The online publication Insolvency Insider highlighted 244 insolvency filings in 2020 as the COVID-19 pandemic wreaked havoc on the financial viability of many companies in Canada throughout various industries.
Retail led all industries with 45 filings mentioned, followed by real estate with 23 filings, manufacturing with 17 filings, food and accommodation with 16, and cannabis with 15.
The publication said 112 filings mentioned were in Ontario, followed by 45 in Alberta and 35 in Quebec.
Dina Milivojevic, Editor of Insolvency Insider, said the number of filings in 2020 in the retail sector was not as high as perhaps expected.
“One of the reasons from a landlord’s perspective is probably that some landlords aren’t enforcing (full rents) because it won’t be good for business in the post-COVID era to have lots of empty un-leased space,” she said. “So to the extent that they can keep their tenants alive I think that’s what they’re trying to do.
“From a tenant’s perspective it may not make sense to file even if they are struggling financially because one of the biggest incentives for filing was potentially having to pay rent and a decision out of Quebec recently made it clear that even if you file for CCAA (Companies’ Creditors Arrangement Act) protection you’ll still have to pay rent to your landlord.
“And so that would have been one of the biggest stressors on a debtor’s cash flow and if they can’t avoid paying rent then it may not make sense to file. And sort of in the same vein, debtors may also be waiting to file as long as possible so that overdue rent accrues in the pre-filing period and that makes it a pre-filing debt. If they file, they will have to pay rent post-filing to stay in the space.”
Milivojevic said that in a typical cycle many retailers file for protection in the first quarter of the year after the holiday season after they’ve looked at their numbers and figured out whether it makes sense to file or not.
She said the industry expects there will be more filings in 2021 because landlords are probably getting a little bit more impatient, lenders are probably getting a little bit more impatient and the Canada Revenue Agency too.
“From the retail perspective we’re still in a stalemate at this point so it’s really hard to predict,” added Milivojevic.
“The holiday season is typically a retailer’s busiest season and a lot of the money they make over the course of a year is made in the months of November and December and so if they haven’t had a good holiday season then they might not have enough cash to service their obligations. So they would typically be filing at this time of year. But for the reasons I’ve described it might not happen this year.”
Milivojevic said retailers can only hold on for so long as the pandemic continues.
“Retailers are trying to hold on for dear life because they’re hoping that if they can stay afloat financially and they can avoid a filing and avoid shutting down then in the post-COVID environment competition will be much less because we’ve already seen a number of retailers that have filed. There will be fewer players in the market and then they’ll be servicing a market that has less competition. So I think that’s what they’re hoping for and another reason why they’re holding out,” she said.
“But it can only go for so long. The longer it goes on the more filings we’ll see for sure.
With the number of CCAA filings, the hope is that companies will be able to restructure. Many businesses in the service industry were impacted by COVID.
“The longer that stores and restaurants aren’t able to have people in their businesses the more likely they will be to file,” added Milivojevic.
“The longer that it goes the more likely that even bigger retailers will be closing their doors in the future. Some companies have been more successful than others in transitioning to online sales. The bricks and mortar shops that drive most of their sales from in-person buying are really, really struggling whereas the Amazons that were already established online are doing very well.”
The vast majority of filings in 2020 were in Ontario most likely because many of the companies are headquartered in that province. For Alberta, the number of filings also may reflect the economic downturn the province has experienced not only due to COVID but also to lower oil prices.