I am becoming an unabashed advocate of the wisdom of using the Companies’ Creditors Arrangement Act (“CCAA”) to restructure dozens of Canadian cannabis companies. I was the CFO of a Canadian LP until I co-founded Restructur Advisors. I understand very well the challenges faced by these companies. My three co-founding partners are lawyers, well versed in the legalities and institutional challenges involved when it comes to using the CCAA to restructure cannabis companies. We contend that the CCAA will serve the Canadian economy in these tough times by helping troubled companies stay viable by giving them time to find new financing or investment, renegotiate unfavorable contracts (such as leases and supply contracts), and/or expedite processes for selling off assets or entering other arrangements with creditors (and potentially shareholders).
Despite these benefits, the CCAA has an image problem. When I first started in this area, I faced challenges selling the CCAA to my former peers running ailing cannabis companies across the country. The CCAA is seen as the fate of dead or dying companies. In fact, the CCAA is anything but – it’s about reviving companies.
When we look back to the financial crisis of 2008, my partners and I would argue that the CCAA and Chapter 11 played a critical role in the recovery of the Canadian and US economies. Unfortunately for US cannabis companies, the CCAA’s American cousin, Chapter 11, does not appear to be an option for now, as cannabis in the US continues to be illegal at the federal level. As was the case for thousands of companies across many sectors in 2008, cannabis companies right now are facing extreme cashflow shortages and towering walls of debt. Many observers are predicting a wipe-out for most of the industry. But let’s remember the remarkable recovery that happened during the three years following 2008 when billions of dollars of corporate debt overhang was eliminated, allowing corporate profits and values to rebound with remarkable speed and vigor. Trillions of dollars in capital that had been on the sidelines began to pour back into the economy, kicking off a bull run that continued into 2020. As posted earlier this week on this blog $2.6 billion has recently been committed by investors to Special Purpose Acquisition Corporations (SPAC) earmarked for value plays in the cannabis industry.
We believe that the lessons of the most recent financial crisis provide a clear demonstration of the importance of the CCAA and restructuring practices in maintaining the competitiveness of Canadian companies and the long‐term growth of the cannabis economy.
My partners and I believe that, right now, a significant portion of the Canadian cannabis industry is on the verge of extinction as it currently exists despite being poised for steady double-digit growth. However, with timely action and proper use of the CCAA, in a relatively short time much of the corporate debt threatening these companies can be managed down, mass liquidations can be averted, and corporate profits, balance sheets, and values can quickly be resuscitated through thoughtful plans of reorganization.
In the US, because Chapter 11 appears to be unavailable for cannabis companies and the restructuring professionals who advise these troubled companies have fewer tools to work with, we believe recovery of cannabis companies in Canada could be faster than in the US where the implications of federal illegality tend to favor liquidation and immediate payback of creditors in many states. Simply put, the CCAA’s availability in Canada offers Canadian cannabis companies alternatives to "free-fall" bankruptcy.
The CCAA isn't the answer for all companies, however. It might yield big benefits for companies that own or lease substantial amounts of assets, but the CCAA is only available to companies that are indebted $5 million or more. For those ineligible companies, there are restructuring provisions under the Bankruptcy and Insolvency Act which do make room for resuscitation vs devolution. There is also the option of a restructuring without court protection which requires a solid plan, quick action, and good communication/negotiation with major creditors and shareholders.
Further, careful analysis needs to be undertaken to ensure that there is a viable business to restructure into. The CCAA only works where the potential to create a going concern exists - it won't rescue a broken business model, poor assets or situations where there is a lack of ongoing leadership and financial support. In those cases, given the not insignificant costs of a CCAA restructuring, the Bankruptcy and Insolvency Act is likely to provide the greatest return to stakeholders (as it is a much quicker process).
So, my advice to the people responsible for Canadian cannabis companies – that’s directors, CEOs, CFOs, General Counsels and their outside counsel and auditors – is to take an honest look at your business right now and look for these red flags:
Looming debt repayment obligations due sometime in the next 12 months for which you don’t already have a plan to repay or refinance in place
Negative working capital (or likely to turn negative due to bad debt write offs and inventory write downs)
Contracts that just do not make sense for your business any longer and are draining your financial reserves.
These are clear signs that the CCAA could be right for you. Consult an insolvency lawyer or your auditor for advice.