Investors could lose out as businesses walk away from debts

Officially, business insolvencies are near the record low, but what else is happening?

Investors could lose out as businesses walk away from debts
Steve Randall

Concern that 2021 would bring a spike in individual and business insolvencies has yet to be realized, at least according to the stats.

Despite the challenges of the past 18 months – and thanks to various support programs – both Canadian consumers and businesses appear resilient as evidenced by a new report from the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).

Although there are signs of greater problems ahead, the number of businesses filing insolvency is near the all-time low with insolvency filings down 22% year-over-year in the three months to the end of June.

Business insolvencies in the second quarter of 2021 were up just 0.8% from their lowest mark in 35 years in the first three months of the year. The extension of some government support programs means that CAIRP expects another small increase in third quarter.

Construction and retail trade saw the largest decrease in filings year-over-year while mining and oil and gas extraction; and finance and insurance experienced the biggest increase in insolvencies.

However, the stats may not entirely reflect the struggles of Canada’s business community, as formal insolvency is not the only option for failed firms.

“Another reason the insolvency trend appears decoupled from the current economic environment is that many company principals are choosing to walk away rather than formally winding down their business,” said CAIRP chair, Mark Rosen.

Rosen added that Statistics Canada data shows that 120,446 businesses closed in the first quarter of 2021 although only 603 filed for insolvency.

Investors beware

With government support helping to keep unviable businesses afloat, Rosen expects further walk-away debtors who could leave investors and other creditors out of pocket.

But he says that business owners facing failure should consider all the options to rescue their firms, such as restructuring.

“The insolvency process in Canada should be a safety valve for any businesses in financial distress. Once a business is distressed, for whatever reason, it is in everybody’s interest – theirs and their lenders’– that they get professional advice,” he advised. “Even small business can and should benefit from restructuring options that may help them avoid filing for bankruptcy and get them back on their feet.”

Consumer insolvencies

Meanwhile, Canadian consumer insolvencies were also under control in the second quarter of 2021.

Although over 22,800 Canadians filed for insolvency or bankruptcy in the three month period, this is down about 35% compared to before the pandemic and down 3.9% compared to the first quarter of this year.

For the 12-month period ending June 30, the number of Canadians who filed decreased by 25.7% compared to the previous year.

“The wild card is that a lot of Canadians have done well financially during the pandemic, but those impacted most – such as low wage earners and those employed in the service industry – have been teetering on the edge waiting to see if circumstances improve,” says André Bolduc, executive board member of CAIRP and Licensed Insolvency Trustee. ”The unequal and slow comeback for those most impacted is made worse by the uncertainty that persists.”

Bolduc expects there to be an increase in consumer filings over the next year or so as the economic picture continues to develop, and some struggling households that are crippled by debts, keep their heads in the sand.

“Few seek professional help at the onset of debt trouble which is unfortunate because the longer they wait, the worse their situation becomes,” he said. “The first step for anyone struggling is to get a clear picture of their debts and to devise a plan.”