Strong Takeaways on Canada’s Bankruptcy Landscape From the head of Fasken’s insolvency-restructuring practice

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As U.S. companies struggle to survive through the pandemic, their counterparts in Canada are facing similar challenges.   Given the huge overlap and dependency on the two neighbouring economies, this might be a good moment to hear from insolvency advisers at leading Canadian law firm Fasken.

“The impact of Covid-19 in Canada is strikingly comparable to the U.S., but we are feeling our own particular pain, given heavy dependence on certain sectors such as energy,” says Stuart Brotman, leader of Fasken’s Insolvency and Restructuring practice.

“But all of Canada’s key business segments – retail, mining, manufacturing and hospitality – are being hard hit,” Mr. Brotman adds.  “Cash flow has dried up and companies can’t afford to pay employees, landlords and lenders.  Supply chains are impaired and companies still operating are struggling to maintain delivery of goods and services.”

One area where Canada has been especially hard hit is oil and gas.  In Alberta, which relies heavily on oil-related revenue, “Covid-19 had drained demand, and crude prices are so low that production has been uneconomic for the province,” Mr. Brotman notes.  “Lenders are being patient with non-performing oil producers and service providers because there is simply no market for oil assets.”

Also feeling the squeeze are Canada’s start-ups, including the country’s nascent cannabis industry, which was struggling even before the pandemic and is now facing a dearth of funding activity, despite market demand.  

Mr. Brotman points out that Canada’s economic health is directly linked to the U.S. in retail, automotive and travel, with major American brands highly visible players in Canadian markets.  “What happens in Canada will heavily depend on what happens in U.S.,” he says. 

While Ottawa, like Washington, has been criticized by some for its response to the crisis, the federal government has moved to expand several emergency loan and subsidy programs to help small- and medium-sized businesses.  But Mr. Brotman expects that even if the economy is reopened by early June, “business mortality will be high.”

“Many companies will be left with wounds they can’t heal,” he adds. “We’ll see a shadow of COVID-related insolvency filings that extend well beyond businesses restart.  And unfortunately, many will not survive.”

However, he says, “There will be a lot of opportunities for those with capital who can deploy it, including private equity investors and strategic buyers able to acquire distressed assets or take advantage of industry consolidation.  But, for many sellers, there is little near-term runway.”

“In most recessions there at least has been market for corporate assets, but right now there is no market – it’s frozen,” says Mr. Brotman.  “With the current stand-still, many borrowers can’t repay debts, and must shelter in place and work out terms and wait for the market to return.”

Mr. Brotman notes business concerns on many fronts, notably about rent obligations when their income has dried up.  “They want to know what to do if they can’t pay rents – they ask if landlords will tolerate a rent vacation.”

While the federal and provincial governments have increasingly taken action to help Canadian businesses, Mr. Brotman remarks that in the area of taxation, aid has been limited.  “No tax payments or obligations have been forgiven, even though deadlines have been extended,” he says.  “With business revenues all but stopped, companies know they are just kicking the tax can down the road.”

Mr. Brotman points out that Canada’s insolvency laws offer noteworthy differences to the U.S. bankruptcy code – including employment provisions that are friendlier to employees and different treatments for worker pension plans.  “We do expect to see companies seek out-of-court restructurings to avoid going through insolvency,” he says.

Mr. Brotman advises clients in bankruptcy, receivership and restructuring under the Companies’ Creditors Arrangement Act, the Bankruptcy and Insolvency Act, the Canada Business Corporations Act, and the Winding Up and Restructuring Act.

Fasken’s Insolvency and Restructuring Group is among the largest in Canada focusing exclusively on insolvency and restructuring, with highly ranked practitioners in all of Canada’s major centers.  The group’s lawyers occupy leadership positions in the Insolvency Institute of Canada, the Turnaround Management Association and other professional organizations.

For more insights into Canada’s bankruptcy landscape amid the COVID-19 crisis, let us know if you’d like to connect with Fasken’s Stuart Brotman.

Stuart Brotman

About Stuart Brotman

Toronto-based Stuart Brotman chairs the Insolvency and Restructuring Group of leading Canadian law firm, Fasken.  Stuart, who has extensive cross-border experience in the U.S., advises clients on bankruptcy, receivership and restructuring matters under all of Canada’s insolvency laws.  He can be reached at