’t be called a Toronto coronavirus news update!
Entrepreneurs are doing whatever they can
I have definitely noticed an uptick in telephone calls from people scared about their personal situation and from worried business owners in the past 4 weeks. They aren’t all set to throw in the towel right now. They are attempting to do whatever they can through the shutdown to stabilize their company. So for now, they are trying to take advantage of various federal government programs to help them stay afloat. The programs include:
- Canada Emergency Wage Subsidy (CEWS)
- Temporary 10% Wage Subsidy
- Business Credit Availability Program (BCAP)
- Canada Emergency Business Account (CEBA)
- Large Employer Emergency Financing Facility (LEEFF)
- Canada Emergency Commercial Rent Assistance (CECRA)
However, the people I am talking to are also realists. They all understand that if what they are doing now doesn’t work, they will either have to try to restructure the company or have it go bankrupt. So for now, there is somewhat of a pause in remedies such as distraints, repossessions, terminations of leases and financial institution collections.
The moratorium won’t last forever
Right now the Canadian federal government is taking the lead. They have extended timelines for filing income tax and HST returns and paying amounts owing. They have also extended certain relief programs from their original expiration date of June 30. Right now, subject to a further extension, of course, it looks like the feds are shooting for September 30 to end the COVID-19 assistance programs.
Ultimately, the patience for non-payment being shown right now by landlords and creditors won’t last permanently. I expect business bankruptcy protection and bankruptcy filings to climb after the “all clear” is sounded on this Toronto coronavirus state of emergency and the government assistance ends. The pent up collection activity will go into full flight.
The floodgates will open. I expect one of the worst offenders to be the Canada Revenue Agency (CRA). There will be so many companies in default of their tax payment obligations. The government is spending trillions of dollars to prop up the Canadian economy. Those programs will have to be paid for and all the IOU’s will be called in.
It seems that everybody I have spoken with is simply waiting until this Toronto coronavirus period quiets down. The pool of business problems is overflowing right now.
Corporate bankruptcy is not the only option for a company battling its financial demons. There are going to be three categories of insolvent companies:
- Those who are too small and it just does not make sense for them to do anything other than paying the employees their final salary, wages and vacation pay. Then file their final corporate and income tax files. Then, turn the key in the door and walk away.
- A company that has just a few creditors and all or some of the business operations remains viable. They can negotiate with their creditors for a reduction in each amount owing on a creditor by creditor basis. The reason this does not work if there is a large group of creditors is because of human nature. Everyone is worried that the next person is getting a better deal. By the time you get the last person to say yes, the first person may have changed their mind. There is no way to independently satisfy all the creditors that nobody is getting a better deal. In reality, some are getting a better arrangement than others. It will be based on the negotiation ability of the creditor and how essential maintaining the supply of their product or service from them is.
- Businesses where all or some of their operations remain viable. However, the company can only survive if it can chop off the sick parts and eliminate however much debt they need to so that the newly restructured company is solvent.
- Companies with complex issues needing to assign their assets to a licensed insolvency trustee through a bankruptcy or whose secured creditor will enforce on their security by appointing a receiver, either a private receiver or court-appointed receiver.
Toronto coronavirus induced restructuring
If you anticipate your entire business or certain business units will remain viable but require relief from its creditors and debts, the first look at restructuring. This route enables a company to stay functioning while renegotiating its financial obligations. This process includes looking critically at all business units and determining how operations can be made more efficient in order to improve profitability. Many hard decisions will have to be made.
Companies have two choices in Canada for restructuring. For the larger restructurings, the kind that you read in the newspaper, the restructuring statute is the Companies’ Creditors Arrangement Act (Canada) (CCAA). In order to qualify for restructuring under the CCAA, the company has to owe its creditors at least $5 million.
All other companies restructure under the Bankruptcy and Insolvency Act (Canada) (BIA) restructuring provisions. It is called Part III Division I of the BIA. Regular readers of Brandon’s Blog will know that I have written several blogs before on aspects of both the CCAA and restructuring under the BIA.
In my blog, BANKRUPTCY EXPERTS WEIGH IN ON US & CDN SMALL BIZ RESTRUCTURING, I lamented the fact that the Canadian insolvency system does not have a streamlined restructuring process for smaller companies. We have the consumer proposal restructuring under the BIA for smaller personal insolvent debtors trying to restructure.
The United States has the Small Company Reorganization Act (SBRA) of 2019, also known as “Subchapter 5”. The SBRA is aimed at simplifying restructuring procedures for small companies by boosting efficiency, lowering costs, and easing the restructuring plan confirmation process. I believe this would be a great addition to the Canadian insolvency system. It may very well move some companies from my #1 category listed above into #3.
There is no sense dwelling any longer on what we don’t have. The Toronto coronavirus news today has affected so many companies. Many will just not survive. Others will be able to come out of the other side of this Toronto coronavirus pandemic but will need major surgery to stay alive.
The first step for any entrepreneur is to get professional advice in order to strategize and make a decision on what plan to put into place. You should speak either to a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee) or a lawyer who has experience in insolvency matters.
Most licensed insolvency trustees will provide a one-hour no-cost strategy session.
You need to understand whether or not you have a viable business and company. Then, you need to have a sensible plan to increase your chances of success based on the viability analysis.
Both Ira and I have been doing many such strategy sessions over the telephone and video meeting since the Toronto coronavirus self-quarantine lockdown came into effect. I know that we will be doing many more as the city and the province begin to open up.
The goals of the entrepreneur have to be the driving force. For example, if the entrepreneur is adamant about staying in business, then you have to hope that business viability can be proven so that the likelihood of a successful restructuring is enhanced. On the other hand, if you can prove business viability but the entrepreneur has had enough and wants out, then you look at the restructuring and sale of the viable business parts.
Once viability is established, then a restructuring plan can be developed. The restructuring will take place either under the BIA or CCAA. Depending on the circumstances and the goals of the entrepreneur, either a refinancing of the restructured company of a sale of the business is part of any restructuring plan.
Business not viable
If the business is not viable, then pure restructuring is not possible. However, that does not mean that the assets that form the business unit cannot be used by someone else to efficiently run the business. I am not just talking about hard assets. Things such as patents, trademarks, processes, experienced workforce and the customer base before they go off to find a new supplier are all valuable parts of a business.
Perhaps the tangible and intangible assets can be sold to someone that can bring them into their existing operation and run the business profitably. Jobs can be saved also if this were to happen.
When this is the case, then you are into some form of liquidation. A secured creditor will move for the appointment of a receiver. As I have written before on this topic, the appointment can either be by way of a private appointment or an application to the court for a court-appointed receiver.
If there are no secured creditors, the security taken is invalid, or there are other factors that make a bankruptcy necessary, then the company can assign itself to bankruptcy. It isn’t every day you find this, but in a recent corporate bankruptcy filing that I am administering, I found that the security of the purported secured creditor was invalid as against us as Trustee.
Then either the receiver or Trustee can take possession of the assets, run a well-advertised and managed sales process and hopefully find a buyer for the assets to comprise all or many parts of the operating business. If such a buyer does not exist, then it will be a straight liquidation of individual assets. Obviously, higher values can be achieved when selling what amounts to a business rather than just individual assets in a liquidation.
Personal guarantees and director liabilities
In any corporate or business insolvency, the exposure of the directors has to be taken into consideration. This is not Toronto coronavirus news. It is normal for entrepreneurs to have to give a personal guarantee to a lender in addition to the security taken. Such a guarantee can be backed up by specific personal assets as collateral, or be an unsecured guarantee. Or, an entrepreneur has to indemnify the landlord as part of the corporation leasing premises.
Directors also have certain liabilities under provincial or federal law. Generally, directors will have personal liability for:
- Unpaid salaries, wages and vacation pay.
- Unremitted source deductions.
- HST/GST that has been collected but not paid over to CRA.
- Any other liability that a director has personally guaranteed.
The exposure of directors must be recognized and taken into account in any restructuring attempt.
Toronto Coronavirus Summary
Businesses all over will look different due to the Toronto coronavirus pandemic and lockdown. The current environment is unprecedented and is teaching all of us things we have never seen before.
The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.
We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.
Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.
Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.
If anyone needs our assistance, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. During this Toronto coronavirus state of emergency, we are doing telephone consultations and/or virtual conferences that are readily available for anyone feeling the need to discuss their personal or company situation.
The Ira Smith Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.
Stay healthy, well balanced and safe and secure everyone.
