Avoiding bankruptcy during COVID-19

What happens when government subsidies and loans come to an end?


To say the coronavirus pandemic has been hard on businesses in Canada is an understatement. And yet, despite this, we’ve seen plenty of data in the news showing that while 2020 was a tumultuous year for many reasons, there were actually fewer corporate restructurings and bankruptcies among small and medium businesses in Canada compared to 2019. This was directly related to government initiatives that supported financially vulnerable businesses, delaying bankruptcy for many. In short, the government’s direct financial support to, for example, subsidize wage costs or provide loans, allowed many businesses to survive 2020.

However, when the stimulus and government support come to an end, those businesses that were already vulnerable will find that repaying both pre-coronavirus and post-coronavirus debt may not be possible, and that the possibility of bankruptcy looms large.

Unfortunately, we now know from recent CFIB data that there are a staggering number of businesses that fall into this category, with millions of livelihoods at stake. So, while 2020 did not see an upsurge in bankruptcies compared to 2019, it’s very possible that 2021 could see a significant spike.

While it’s difficult to predict when government subsidies will end, businesses that plan ahead will have a far greater chance of survival post-pandemic.

With that in mind, there are some proactive steps business owners concerned about their financial position should consider if they are looking to others to assist them over the COVID-19 hump.

What to Try First

There are a number of sources of additional funds that may be available to a small business. These include, for instance, government grants, wage subsidy assistance, CRA tax deferral programs, sale of assets no longer used, and additional shareholder equity contributions.

If the funding available from these sources will not be enough to carry the business through, the business will then need to approach its primary lender, which typically is a bank.

Approaching the Bank

A lender will want a business case from the owners to assess a request for additional financing. The more complete the business case is, the greater the chance the bank will look favourably on the request for additional advances. The business case should include:

  • Up to date financial statements – to show current financial position and performance;
  • Commentary on how the business is performing during the period since the COVID -19 pandemic began;
  • The steps taken by the business to obtain other sources of financial help (discussed above);
  • Short-term cash flow forecasts that show when the business will require additional financing; and
  • Medium-term forecasts that show when the business will be able to afford to pay back the additional amount advanced.

In addition to the above, it is possible that the banker will request that the company consider undertaking a financial restructuring in order that the business’ other stakeholders, namely the business’ creditors, become part of the solution and “share the pain”.

Consideration of a Financial Restructuring

All parties involved in a business share a common goal: the continuing good performance of the company. Their reasons may differ – employees want to keep their jobs, the bank wants debt repaid, suppliers want to keep their customers – but they’re all aligned on seeing the business succeed.

However, if the business becomes burdened with too much debt, stakeholders start making decisions that are not in the company’s best interest. For instance, the management team may no longer be incentivized to drive the business forward knowing they will not be rewarded for their hard work, suppliers stop shipping if they’re not getting paid, etc.

A financial restructuring helps to ensure that stakeholders’ interests are aligned, keeping everybody motivated to support the business and see it not just survive, but thrive.

A restructuring can take many forms, but the essence of a restructuring is that creditors of the company agree to accept less than the full amounts owed to them.

Carrying Out a Financial Restructuring

It is critical to keep stakeholders aligned and motivated to cooperate, even when there are bumps in the road, since owners may need stakeholders to, for instance, agree to a forbearance or debt/payables write-off,  or commit to the business via equity injection or other incentives. External advisors to the company can play a key role point by providing an objective, independent voice representing the business owner while also getting to know key stakeholders and each of their positions, reviewing the company’s financial position, stress testing the business’ forecasts and providing analysis of the optimum financial structure that will support the business for the future.

Once the proposed approached is agreed to by the business owner and its external advisor, the advisor will work alongside management, assuming there are only a handful of parties whose agreement is required, to negotiate an informal restructuring with those parties.

Formal Financial Restructuring

If the informal restructuring is not the recommended approach or is not successful, a more formal process may be required. Formal restructuring processes in Canada include:

Proposal under the Bankruptcy and Insolvency Act

This allows a company to make arrangements with its unsecured creditors for payment over a prolonged period, and potentially at a reduced level. Once the Proposal is accepted by the business’ creditors, and approved by the Court, the creditors are bound by the terms of the Proposal.

Plan of Arrangement under the Companies’ Creditors Arrangement Act

Typically used by larger businesses with claims against them exceeding $5-million, there may be some benefits to this approach for medium-sized businesses in that it can provide more flexibility than a Proposal under the Bankruptcy and Insolvency Act. Similar to a Proposal, once a Plan of Arrangement is accepted by the business’ creditors, and approved by the Court, the creditors are bound by the terms of the Plan of Arrangement.

We don’t have the crystal ball to know when government support for businesses during the pandemic will come to an end, but we know that it will end. Vulnerable businesses should explore options sooner than later to ensure they set themselves and all their stakeholders up for success.

Bryan A. Tannenbaum and Daniel Weisz lead the Restructuring and Recovery practice at RSM, which is Canada’s leading tax and consulting firm for middle market businesses. With over 30 years of experience, they have advised numerous businesses through financial restructurings.


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