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Navigating the world of bankruptcy, restructuring in the cannabis industry

Media Partners, Stratcann

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Five years into a legal non-medical cannabis market in Canada, the industry is beginning to mature in many ways, including the unfortunate demise of many hopeful companies.

Bankruptcies, insolvencies, and restructuring are becoming more common, even as new licences continue to come in every month. 

“…the company should be getting key creditors on board before the filing. You don’t want to surprise people.”

Dina Kovacevic, Insolvency Insider

A relative handful of cannabis companies filed for creditor protection in 2023, according to listings by Insolvency Insider Canada, which focuses on the Canadian insolvency market.

One of the most common filings is for the Companies’ Creditors Arrangement Act (CCAA), which allows insolvent companies to restructure their businesses and finances. With proper planning, a company can take this step to avoid declaring bankruptcy, says Dina Kovacevic, Editor at Insolvency Insider.

Typically, she explains, if a cannabis company is in trouble, it can either file for CCAA protection, or a notice of intent to make a proposal, or an “NOI” under the Banking and Insolvency Act. This is, ideally, a step taken to avoid being put into bankruptcy or receivership by a creditor or a company declaring bankruptcy themselves. 

One of the most significant points Kovacevic stresses is for distressed companies to ensure they take steps in advance if they see themselves running into long-term financial issues. 

“If a company is facing financial issues and it wants to restructure, it doesn’t just want to go out of business, and perhaps it fears that its secured lender is going to put it into receivership. I’d say that it has several options. 

“The first option is to try to work with its creditors and suppliers on an out-of-court restructuring plan. The second would be to file for CCAA protection, and even in that type of situation, I would say that the company should be getting key creditors on board before the filing. You don’t want to surprise people.”

“You have to critically self-assess where you are. Doing nothing isn’t an option. It’s being very critical of yourself as a business owner. How are you competing?

Clark Lonergan, BDO Canada

Clark Lonergan, a Financial Recovery Services partner in BDO Canada’s Toronto office, reiterates that any company facing financial challenges needs to make tough choices early on in the process to ensure they can either bring in new investment or creditors, or have a chance to wind down their operations and liquidate assets on a timeline they control. 

“You have to critically self-assess where you are,” he says. “Doing nothing isn’t an option. It’s being very critical of yourself as a business owner. How are you competing?

“What’s your balance sheet look like? Do you have sufficient capital to weather the ups or downs? And who are your stakeholders? Do you have bank debt? Is it all equity? How are you competitive in this market?”

Assessing these issues well beforehand can make a huge difference. Bringing in others who can assist in the process can also be important. 

“When you get into a level of distress, it becomes more crisis management,” adds Lonergan. “So you’re dealing with stakeholders, focussing on liquidity, on meeting payroll and dealing with creditors who need to be paid. So the additional perspective of an advisor can mean the business can still run, while ensuring you have someone able to steer you through that process, with all the available options and resources you as a business owner might not know about.”

The cannabis industry had an initial burst of interest due to the excitement of legalization, he argues, but that excitement and “wild west” mentality was quickly tempered by the realities of a complex, highly regulated industry.

These realities will continue to settle in in the coming years, says Kovacevic at Insolvency Insider.

“At the end of the day, we’re still expecting more,” she says. “It’s still early in the industry cycle, people are still dealing with oversupply. There’s a lot of growing pains, a ton of consolidation that’s happening. So I think we’re still in the pretty early stages of this.”

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