Meeting Your Current Obligations and Liabilities

Bankruptcy and insolvency alternatives

If you find that you are having trouble meeting your liabilities bankruptcy is not necessarily the inevitable result.

Assuming that all costs have been rationalized to the extent possible you can also consider:

obtaining an equity injection from a third party investor;

obtaining credit from suppliers by extending payment terms;

obtaining credit from customers by way of early payment or pre-payment for goods to be delivered;

obtaining a forbearance agreement from your bankers and adjusting payment obligations and covenants.

In these difficult times we can predict that many businesses will fail. Suppliers will be desperate to have customers to sell to. Customers will be concerned that they have a source of supply. Bankers will be fearful that in a forced realization they will suffer significant losses. This can be used as leverage by a company in difficulty to creatively improve its financial position.

Dealing with troubled Canadian companies

Given the borderless nature of commerce American creditors often become involved in Canadian insolvency proceedings.

Canada has sophisticated insolvency laws dealing with liquidations and restructurings. These regimes are similar to Chapter 7 and Chapter 11 of the US Bankruptcy Code. Though similar, there are significant differences. In addition, receiverships are a common feature of Canadian insolvencies. This is a remedy which is not frequently used in the United States.

A danger arises from the similarity of the Canadian and American systems. Canada has borrowed words and concepts from the American process which have nuanced differences from the original concepts. For example, in Canada, although we use the phrase “debtor in possession financing” there is no requirement for “adequate protection”. Similarly, although we use the phrase “administration charge”, it is a very different concept than an “administrative claim” in the US. For more information with respect to potential confusion in the meaning of certain words see Cross Border Nuances.

Internal reorganizations

With appropriate approvals and due regard to restrictions in agreements, licenses and other existing legal obligations/privileges of the entities involved and to the tax ramifications of proposed actions, you may wish to reorganize your operations by eliminating the extra costs involved in maintaining separate corporate or other structures and by eliminating layers of ownership that may no longer be advantageous.

Raising cash through divestitures of non-core assets

After following an appropriate procedure to identify suitable buyers and appropriate measures of evaluating the offers by such buyers, you may dispose of assets which are no longer necessary to your business or you may decide to divest of a particular line of business and focus on others that are strong in the current environment. Due regard must be paid to director and officer fiduciary obligations and to statutory requirements relating to the making and implementation of such divestiture decisions.

Raising financing through leveraging your assets

You may be able to raise financing by granting security on assets that are either currently unencumbered or that have appreciated significantly in value since they were last evaluated for this purpose. Review of the terms attached to existing encumbrances and restrictions in agreements, licenses and other existing legal obligations should be undertaken to ensure that the use of these assets for this purpose is permitted. The terms of any new security should be carefully negotiated and inter-creditor agreements may be required for those parties that may hold security on the same assets as a result of this action, so that their remedies and priorities are adequately dealt with at the outset.

Creative ways to cut your labour costs

Many employers are assessing how they can continue to compete during the tough financial times. One of the most difficult decisions employers must make is how to reorganize or reduce labor costs in order to stay competitive. While closures and layoffs make sense for some employers, other employers are questioning whether other options are available to them. What options do companies have in tough economic times to reduce labor costs? One way is to spread the pain among the workforce instead of among a few employees. Among the lessons that Canadian employers are taking from their American counterparts is to grant furloughs for workers during tough economic times. For a discussion of these issues, click here to see our article on "Creative ways to cut your labour costs: furloughs and work sharing."

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