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A weak economy spells trouble for any business that doesn’t manage its finances closely. On one hand, suppliers begin to demand quicker if not up front payment and on the other hand, customers begin to stretch their payables or stop buying all together.
In the middle of this is the cash-starved entrepreneur who can’t make ends meet and ends up sometimes in bankruptcy. It doesn’t have to be that way however. When otherwise strong companies run into cash flow problems, they usually just need to buy themselves some time to get their fiscal house in order and there are laws that exist for that very reason.
In this episode of the Business Coach Podcast, we’ll discuss the protections available to companies with Michael MacNaughton, a Toronto-based partner in the Insolvency and Restructuring group of Borden, Ladner, Gervais which at present is Canada’s largest law firm. Michael, welcome to the Business Coach Podcast.
Michael: Good to be here.
Ian: So Michael, quickly, what are some of the most common treats that companies face in tough times like these?
Michael: Well I think you have touched on two of them already. Customers will often delay payment. In the current economy where there is difficulty across the board, one of the issues is not simply delaying payment but cutting orders that is a decline in revenues. On other hand, on the supply side, suppliers of goods, services and importantly of credit as well are going to look at their customers much more closely. Suppliers of credit, lenders are going to play a more intense focus on performance, are going to be particularly concerned about compliance with financial covenants. Especially again in the current economy if a business is in the need of refinancing or additional financing, that’s going to be a real challenge. On the purchasing side, while the decline in the Canadian dollar is probably good for some businesses, those that are buying off shore are going to find a real challenge.
Ian: So when they are looking at their financial statements, what are the red flags that will tip off a business owner that their fiscal situation is becoming dire?
Michael: I honestly am not sure that there are particular red flags. The kinds of issues that I outlined a minute ago are in themselves red flags. If you see that kind of things then you know you have a problem. I think rather then worrying about red flags, I think in the current economy, every business owner ought to side down perhaps with the assistance of an advisor but certainly on their own, sit down and honestly examine where their business is. This is not a legal point, businesses need to honestly analyze their strengths and weaknesses today because there are going to be challenges across the board.
Ian: So when should an entrepreneur finally seek relief from his or her creditors?
Michael: In a way, that’s a question about when to use formal proceedings. When people talk about relief from creditors, they often mean filing a notice of intention to make a proposal under the Bankruptcy and Insolvency Act or for a larger business, because you have to have debt of at least million dollars, making an application for relief under the Companies’ Creditors Arrangement Act. But as I tried to say earlier, the focus from a business owner’s perspective ought to be pro-active. Because there are many situation that can be resolved consensually, short of proceedings whether that’s through re-negotiation of terms with lenders, whether that’s operational changes, sales of non-core assets and the like, many of those things can be dealt with outside proceedings. Often I find, it’s the business that doesn’t address its issues early on that is forced into proceedings and those situations can be unfortunate, they can result in the liquidation of a business.
On the other hand, if you are pro-active about addressing issues, identifying issues, finding a solution that makes sense in a business financial and operational context, then the next step is what kind of structure do I need to put in place to get to the end game. And sometimes, as I said, that can be done outside formal proceedings, sometimes formal proceedings are very useful to get you to where you want to go.
Ian: So, speaking of formal proceedings, you can go through a CCAA or you can make, I think it’s a Division 1 proposal under the Bankruptcy Act. You mentioned earlier there is a five million dollar debt threshold with CCAA, is that the only really note where there is a difference between the two?
Michael: The basic principles underlying each statute are the same, they allow an insolvent person to obtain a stay of proceedings that is to stop creditors from exercising remedies or commencing or continuing legal proceedings to give the business a breathing space in order to try to come up with a plan that will be acceptable to a majority of the businesses creditors. Where the two statutes differ is on the flexibility spectrum. The more complex, the more issues that need to be dealt with, the more a business would be better served by using the CCAA. The CCAA, that is the Companies’ Creditors Arrangement Act, is a much more court driven process, it’s necessarily more expensive but proceedings under the CCAA can be tailored more and better to the particular circumstances of a business. That’s the biggest difference between the two.
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