Is a spike of insolvency cases in Canada a sign that more is to come in the coming months?

Business insolvency filings in Canada rose 33.8 per cent in the first quarter of this year compared to the same quarter last year, the highest year-over-year increase in 31 years, according to records from the Office of the Superintendent of Bankruptcy. 

In the first quarter of this year, 807 business insolvency proceedings were filed under the Bankruptcy and Insolvency Act, up 10.1 per cent compared to the previous quarter and catching up to levels seen at the onset of the pandemic in the first quarter of 2020. For the 12-month period ending March 31, 2022, business insolvencies are up 7.1 per cent compared with the 12-month period ending March 31, 2021.

“The number of businesses becoming bankrupt or filing proposals is growing, and likely to worsen under the stress of inflation and as the cracks begin to show following the withdrawal of pandemic-related government support,” said Jean-Daniel Breton, Chair of the Canadian Association of Insolvency and Restructuring Professionals, the national voice on insolvency matters in Canada. 

“The support measures, together with a heightened level of creditor patience, prevented an initial spike in business insolvencies. However, the reversal in the recent trend of decreasing insolvency filings, seen over the last two years, puts in evidence the economic damage caused by the pandemic.

“With inflation now at a 30-year high and the Bank of Canada looking to correct with several interest rate increases this year, it stands to reason that we could see even further surges in the rate of business insolvencies.”

George Minakakis, CEO of Inception Retail Group and author of The New Bricks & Mortar Future Proofing Retail, said bankruptcies are up and they come as no surprise. There are more to come. 

“We should not ignore the human struggle that comes with it. Those that lost their investments as business owners, the workers who lost their jobs, and the suppliers. This is unfortunately not over. Lower revenue, debt, inflation, higher interest rates and supply chains are just some of the issues that will perpetuate more bankruptcies. Are these a hangover caused by the pandemic? Perhaps. What we don’t know is how many businesses shuttered in silence. Nevertheless, the current issues today will accelerate challenging times and if revenue cannot meet operating expenses and the ability to service debt, it will not be good news,” he said.

“We are about to see a resetting of what success looks like for consumer-facing businesses. As a result I expect, as consumers pull back to pay for necessities, larger retailers will dial up their digital warfare tactics poised to address everything from a short recession to deep recession or even worse stagflation. All of these scenarios pave a path for more business closures and job losses, not to forget the suppliers who fail because their customers can’t pay. It’s happened in other economic downturns and it will happen again. 

“After 20 years of leading retail chains, my advice to businesses is don’t buy into the farfetched rhetoric that there are shortcuts to protecting your business from failure. Focus on the fundamentals. Start with great marketing, that sells the right products at the right price with service, that comes with an experience that becomes a customer expectation that can be repeated and improve on it continuously. That’s how you build traffic and loyalty. It’s the only way to stay in the game in this environment.”

Bruce Winder, author of RETAIL Before, During & After COVID-19 and President, Bruce Winder Retail, said the rise in business insolvency filings is not surprising. 

“Weary from two years of pandemic driven shutdowns, businesses now face the reality of massive cost and price inflation, in some cases higher wage rates, and issues regarding labour availability. In addition, some businesses face a mountain of debt taken on during the pandemic while government subsidy programs have ended. Higher interest rates make this debt harder to pay back from operations,” he said.

“Also, consumer buying habits have changed since early 2020 because of the pandemic, and the new normal may not match with a retailer’s value proposition anymore. Many customers are trying to save money through reduced spending to compensate for inflation. Finally, some businesses may have already closed and not bothered to complete the documents that would register them as insolvent so the problem may be understated. I expect insolvency reports to increase as more businesses try to make a go of it in the summer but wrap up operations this fall. 

“The good news is that we should see a number of new businesses start as entrepreneurs try and capitalize on life after the pandemic.”

Breton said budgeting for Canadian businesses has never been more challenging. Many fixed costs, such as rent and interest payments, remain due while the cash flow intended to meet these obligations has dwindled. 

He said business owners should seek professional expertise for guidance on how to implement new strategies or restructure their debts.

“One thing that might alleviate those factors is how they perceive the future to be. If they think the business will improve over time, well then the insolvency rates might actually become lower even though there is prevailing inflation or interest rates are high. If on the other hand, the numbers start going down but the business owners think that everything is doom and gloom then the insolvency rates might actually increase because of that,” added Breton.

“It’s not something that you can pinpoint with precision and forecast with certainty what will happen. All of these factors come into play and will influence the behaviours of the businesses.

“What we do know is that some level of insolvency filing is normal. It’s actually healthy. There’s like a cycle in the economy where some businesses start and some businesses fail. That is just a sign of a healthy economy. It means that people are taking risks and are starting businesses. Some of them will not work out but a lot of them will. So the insolvency system is a way to in some cases remove the businesses that shouldn’t be in the economy because they’re not viable or they’re not productive or improve the businesses that are there through a restructuring to make them viable.”

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