The impact of COVID-19 on the bankruptcy and insolvency system in Quebec on MSMEs
Full Professor Aurore Benadiba, LL.D., Université Laval
The COVID-19 pandemic has had significant economic and social impact on many micro, small and medium-sized enterprises (MSMEs) in Quebec and across Canada.Professor Aurore Benadiba’s current work aims to evaluate the conditions for the economic and social rehabilitation of Canadian micro, small and medium-sized enterprises.
MSMEs account for nearly 99.7% of the 241,000 existing businesses in Quebec (Government of Canada, January 2019). They play an essential role in the province’s economy, as a driver of growth and job creation. They account for a very large proportion of jobs in Quebec in several industries, including: agriculture, forestry, fishing and hunting; wholesale and retail trade; construction and manufacturing; transportation and warehousing; real estate; professional and scientific services; health and social assistance; accommodation and food services; and other services.
The COVID-19 pandemic weakened many MSMEs in Quebec, a number of which have had to close their doors permanently. Many of these businesses, already in financial difficulty before the pandemic, required additional financing to pay rent, fixed costs, salaries, and contracted debt repayment. In addition, there were supplemental costs related to the health situation, such as interest on several bank loans, both personal and mortgages, taken out during the crisis.
The first negative “post-pandemic” effects on the solvency status of MSMEs are just beginning to be seen as government assistance programs have ended, even though the repayment deadline for the $60,000 loans made to 900,000 businesses under the Canadian Business Emergency Account (CBEA) has been extended to December 2023. Licensed insolvency trustees are facing a surge of new applications for rehabilitation, and that number will certainly increase during 2023. Insolvency filings are once again on the rise. Presumably, some of these insolvencies, though this is difficult to quantify, could have been filed before the pandemic. The crisis may have extended the survival of some MSMEs that were artificially maintained during Covid-19. After more than two years of the pandemic, many businesses are in a precarious situation due to several apparent factors: an inadequate business model, increased operating costs, and a limited workforce. Many have not recovered their pre-pandemic sales levels. Entrepreneurs are being tested by these persistent difficulties.
In this context, the health crisis is leading jurists to rethink the system of commercial and even personal insolvency in the face of a financial crisis, for a greater effectiveness of the rights of individuals, companies and creditors.
Our current work aims to evaluate the conditions of economic and social rehabilitation of micro, small and medium-sized enterprises in Quebec and, more generally, in Canada, in the context of the Covid-19 pandemic. This first study, targeting Quebec, will then be extended to the other Canadian provinces.
Our research seeks to identify the types of indebtedness and the difficulties Quebec MSMEs face, due to the health crisis, in accessing the legal insolvency system. Changes in legal practices such as assessments with debtors, remote creditor meetings of creditors, and virtual court hearings have allowed entrepreneurs to see their cases progress through adjustments made to traditional methods. Should these new management methods be maintained at the choice of the participants?
It will also be useful to document the processing of proposals and bankruptcies of MSMEs in each industry affected by the pandemic. What’s more, access to bankruptcy proceedings comes at a cost that many debtors have not been able to or cannot afford due to economic conditions. In Quebec, business closures have been preferred over bankruptcy proceedings. Does this mean that simplified bankruptcy or business proposal procedures (in terms of formalism, delay and cost) should be introduced in the Canadian legal system?
Another objective of this study will be to describe the causes of insolvency, the needs of indebted MSMEs, and to explain the particularities of insolvent MSME profiles within the context of the pandemic. It is true that inflation, supply-chain problems, the increase of certain commodities and the impact of the conflict in Ukraine have added a measure of complexity to global economic exchanges. The recession in Canada will also have a rebound impact on the overall negative effects of Covid-19 already affected MSMEs.
The observation of the professional practices of licensed insolvency trustees working in a weakened economic context, due to Covid-19 and the announced recession, will be one of the assets of this study conducted by Professor Benadiba, which also includes an empirical component. Interviews are conducted with trustees who, on a voluntary, confidential and anonymous basis, provide insightful information. The Association Coopérative d’Économie Familiale (ACEF) will also be interviewed on the issues of indebtedness and access to insolvency procedures for MSMEs facing a liquidity crisis. Other components will also be addressed such as easy access to credit and financial literacy.
This research, which benefited from an SSHRC grant and support from the Quebec Bar Foundation, aims to contribute to a hybrid knowledge, both academic and professional, to address the financial concerns of debtors with a high debt status. The compilation of the data can be disseminated in the form of an article and a roundtable discussion.
The results will contribute to the legal discussions on the upcoming reform of insolvency and bankruptcy law as well as on the vulnerability of individuals and companies in the event of a systemic crisis.
Research is currently underway, and the participation of licensed insolvency trustees is being encouraged across Canada: firstname.lastname@example.org
When the results are available, we will summarize them and provide an access link.