Canadian Business Insolvencies Down 25% Over Last Year

Government support providing relief for Canadian businesses under strain but many at risk come fall
July 7, 2020

TORONTO – July 2, 2020 – Contrary to the barrage of headlines announcing Canadian companies filing for bankruptcy over the past few months, new statistics released today by the Office of the Superintendent of Bankruptcy (OSB) indicate Canadian businesses are weathering the storm amidst the COVID-19 pandemic. So far in 2020, business insolvencies are down 24.9 per cent compared to the same period last year (January to May). In May alone business insolvencies were down 38.9 per cent compared to last year, although 17.7 per cent more businesses filed for insolvency in May compared to April.

Mark Rosen, Chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), says the figures show businesses have benefitted from government aid programs including The Canada Emergency Wage Subsidy (CEWS), Canada Emergency Business Account (CEBA), and Canada Emergency Commercial Rent Assistance (CECRA), helping them to stay in business despite the headwinds presented by the pandemic.

 “Government subsidies, interest-free loans, provincial grants and deferred deadlines on payments for rent and taxes have all contributed to the low number of businesses we’re seeing filing for insolvency across most of Canada,” says Rosen. “All of these measures have provided short-term relief to business owners who are struggling with cash flow issues.”

In mid-June, it was announced that more small businesses would be able to access CEBA, providing them with interest-free loans of up to $40,000. Meanwhile, government aid for programs such as CEWS and CECRA have also recently been extended into the summer. Other measures, such as the ban on commercial evictions in certain provinces, aim to keep businesses from being forced out for failing to pay rent.

David Lewis, a board member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) says that while some programs may offer partial loan forgiveness, some of the loans and deferrals need to be paid back. Deferred payments like rent and taxes may also have been piling up over the last few months, and those payments will also soon come due, at which point any delays in payment could result in penalties and interest. Some of those deferred payments have already become due, such as GST/HST payments, which were deferred until June 30th.

“Come fall, I think we’ll see more companies will buckle under the strain unleashed by the pandemic. Bankruptcy filings could increase at the fastest pace ever. We’re already starting to see the writing on the wall in certain areas and industries,” says Lewis who is based in Edmonton, Alberta.

BC, Alberta and Manitoba have experienced an increase in business insolvencies compared to last year. In BC they are up 20 per cent for the 12 month period ending May 31, 2020, compared to last year. Manitoba saw an 8.8 per cent rise and Alberta was up 1.4 per cent for the same 12 month period.

Nationally, the arts, entertainment and recreation sector experienced the biggest increase in insolvencies. Somewhat surprisingly, the construction and accommodation and food services sectors saw the largest decreases in the number of insolvencies during the 12-month period ending May 31, 2020.

“In some provinces, construction was able to continue through most of the pandemic. Some food services areas were able to adapt to provide delivery and takeout options, so it makes sense that these industries would be faring better compared to businesses in arts and entertainment that were closed entirely, unable to fill seats or sell tickets due to physical distancing measures.”

Lewis says that without the current financial supports, many Canadian businesses are likely already insolvent. He points to a survey released by the Canadian Federation of Independent Business (CFIB) this week showing that 30 per cent of small businesses cannot afford their July rent without assistance.

“Businesses are reopening but in a completely new environment. They may find that their revenues are falling short as customers are slow to return, and as a result that will make it difficult to keep up with their accumulated debts once the government aid is phased out. Business owners in that position should seek out professional advice early on. The benefit of this is that they will have more options available to manage their repayment obligations than if they wait too long to ask for help,” says Lewis, pointing out that Licensed Insolvency Trustees provide expertise in this area. They take a customized approach to review the business’ financial situation and help business owners understand their rights and options.

One of those options is restructuring, which allows businesses to reorganize their financial liabilities, either through a formal process or by informally coordinating directly with the creditors. The business and creditors agree to new payment terms that better fit the company’s cash flow, effectively reducing the company’s burden of debt so that it can continue to operate. Or, if a business is winding down, restructuring can help avoid some of the longer-term fallout from filing a bankruptcy.

“Some people only think of restructuring as an option available to large companies, but in reality, even a small business can benefit from restructuring and could help them avoid filing for bankruptcy and get them back on their feet,” he says. “Many small businesses right now are hoping they can just hold on until their customers return.  And herein lies the problem: Canadian consumers’ spending habits have changed and because many are struggling financially, they might never return.” 

Despite the unemployment rate reaching the highest level in more than four decades in May (13.7%), the total number of Consumer insolvencies in May 2020 was 50.6% lower than the total number of insolvencies in May 2019. Canadian consumers are also benefiting from COVID-related government financial aid which has driven consumer insolvencies down. For the 12 month period ending May 31, 2020, they decreased by 1.8% compared with the 12 month period ending May 31, 2019.