James Steele Published in CBA Bar Notes – Summer 2021 Edition

Covid-19 Insolvencies: What will the next year bring?

After Covid lockdowns shut down many businesses, one might have expected insolvencies in Canada to rise sharply. However, the reality has been the opposite thus far.

Consumer insolvencies last year were down 30 percent from 2019, while business insolvencies in 2020 were down 24 percent from 2019. The reasons for this appear to be government help, combined with creditor patience. By August 2020, more than 16% of Canadians were receiving some form of income replacement. For very low-income earners, CERB was beneficial. Such earners may have earned more than they were earning pre-COVID. Businesses were also able to take advantage of subsidies.

What will happen when the subsidies are turned off?

However, what will happen to hard-hit businesses when arrangements with creditors end or subsidies are discontinued? The hardest-hit sectors have been retail trade, arts and entertainment, and recreation. Many of these businesses have thus far managed to limp along by making informal arrangements with creditors.

Debt cannot be deferred forever. Moreover, the economy is not predicted to be back in full swing until late 2021 or early 2022. In the meantime, insolvencies will start to rise.

There appear to be two schools of thought of predicting what will happen:

1. One school predicts that with the vaccine and most people inoculated by the fall, the economy will quickly get back to normal, and massive insolvencies may be avoided to some degree;
2. The other prediction is that we will not in fact return to normal for quite some time. In the meantime, there will be a significant surge in bankruptcy filings.

While we all may hope for the first prediction to come true, lawyers who act for creditors may be well placed to prepare for a potential surge in collection work or insolvency proceedings. More than a few struggling businesses who have avoided formal insolvency proceedings, may not survive long enough to take advantage of an eventually improving economy.

Lenders may wish to form an early strategy for dealing with their debtors. Each lender will wish to review their own situation. A debtor with only one creditor involves different considerations than heavily encumbered borrowers, who may have numerous other creditors.

Multiple creditors pursuing a very small pool of assets is a common reality in debt collection, and can often produce a situation in which a judgment is little more than a piece of paper. Moreover, even aggressive lenders who pursue collection and thereby force some payments from debtors will wish to be aware of the rules prohibiting preferences if other creditors are involved.

An early conversation with encumbered debtors, to discuss refinancing, a restriction on further lending, a different repayment structure, or still other issues, may be a conversation better had now, rather than later when the situation is more dire.