Insolvency Now Insolvencies in 2021: A Look Back and the Road Ahead Issue 5
Contents 2021 Insolvency Data: Analyzing the Numbers 02 A Deep Dive into Q4 Activity in Context 05 Business Bankruptcies and Proposals 05 Receiverships 06 CCAA Proceedings 08 ADR in Insolvency Proceedings 09 Mediation 09 Arbitration 10 Key Contacts 12
1 Davies Insolvency Now: Issue 5 Two years into the pandemic, policymakers struggle to strike a balance between mitigating the ongoing human costs of the crisis and exacerbating the financial strain caused by economic support measures. The 2022 World Development Report (Report) considers the central role that finance will play in enabling countries to recover economically from the pandemic, which in 2020 caused the global economy to shrink by approximately 3% and led to the largest singleyear surge in global debt in decades. In the pages that follow, we explore the Canadian application of two key themes emerging from the Report. – A sectoral analysis of insolvency activity is insufficient. Problems in one sector can have repercussions for the wider economy through multiple, mutually reinforcing channels that connect the financial health of households, firms, financial institutions and governments. A retrospective analysis of Canadian insolvency data from 2021 highlights the need to consider this interconnection in our efforts to support economic recovery. – A sudden increase in non-performing loans and bankruptcies can pose a significant challenge for the capacity of insolvency systems to deal with insolvencies in a timely manner. As illustrated in the Petrowest decision and in our own data from the past decade, alternative dispute resolution (ADR) has emerged as a potential mechanism for addressing shortages in judicial resources in the Canadian and cross-border insolvency context. Davies Insolvency Now is a quarterly publication authored by Natasha MacParland, Robin Schwill and Stephanie Ben-Ishai that analyzes key trends and developments in the insolvency and restructuring community. We also acknowledge, with gratitude, the contributions of Victoria Li.
2 Davies | dwpv.com 2021 Insolvency Data: Analyzing the Numbers Recently released data on Q4 2021 insolvencies indicate that business insolvencies rose 38.6% from Q3 to Q4, sparking much media attention. Overall, formal insolvency activity reached its lowest level in the summer of 2021 before rapidly picking up in the second half of 2021. From a geographic perspective, the Q4 spike is largely the result of an increase in business insolvencies in Nova Scotia, Québec, Ontario and Saskatchewan. The increase can be partly explained by the removal of government supports; however, as discussed in our previous issue of Davies Insolvency Now, other factors such as inflation, changing consumer behaviour, supply chain disruption, interest rate increases, geopolitics and, more recently, Russia’s invasion of Ukraine and corresponding international economic sanctions will likely contribute to a further upward trajectory in filing numbers. The upward trend in filings is beginning to emerge. As shown in Figure 1, the number of business insolvencies (bankruptcies and proposals) was much lower in 2021 than in every quarter of 2019. Figure 1: Total Business Insolvencies in Canada 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 50 100 150 200 250 300 350 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 2021 For example, the number of business insolvencies decreased by 19.2% in Q4 2021 compared with Q4 2019. And the number of business proposals decreased by 40% in Q4 2021 compared with Q4 2019. In contrast, the total number of business insolvencies in Q4 2021 increased by 9.7% compared with Q4 2020, and the trend holds true when the numbers are broken down into bankruptcies and proposals (as shown in Figures 2 and 3). Individual sectors generally follow the overall trends. However, the number of insolvencies in the accommodation and food services sector increased to 130 in Q4 2021, up from 111 in Q4 2019 (and 93 in Q4 2020).
3 Davies Insolvency Now: Issue 5 Figure 2: Business Bankruptcies in Canada 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 50 100 150 200 250 300 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 2021 Figure 3: Business Proposals in Canada 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 10 20 30 40 50 60 70 8 90 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 2021
4 Davies | dwpv.com Bankruptcies and proposals in Canada each decreased by 15.7% in December 2021 compared with the previous month. Overall, the fourth quarter of 2021 looked very similar to the fourth quarter of 2019, suggesting almost a full-circle return to the picture at the start of the pandemic. Business insolvencies for the 12‑month period ending December 31, 2021, decreased by 11.0% compared with the 12‑month period ending December 31, 2020. The two sectors that registered the biggest decrease in the number of insolvencies in 2021 were the retail trade and the accommodation and food services sector. Construction, and transportation and warehousing experienced the biggest increase in insolvencies. Utilities, information and cultural industries, educational services and public administration were the most stable sectors in 2021. Not surprisingly, finance and insurance, construction, retail trade and the accommodation and food services sector were the most volatile sectors in 2021. Figure 4: Total Insolvencies in Most Affected Sectors, 2019-2021 0 10 20 30 40 50 60 70 80 Apr 19 Mar 19 Feb 19 Jan 19 May 19 Sep 19 Aug 19 Jul 19 Jun 19 Oct 19 Nov 19 Dec 19 Apr 20 Mar 20 Feb 20 Jan 20 May 20 Sep 20 Aug 20 Jul 20 Jun 20 Oct 20 Nov 20 Dec 20 Apr 21 Mar 21 Feb 21 Jan 21 May 21 Sep 21 Aug 21 Jul 21 Jun 21 Oct 21 Nov 21 Dec 21 Agriculture, Forestry, Fishing and Hunting Arts, Entertainment and Recreation Construction Retail trade Accommodation and Food Services Transportation and Warehousing Figure 4 illustrates the specific timing of spikes and drops over the pandemic period to date. With a view to highlighting the overall trends in this period, Figure 5 demonstrates the trends by quarter.
5 Davies Insolvency Now: Issue 5 Figure 5: Total Insolvencies in Most Affected Sectors, 2019-2021 (Quarterly) 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 20 40 60 80 100 120 140 160 180 200 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Agriculture, Forestry, Fishing and Hunting Arts, Entertainment and Recreation Construction Retail trade Accommodation and Food Services Transportation and Warehousing A Deep Dive into Q4 Activity in Context BUSINESS BANKRUPTCIES AND PROPOSALS The number of business insolvencies in 2021 decreased by 11% compared with 2020 and remains well below 2019 levels. The trend holds true when the filings are broken down into bankruptcies and proposals. At the same time, insolvency filings have grown consistently since the summer of 2021. In particular, the number of business insolvencies in Q4 2021 increased significantly – by 36.8% – over the number in Q3 2021. The provinces that contributed most to this increase were Nova Scotia, Québec, Ontario and Saskatchewan. However, this sharp increase should be qualified by the fact that Q3 2021 saw historically low filings (the lowest number of filings in since 2019). We turn now to a sectoral analysis comparing 2020 with 2021. The two sectors that registered the biggest decrease in the number of insolvencies were retail trade and the accommodation and food services sector. As COVID-19 restrictions are lifted for retail services, travel and indoor dining, their impact to these two sectors has most likely slowed down. On the other hand, construction, and transportation and warehousing showed the biggest increase in insolvencies, potentially explained by continued supply-chain issues that are likely to be exacerbated by the recent protest activity and the threat of global conflict limiting the flow of
6 Davies | dwpv.com goods domestically and internationally. We also see the potential impact resulting from movements out of the city core as work patterns are altered. The World Bank Report reminds us that a sectoral analysis is not sufficient, and we need to continue monitoring the relationship between sectors that experienced the highest and lowest numbers of filings in 2021. RECEIVERSHIPS As Figure 6 reveals, the number of receiverships reached its lowest level for 2021 in August, before showing a fluctuating but upward trend. However, the volume is still well below the 2019 and 2020 figures. Unlike the significant fluctuations in the number of receiverships on a month-to-month level in 2019 and 2020, the 2021 numbers remained steady. Figure 6: Receiverships in Canada by Volume 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 10 20 30 40 50 60 70 80 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 2021 This general observation continues to hold true when the aggregate number of receiverships is broken down into court-appointed and privately appointed receiverships, as shown in Figures 7 and 8.
7 Davies Insolvency Now: Issue 5 Figure 7: Court-Appointed Receiverships in Canada by Volume 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 10 20 30 40 50 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 2021 Figure 8: Privately Appointed Receiverships in Canada by Volume 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep 0 10 20 3 4 50 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020 2021 The provinces that experienced the highest number of receiverships in 2021 were Ontario, Alberta and British Columbia. This is consistent with the historical trends. It is notable that the total dollar value of declared assets in receiverships in 2021 decreased significantly compared with 2020 and 2019: $1.37 billion in assets were declared in receiverships in 2021, whereas $4.23 billion and $5.73 billion were declared in 2020 and 2019, respectively.
8 Davies | dwpv.com CCAA PROCEEDINGS The number of CCAA proceedings peaked in Q2 2020 but has declined since then. A temporary uptick occurred in Q1 2021, but CCAA activity remained relatively low for the remainder of 2021. Twenty-six CCAA proceedings were commenced in 2021, compared with 60 in 2020 and 38 in 2019. The value of liabilities for CCAA filers in 2021 was consistent with the trend in the number of proceedings. The liabilities amounted to $2.78 billion in Q1 2021 before dropping significantly in the next three quarters. The total value of liabilities for CCAA filers also dropped significantly in 2021 – to $4.22 billion from $8.76 billion in 2020 and $9.00 billion in 2019. CCAA activity in the mining sector and the oil and gas extraction sector remained strong, despite the overall declining trend in CCAA proceedings, with eight filings in 2021 and nine in 2020. We note that these sectors have historically been predominant in CCAA filings. The retail trade sector, on the other hand, experienced a significant decrease in filings, dropping from 12 in 2020 to only two in 2021 (in Q4 2021). Four provinces reported the highest number of CCAA proceedings in 2021 (Québec, Ontario, Alberta and British Columbia), consistent with historical trends. It is also important to highlight that a number of CCAA proceedings commenced in previous quarters are ongoing and have continued implications for 2022. For example, in the retail sector, Davies acts for Ivanhoé Cambridge Inc. and Oxford Properties Group in the CCAA proceedings of Le Château Inc. In the higher education context, we act as lender counsel to Laurentian University, Sudbury, in its restructuring proceedings under the CCAA. This is an unprecedented case for a publicly funded Canadian university. We also act for Nemaska Lithium Inc. in proceedings instituted by Victor Cantore requesting that Nemaska be compelled to convey to him a 3% net smelter return royalty on all metals extracted from Nemaska's Whabouchi mine. We also note the ongoing globalization of reorganization activity and, in this context, in Q4 we acted for Blue Torch Capital LP, as lender, and HPS Investment Partners, LLC, as agent, in the recapitalization of an ASX-listed mining company, Boart Longyear Limited, under the secured and the unsecured creditors’ schemes approved by the Supreme Court of New South Wales, Australia.
9 Davies Insolvency Now: Issue 5 ADR in Insolvency Proceedings As Chief Justice Morawetz recently highlighted, the Ontario Superior Court of Justice heard at least 200,000 virtual hearings in the 22-month period ending in February 2022. We now turn to a potential lever for addressing the expected increased demands on Canadian and international insolvency systems – namely, alternative dispute resolution. MEDIATION We are increasingly seeing companies enter insolvency proceedings when mass litigation threatens their ongoing viability. In this context, ADR can play a key role. Generally, this occurs when a presiding CCAA judge directs parties to participate in mediation overseen by either another judge or a private neutral person. Since 1998, at least 14 CCAA proceedings adopted mediation as a part of their process, and this approach has become increasingly popular. A CCAA court made mediation orders in complex proceedings such as the CCAA of CannTrust Holdings Inc., Imperial Tobacco Canada and Sears Canada Inc. The proceedings and results of mediation are often confidential, which is consistent with the efficiency and fairness goals of mediation in the CCAA context. One mediation example from 2021 stands out. In the context of a court-appointed mediation led by retired Ontario Court of Appeal Justice Dennis O’Connor, CannTrust and most of the defendants in class actions pending in the United States and Canada reached a global resolution of the claims asserted against them. The Ontario Superior Court of Justice (Commercial List) approved the proposed settlements with a sanction order entered on July 16, 2021. In another example in which Davies acted as counsel to the debtor, Crystallex International Corporation, the Court ordered the parties to attempt to resolve a number of motions and cross-motions through confidential mediation, in part due to the interconnectedness of the issues and the confidential nature of the evidence. We are continuing to monitor the Northern Pulp CCAA proceedings, in which a hearing is scheduled for the end of March 2022 to consider the applicant’s request for the appointment of a mediator. The province of Nova Scotia has opposed this application for procedural and substantive reasons, including the timing and role of the proposed mediation. The CannTrust example also highlights the ways in which ADR can be used to assist a court in crossborder insolvency cases. And in this context, we had extensive experience as counsel for the U.K. estate in the Nortel proceedings. The mediations that took place provide insights into the way ADR processes complement each other and the types of areas (allocation decisions in this context) that can benefit from ADR, while allowing the overall insolvency process to reach a conclusion. Overall, we expect that ADR processes will increasingly be used in the near future as a complement to courts in dealing with crossborder insolvency proceedings. With experienced counsel and mediators, this approach can promote efficient, fair and timely resolution of insolvency proceedings.
10 Davies | dwpv.com In a thoughtful new article titled “Other Judges’ Cases,” Professor Melissa Jacoby, writing on the American experience, notes two benefits to this approach: 1) Mediating judges limit the time demands on the presiding judge while honouring lawyers’ and parties’ interests in a preliminary judicial evaluation of their cases. 2) The practice improves access to justice by shifting the costs of the mediating judges’ services from the litigants to the public, particularly in cases where there is significant disparity in the parties’ abilities to pay. At the same time, Professor Jacoby suggest that the judiciary pay greater attention to this understudied but common practice where significant decisions are being made in the insolvency context. ARBITRATION The Supreme Court of Canada recently considered the scope of another aspect of ADR activity in the insolvency context – namely, arbitration. In British Columbia, as in other provinces, section 15 of the Arbitration Act requires a court to enforce valid arbitration agreements by staying court proceedings commenced in breach of the agreements. In Petrowest Corporation v Peace River Hydro Partners (Petrowest), the British Columbia Court of Appeal (BCCA) concluded that section 15 of the Arbitration Act is not engaged when a receiver has been appointed under the Bankruptcy and Insolvency Act (BIA) and disclaims an arbitration agreement made between the debtor and a counter-party. The BCCA held that the litigation commenced by the receiver was distinguishable from litigation commenced by the debtor pre-insolvency. The debtor was put into receivership and the receiver was also its licensed insolvency trustee (LIT). The BCCA pointed out that both the receivership and the bankruptcy fall under the umbrella of the BIA. The Court also noted that the power of the receiver to disclaim contracts illustrates the fundamental difference between the receiver/LIT and debtor/bankrupt relationships. The “party” that commenced legal proceedings within the meaning of section 15(1) of the Arbitration Act was not Petrowest but the receiver. The Court concluded that it is open to the receiver to disclaim the arbitration agreement, notwithstanding that it had adopted the containing contracts for the purpose of suing on them. This result, the Court held, flows from the receiver’s particular powers and position, and from the separability of the arbitration agreements. Finally, section 15 was not engaged because the receiver had disclaimed the arbitration agreements and the action was not commenced by a party to the arbitration agreement.
11 Davies Insolvency Now: Issue 5 An appeal of the decision was heard by the Supreme Court of Canada on January 18, 2022. From an insolvency perspective, the questions raised during the hearing highlighted two key areas of concern: – The relationship between a receivership and a bankruptcy, on the one hand, and the role of the LIT versus that of the receiver, on the other. – The relationship between provincial arbitration legislation and federal bankruptcy legislation as well as the statutory and inherent discretion in each piece of legislation. The Supreme Court of Canada’s decision in Petrowest will likely prove helpful in navigating the role that one aspect of ADR – arbitration agreed to before the insolvency proceeding – will play in future insolvency proceedings. Another branch of arbitration – arbitration agreed to in the course of the insolvency proceedings – is also evolving. For example, in the context of Davies’ mandate in the Urbancorp Toronto Management Inc. insolvency proceedings, consensual arbitration was utilized to adjudicate a complex claim before a retired judge who is now a private arbitrator/mediator and had been the supervising judge in the case before retiring. In another example, in Davies’ capacity as counsel to the proposal trustee in YSL Residences Inc, we employed arbitration to determine certain key facts in a complex claim that relied heavily on conflicting viva voce evidence pertaining to the existence (or not) of an oral profit-sharing agreement and its essential terms. On obtaining a ruling on such key facts, the proposal trustee will be in an informed position to make a recommendation to the court on the adjudication of the claim. As 2022 progresses, we will continue to monitor trends in arbitration and mediation in the ADR context. The Canadian and international insolvency systems will continue to benefit from ADR to potentially lighten the impact of an expected uptick in filings on insolvency systems. We have extensive experience participating in a range of ADR processes at all stages of the Canadian and cross-border insolvency context and would be happy to draw on our data-driven analysis and experience to assist in navigating the evolving practice.
12 Key Contacts With extensive experience across sectors and in complex litigation, Davies draws on the strategic skills of our team to help you navigate the intricacies of a restructuring or insolvency. We would be happy to discuss your specific circumstances and answer any questions you may have. Please contact any of the individuals listed below or visit our website at www.dwpv.com. Natasha MacParland Partner 416.863.5567 nmacparland@dwpv.com Robin B. Schwill Partner 416.863.5502 rschwill@dwpv.com Denis Ferland Partner 416.841.6423 dferland@dwpv.com Christian Lachance Partner 416.841.6576 clachance@dwpv.com Davies | dwpv.com
The information in this publication should not be relied upon as legal advice. We encourage you to contact us directly with any specific questions. © 2022 Davies Ward Phillips & Vineberg LLP. All rights reserved.
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