As long as there have been companies doing business, there have always been success stories. Along with those success stories come tales of corporate financial difficulties. These difficulties often have a trickle down effect, especially when the companies in question are large.
For example, if you were born before 1985, you likely shopped in some of Canada’s legendary and most-loved stores. Retailers such as Miracle Mart, Eaton’s, Consumer’s Distributing, and Sam the Record Man are just a few Canadian brands that were once common entities in communities across the country.
These companies also have something else in common: each one filed for some sort of creditor protection.
When a company seeks creditor protection, there’s a ripple effect that doesn’t often make headlines: much of their debts are often owed to smaller businesses that rely on the timely payment of their accounts. When those accounts go unpaid, it results in financial difficulties for those smaller companies.
Corporate Financial Restructuring Leads to Distressed Businesses
James was a Canadian success story. He started a furniture manufacturing company that after a number of years had grown to include three factories that had well over 75 customers and $8 million in annual revenue.
After years of financial success, he was shocked to hear that Sears had filed for creditor protection. Adding to his concern was the fact that Sears was a long time customer of his company, and owed him a large sum of money.
James received a notice from what’s known as a monitor. The monitor, in most situations, is an independent firm of accountants who specialize in insolvency cases. Monitors are appointed by the court to oversee the debtor’s operations and help the debtor restructure their financial affairs. They also ensure that the debtor is operating in compliance with their court-ordered responsibilities in terms of financial restructuring and debt repayment.
After receiving the notice, James called the monitor to ask when his receivables from Sears were going to be paid. The monitor couldn’t say at that time when payment could be made, but did comment that he was unlikely to ever see the debt from Sears paid in full.
Why was Sears able to avoid full payment of its debt responsibilities to James’ company? The reason is that Sears was under the protection of the Companies Creditors Arrangement Act (CCAA).
What is the Companies Creditors Arrangement Act (CCAA)?
The CCAA is a federal law that allows companies that have debts over $5 million to re-organize their debts and continue in business when they are unable to pay their debts, the state of which is called insolvency.
In order to avoid bankruptcy, the court grants businesses that qualify for the CCAA protection from their creditors taking or continuing any action to collect unpaid debt. During this time, the business develops a formal Plan of Arrangement that details the companies restructuring strategy and creditor repayment plan.
This is also where the monitor comes in. Not only does the monitor oversee the company during this period, also known as a stay period, but it also acts as a go-between for the company, its creditors, and other interested parties.
The stay can be extended indefinitely if the business shows that it needs more time to develop its Plan of Arrangement. In the meantime, the business can keep operating and even begin restructuring activities.
So where did this situation leave James’ company?
Sears was one of his biggest customers. Together, it owed his company over $100,000 in accounts receivables and wouldn’t be ordering again. This in turn affected James’ ability to pay his own suppliers, putting his own credit at risk through no fault of his own.
The impact to his company was so severe that he was considering developing some corporate restructuring strategies, which could involve plant closures or layoffs.
Caught in the middle of a situation nobody wanted, James’ didn’t act in haste, but rather sought help from the corporate debt specialists at Charles Advisory Services.
Solving Corporate Financial Difficulties
We met with James in our office to take a close look at his business finances. After we discussed his various options, our team worked with James to determine his new cash flow and company size versus his current expenses, to determine if his company was currently solvent.
Our trustees also took at look at whether James needed to downsize his company in the short term while he moved to replace this lost business.
James will likely survive. His company is slowly returning to a healthy financial state and looking forward to profitable days ahead.
Division 1 Proposal: Another Corporate Restructuring Strategy
Business with debts under $5 million don’t qualify for the protections under the CCAA, but can file a Division 1 proposal, which is a formal legal proceeding under the Bankruptcy and Insolvency Act of Canada. Upon filing the Division 1 proposal, the business is immediately protected from further creditor contact, but must develop an offer of reduced or modified payments to its creditors. If the plan is approved, the business can continue operating while making repayments under the proposal. Rejection of the proposal means the business is immediately deemed insolvent.
However, licensed insolvency trustees do want your business to succeed. Our trustees work with our clients to create a proposal that has the best chance of success, so you can focus on repaying your debts and building your business back into prosperity.
Get a team who’s on your side in times of corporate financial difficulty. Since 2006, Charles Advisory Services has been helping businesses in Toronto renegotiate their debt with financial restructuring services designed to protect both you and your business. Call us for a free consultation today!
TIP : In business, you need to expect the unexpected. Even healthy companies should develop a reorganized financial strategy should a crisis occur. You’ll then have a plan in place so you can keep operating today while you strategize for the future.
James and his company are based upon people and situations helped by Charles Advisory Inc. Names and certain facts have been changed to protect our clients’ confidentiality.