Canadian restructuring trends amid economic uncertainty

May 05, 2021

While Canadian insolvency filings reached a 20-year low this past year, Lexpert reports that these figures do not provide the full picture as companies receiving government support will eventually have to repay their loans—which will undoubtedly lead to further insolvencies.

Speaking to Lexpert on Canadian restructuring trends head of Torys’ Corporate Restructuring and Advisory Practice David Bish pointed out that although consumer filings, bankruptcy filings and proposal filings under the Companies’ Creditors Arrangement Act (CCAA) plummeted in 2020, there was still a rise in and court-appointed receiverships.

David indicated that although the low insolvency filling figures from 2020 could be the result of government subsidies, there were many businesses that simply closed their doors and didn’t file for insolvency.

“They literally just turned out the lights, and they locked up and left,” David said.

Another trend David touched on is the rising popularity of acquirers using reverse vesting orders (RVOs) to buy distressed companies and assets—the advantage being that RVOs enable the movement of liabilities from a target company allowing the purchaser to acquire a “clean” company.

Speaking on the Arrangement of Nemaska Lithium Inc. (a case where Torys acted for the purchaser), which was the first RVO to be issued by the Québec Superior Court under the CCAA after a contested hearing, David noted that while the Québec appellate court’s denial of leave to appeal has been appealed to the Supreme Court of Canada, the decision showed that “there was confirmation that the courts have the jurisdiction to permit this tool”.

Read: To find out more about the Arrangement of Nemaska Lithium Inc., read our bulletin “Reverse vesting order issued by Québec Superior Court after first contested hearing”.

David attested to the gravity of the confirmation, noting that historically, “you could buy assets, but you couldn’t buy shares” and he pointed out that buying shares meant taking on “all the liabilities in the company whose shares you had bought”. He noted that previously, shares could be bought once buyers created a share deal through a restructuring plan and cleansed the distressed business.

David recognized that while transactions have proceeded for many years as asset deals (leading to a significant decrease in value), there may be a higher demand for RVOs in the future as they pave the way for more share deals.

“Because it allows you to move the liabilities that you don’t want out of the entity and then buy the shares; it opens up a whole other aspect to sale transactions that really has been foreclosed to us up until now,” David said.

“I think people are quite excited about the prospect of it, and I think you’ll see a lot more of those transactions now that we have a green light.”

David also spoke about RVOs being a chosen route for many companies in the cannabis sector (an industry where licensing requirements are “very particular,”), with the benefit of an RVO being that an acquirer doesn’t need a new licence or even to transfer the existing licence.

“It’s been a transaction vehicle of choice in the cannabis sector,” David said.

To find out more about the impact COVID-19 is having on organizations, listen to the Torys Business Brief podcast “The art of fixing broken businesses” where insolvency lawyers David Bish and Kyle Kashuba discuss how this current financial crisis is different from the 2008 recession, what principal challenges companies are facing, and what management can do to ease the pressure.


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