Is Your Business Struggling Financially Due to COVID-19? Consider Corporate Restructuring
COVID-19 has produced waves of financial distress for BC businesses, large and small. Many companies are struggling to rebound in the wake of COVID-19. As time goes on, government measures to ease the financial strain may not be enough to keep a business afloat. If your company is facing financial difficulties due to COVID-19, corporate restructuring can help your business survive.
Reasons to Consider Corporate Restructuring
If your business is in financial distress due to COVID-19, corporate restructuring may be the proactive solution you need. Warning signs of financial distress include defaulting on payments to creditors, liquidity problems, and relying on personal finances or personal credit to keep the business going. Corporate restructuring provides an opportunity to reorganize operations and reduce debt. There are several corporate restructuring options available, discussed below. The restructuring mechanism that is right for your business depends on factors such as the amount of debt and the number of creditors. Additional objectives can be achieved by the different restructuring options, so it is important to consider whether these outcomes are vital to your business:
- Reducing your personal obligations as a business owner and/or liability of corporate directors
- Gaining protection (known as a “stay of proceedings”) to prevent creditors from taking action against your company for debt
- Securing non-traditional financing as part of the restructuring process
- Ability to terminate unprofitable contracts or leases
- Avoiding corporate bankruptcy proceedings.
- Implementing a strategy to wind down your company.
The best course of action is to consult with an experienced insolvency trustee for advice that is customized to your objectives and your company’s needs.
Mechanisms for Corporate Restructuring
There are benefits and risks associated with each corporate restructuring mechanism. Here is a brief overview of the options:
Informal corporate restructuring
An informal restructuring or “workout” involves direct negotiation with creditors to come to a payment arrangement that is in line with your company’s ability to pay (e.g. newly compromised payment terms or a one-time settlement payment). If creditors agree, they will receive less than they are owed, but it will likely be more when compared to payment they would receive if your business ceases to operate or goes bankrupt. Informal restructuring is the least costly and simplest of the options to address financial difficulties or liquidity problems, but there are some downsides to consider. First, it requires the consent of all or the majority of your company’s creditors, which may not be possible. Another downside of informal corporate restructuring is that the potentially advantageous tools associated with more formal mechanisms (discussed below) are not available.
Formal restructuring under the Bankruptcy and Insolvency Act (“BIA”)
Unlike informal negotiations, a Division I Proposal under the BIA creates a contract that is binding on all of your unsecured creditors, so long as a majority of them approved it. The Proposal will also be binding on secured creditors who voted to accept it. Common Proposal terms include deferral of time for payment, an offer to settle in full satisfaction for an amount less than 100 cents on the dollar, converting debt to equity, or a combination of all of these. Once approved by creditors and the Court the Proposal is administered by a Licensed Insolvency Trustee (“LIT”), but the company maintains control of its assets and operations. When the terms of the Proposal have been fulfilled, a Certificate of Full Performance is issued which legally discharges the debts included in the Proposal. Significant benefits of restructuring under the BIA include release from certain contracts or commercial leases and the provision of a stay of proceedings which prevents your company’s creditors from taking steps to enforce debt claims (though there are exceptions). A significant downside is that if the Proposal is not approved, your company is automatically assigned into bankruptcy.
Formal restructuring under the Companies’ Creditors Arrangement Act (“CCAA”)
There are many similarities between an arrangement under the CCCA and a Division I Proposal (see here for a detailed overview from our insolvency trustees). A major difference is that restructuring under the CCAA is only available to companies owing more than $5 million. The company remains in control of its assets and continues its operations after the Court application under the CCAA is approved, with a Licensed Insolvency Trustee appointed as Monitor to oversee and report on the company’s financial affairs during the period of the stay of proceedings. Restructuring under the CCAA may make it easier to secure interim financing during the restructuring process as the Court can grant that lender priority status. Another significant benefit is that the Court can determine if a supplier is critical to your company’s ongoing operations. A “critical supplier” declaration means the supplier must continue to supply goods or services to your company.
Get Corporate Restructuring Advice from a Licenced Insolvency Trustee
Corporate restructuring may be what your business needs to weather the financial storms brought about by COVID-19. Crowe MacKay & Company provides trusted advice to businesses of all sizes and across all industries.Contact us today to discuss your company’s financial circumstances and get started on a customized strategy for your business to navigate the financial impacts of the pandemic.