COVID-19 and the Failing Business
Robert Rogers and Rory Morgan
Hamilton Duncan, Surrey, British Columbia
With the outbreak of COVID-19, many businesses are being forced to limit or cease their operations, either due to public health orders to prevent the spread of the illness or due to a lack of customers. These circumstances have had obvious impacts on revenues and cash flow, and for some businesses have led to an inability to keep up with their financial obligations and have left them wondering about their options. In this article, we address some of the most common questions.
Can I save my business without it closing and/or going bankrupt?
In most cases, there are options to save a struggling business short of a bankruptcy or a complete wind-up.
A good early step in many cases is to have open and frank discussions about the effects of COVID-19 on the business with creditors – such as lenders, suppliers and landlords – in an attempt to reach alternative arrangements as to payment. Creditors are frequently open to making such arrangements rather than insisting on and enforcing their rights because enforcement can be expensive, because there are often competing creditors and because repayment in full is often seen as more likely if an otherwise profitable business will be able to continue as a going concern following the downturn. These kinds of arrangements can take many forms, including:
- An agreement to defer payment of the obligation to a later date (typically referred to as a “forbearance agreement”). A forbearance agreement generally acknowledges the amount currently due but provides for its repayment either by way of a lump-sum at a later time (usually with interest) or by way of periodic instalments to be made over time (again, usually with interest)
- A restructuring of the obligation in order to make repayment less onerous, including (for example) by:
- reducing the interest rate;
- changing a variable rate to a fixed rate;
- extending the term of the loan;
- reducing or deferring the principal portion of monthly payments for a time (which will require more payments over time, but will decrease the amount of the periodic payments during the downturn)
If these negotiations fail, the Bankruptcy and Insolvency Act (“BIA”) and the Companies Creditors Arrangements Act (“CCAA”) – two federal statutes – provide avenues for the restructuring of obligations.
The BIA provides a means by which an insolvent company may make a proposal to its creditors to address its debt load. The proposal may involve paying creditors only a portion of what is each is owed, paying over time or both. If a majority of the creditors holding at least two-thirds of the total debt vote to accept it, the proposal will govern the repayment of the entirety of the company’s unsecured obligations as of the date of the proposal.
The CCAA provides debt restructuring options for companies with debts in excess of $5,000,000. The process is generally more complicated, but can also be an effective tool for businesses facing much larger debt issues.
What if creditors won’t agree to restructure obligations or if they decline a proposal?
Sometimes, bankruptcy is the most viable option for a business heavily burdened by debt, and in the case of a rejected proposal under the BIA is an automatic result. The term may sound scary or have negative connotations, but in reality, the BIA exists to provide an orderly means by which a failing business can address its debt in a manner the government has deemed fair for its creditors.
That said, even where creditors are not inclined to rework their arrangements, a bankruptcy is not always necessary. In some cases – such as where the company has few assets and few debts for which the owners might be liable – the orderly winding-up of a business may provide a far less complicated and less expensive means of bringing matters to their conclusion. An experienced lawyer can help you decide whether bankruptcy is necessary or whether to make a proposal that might result in a bankruptcy if it is not accepted.
Can we make the calls, demands or litigation by creditors stop?
Whether it is a restructuring or a bankruptcy, there are measures available under each of the BIA and the CCAA to prevent legal actions from continuing while the insolvency proceedings are ongoing. Under the BIA, proceedings for the recovery of amounts recoverable from the bankrupt are automatically halted (or “stayed”) as soon as a proposal, notice of intention to make a proposal, assignment into bankruptcy or bankruptcy order is made. Under the CCAA, the process typically starts with a court application that results in an order protecting the company from creditors for 30 days (which may be extended later). In both cases, there may be exceptions – for instance, if the court permits a creditor to continue a claim – but absent those relatively rare circumstances, statutory insolvency proceedings can be an effective way of stopping litigation or self-help remedies being taken by creditors while the business attempts to address its debts.
Will I be held personally liable for the debts of my insolvent company?
This question is difficult to answer in a general way because while the principals of a company are not normally liable for the company’s obligations, they may have personally guaranteed the company’s obligations under loan agreements, leases and even supply agreements. To determine your personal exposure, you should consult a lawyer and provide the lawyer with copies of all of those kinds of agreements. The lawyer can then advise you on their scope and enforceability.
There are some situations where personal liability arises without a guarantee. For instance, the directors of a company (which usually include the owners for most small-to-medium-sized companies) may be personally liable for some or all of the wages, termination pay or vacation pay amounts due to employees and for unremitted payroll deductions or unremitted sales taxes collected. Some of those liabilities may be affected by insolvency proceedings. Again, the extent of your liability for these kinds of obligations is something you should discuss with a lawyer.
What should I do first?
Navigating through bankruptcy, insolvency and restructuring can be both intimidating and incredibly difficult, and the best course of action depends on a number of factors that vary from business to business and case to case. There is no substitute for advice from a lawyer in these matters.
When consulting a lawyer, it will be most helpful to give him or her an understanding of:
- the structure of the business;
- its current revenue and cash flow situation;
- its debt and its ongoing obligations (including providing any agreements and guarantees);
- any obligations in respect of which the company or its principals have pledged security;
- the circumstances that have led to its decline (be it COVID-19 or any other causes); and
- its future economic prospects (e.g. after COVID-19 has passed).
During these are unprecedented times, we are here to help and encourage you to contact our experienced lawyers for information on any insolvency or business law issues, whether covered here or not. Call us at 604.581.4677 or email email@example.com.
The Authors: Robert Rogers is a partner and senior litigator at Hamilton Duncan with many years of experience in insolvency law matters. Rory Morgan is a partner at Hamilton Duncan and whose practice includes bankruptcy and insolvency matters. The authors would like to acknowledge Christine K. Purewal, a litigation associate at Hamilton Duncan, and Ajay Aujla, an articled student at the firm, for their valuable contributions to the preparation of this article.
Notice: This article is for general information purposes only, and is not legal advice. Readers should not act based only on general information or neglect to seek legal advice because of it. Proper legal advice is highly dependent on the facts of each particular case, and the lawyers at Hamilton Duncan would be pleased to discuss your situation with you and to provide you with advice specific to it.