Despite optimistic predictions in early 2022, slowed down world growth as a result, in part, of the war in Ukraine, it has raised inflation and interest rates, reducing the availability of credit, increasing corporate borrowing costs, and threatening the ability of companies to retain the confidence of their shareholders . With this competitive credit market in mind, in this issue of Davies insolvency now, we delve into the legislation that regulates interest rates in Canada, drawing on recent case studies to provide guidance to lenders. We then highlight Canadian data for the first quarter of 2022, revealing that total business insolvencies increased by 33.8% compared to the same period in 2021. We conclude by discussing a potential template for future insolvency-related emergency measures in Canada. .
Canadian Criminal Interest Rate Framework
Section 347 of criminal code criminalizes “entering into an agreement or arrangement to receive interest at a criminal rate, or [receive] a payment or partial payment of interest at a criminal rate.” Recent regulatory and case law developments suggest that close attention should be paid to this area. In the next section, we extract information from judicial decisions of section 347 in the context of the Business Creditors Agreement Law (CCAA) to help the parties avoid possible difficulties in structuring agreements.
LESSONS FROM THE COURTS: HOW HIGH IS TOO HIGH?
Report Capital Development (EV) Inc..British Columbia Supreme Court
Lenders in distress must proactively manage the risk of exceeding the criminal interest rate threshold. Since CCAA supervisory courts may be reluctant to provide comfort to an interim lender, these lenders must consider certain important factors when managing the risk of a future section 347 claim: the terms of a credit agreement, various fees and charges that may constitute “interest.” and the conduct of the parties.
Re 12178711 Canada Inc., Alberta Queen’s Court Bench
Lenders may take some comfort in the fact that a high threshold must be met to be held liable under section 347 in a business restructuring context. However, lenders are cautioned that the section may apply to arrangements under the Canadian Business Corporations Act and other similar agreements. Accordingly, the parties must actively document their intentions and the terms of the agreement with respect to any obligations that may fall within the meaning of “interest.”
Re Crystallex International CorporationSuperior Court of Justice of Ontario (Commercial List)
Explicit language in a credit agreement prohibiting a criminal rate of interest would be a useful safeguard against a possible section 347 claim. For a crime to exist, the agreement or arrangement in question must, on its face, require payment. at a criminal rate of interest. If a credit agreement did not require, and in fact expressly prohibited, the payment of interest at a penal rate, section 347 would be deemed not to apply.
Re Great Basin Gold Ltd.British Columbia Supreme Court
Section 347 is not a particularly useful tool for challenging a competing interim funding proposal without presenting specific facts on which to base such a challenge. However, the possibility of such a challenge remains, depending on how an interim financing agreement is implemented.
Transport North American Express Inc. v. New Solutions Financial Corp.Supreme Court of Canada
If the parties have any doubts about the application of section 347, they should consider structuring contracts in a way that allows for possible separation. However, the parties should not rely solely on this possibility.
Garland v. Consumer’s Gas Co.Supreme Court of Canada
Section 347 may arise in a future claim, many years later. Consequently, due consideration should be given to the finality of transactions in the context of insolvency in the light of this risk.
PROPOSED AMENDMENTS TO LOWER THE CRIMINAL INTEREST RATE
Bill C-274, a private member’s bill that received first reading in 2021, proposed lowering the threshold at which an interest rate becomes a criminal rate to 30%, from 60%, plus the overnight rate of the Bank of Canada, and repeal section 347.1, which had allowed certain Exceptions for payday loans. More recently, Bill S-239a public Senate bill that passed first reading on March 1, 2022 and was debated on second reading on March 22, 2022, proposes
- reduce the penalty interest rate from 60% to 20%, plus the Bank of Canada overnight rate, and
- defines the Bank of Canada overnight rate as the “rate on the day on which the agreement or arrangement under which credit is or will be advanced is entered into or renewed.”
It is important to note that Bill S-239 focuses on the interest rate on the day a credit agreement is entered into or renewed. Also, unlike House Bill C-274, House Bill S-239 will not affect payday lenders because it does not amend section 347.1 of the criminal code.
The 2021 Budget announced that the federal government planned to launch a consultation on the reduction of the penal interest rate applicable to, among other things, installment loans offered by payday lenders. However, according to a Press release of ACORN Canada in March 2022, the government has not yet launched the consultation. The acorn report found that payday loans were the predominant type of high-cost loan Canadians turned to during the pandemic, although installment loans continue to rise. The report, like other comments on this topic, focused on the impact of high-cost loans on individuals rather than businesses.
Insolvency data for the first quarter of 2022: highlights
In the first quarter of 2022, total business bad debts increased by 33.8% over the first quarter of 2021. This growth was driven by a 44.7% increase in business proposals and a 30.8% increase in % in business bankruptcies as of the end of the first quarter of 2022. The data for the first quarter of 2022 indicates that business bankruptcies are generally higher than in 2021, and the monthly fluctuations are very close to the pattern seen last year.
The following are our main findings from the data for the first quarter of 2022:
- While the increase in filings appears significant when the benchmark is Q3 2021, the actual volume of filings might not be as notable overall and was potentially a correction to longer-term historical levels before the lows. of the third quarter of 2021.
- In the first quarter of 2022, there were 807 business insolvencies across Canada, averaging 269 filings per month. The most affected sectors were construction and accommodation and food services, which together accounted for 25.9% of all insolvencies.
- In the first quarter of 2022, there were 31 court-appointed receiverships and 14 privately appointed receiverships. Both the volume of bankruptcies and the value of bankrupt assets have been well below the figures for the first quarter of previous years. Specifically, the $185.5 million of assets in default this quarter is lower than the first quarter of 2021 ($199.3 million) and much lower than the first quarter of 2020 ($875.7 million) and the first quarter of 2019 ($476.6 million). January had a remarkably low value of assets in default of $7.6 million (9.3% of total assets in default in January 2021).
- CCAA proceedings continued the decline that began in the second quarter of 2020, with only four proceedings filed in the first quarter of 2022.
Plan for future emergency responses in the context of insolvency
The best approach for future emergencies, according to international consensus, is one that is flexible, includes long-term legislative reforms to support viable businesses facing significant financial difficulties, and provides access to simple and profitable liquidation processes for unviable businesses. The world report of May 2022 From Hibernation to Revitalization: Insolvency Analysis Response measures to COVID-19 and its liquidation (Report) provides a commentary and summary of data collected from a survey conducted jointly by the World Bank Group, INSOL International and the International Association of Insolvency Regulators.
The authors classify Canada as an outlier in failing to introduce significant substantive reforms to its insolvency law. Canada’s insolvency system remained largely intact during the pandemic, with most legal insolvency services remaining available. Canadian commentators hypothesized that Canada’s lower business insolvency rates were likely due to its precautionary approach, the extension of substantial financial and liquidity supports to businesses, and the patience on the part of lenders and banks toward lending. defaulters and their willingness to enter into informal arrangements.
In terms of short-term procedural changes, Canadian courts have fluctuated between loosening and tightening restrictions. At the request of the Bankruptcy Superintendent, Canadian courts extended certain time limits under the Bankruptcy and Bankruptcy Law. The Superintendent of Bankruptcy has issued directives to provide additional flexibility to authorized insolvency trustees in carrying out their duties to comply with social distancing measures. In addition, various government agencies have improved their monitoring of insolvency trends by (i) establishing an interagency group comprised of different departments and regulators, as well as Statistics Canada, to adopt a global monitoring approach; and (ii) seeking feedback from various insolvency stakeholders such as experts, judges, trustees and lenders.
At this point, the most important challenge regarding the reversal of government supports is to ensure that procedures are in place to address a likely increase in insolvencies during the phase-out of temporary measures. As discussed in our previous numberalternative dispute resolution (ADR) is increasingly being used as a tool to address the scarcity of judicial resources and the time pressures associated with the expected increase in insolvency filings.
The Report suggests that Canada’s insolvency system could respond to future emergencies by (i) encouraging restructuring rather than liquidation, (ii) continuing to offer a fast and efficient liquidation process that maximizes recovery from creditors and avoids accumulation of zombie companies, and (iii) ) encouraging the formation of new companies. A full spectrum of tools would include (i) the strengthening of formal insolvency frameworks, (ii) the development of informal negotiation tools, (iii) the development of electronic platforms to facilitate insolvency proceedings, (iv) the facilitation of ADR tools, and (v) the development of specific medium-sized enterprises (MSE) responses and procedures. In the Canadian context, there are growth opportunities in the development of electronic platforms and specific MSE responses and procedures. As we have documented in the past, Canada continues to be well equipped with strong formal insolvency frameworks, informal resolution tools and emerging ADR processes.