Business insolvencies in January were 55 per cent higher than the same month a year ago, and 7.5 per cent higher than January, 2020.Nathan Denette/The Canadian Press
The era of a historically low number of business insolvencies has come to an end, and a new epoch of business closures may have just begun, new data suggest.
The federal Office of the Superintendent of Bankruptcy reported Wednesday that business insolvencies in January were 55 per cent higher than the same month a year ago, and 7.5 per cent higher than January, 2020.
Bankruptcies and proposals, which are two legal avenues for dealing with unmanageable debt, are now higher than they were before the pandemic began. This ends an era of low numbers of business closings, which seemed at first glance to be unusual given the widespread lockdowns and economic disruption of the past three years.
Economists had credited federal subsidies and low interest rates for helping prop up enterprises for an extended period of time, but both those factors have now ended and a period of high inflation and high interest rates may finally be biting into businesses’ bottom lines.
“There is a lot of damage from COVID that we’re catching up on now,” said David Lewis, a licensed insolvency trustee and a spokesperson for the Canadian Association of Insolvency and Restructuring Professionals.
The federal data show there were 331 business insolvencies in January, compared with 213 in January of 2022. The bulk of insolvencies were in the accommodation and food services, construction, retail and manufacturing sectors.
Randall Bartlett, senior director of Canadian economics at Desjardins Group, said interest rates have hit low-margin businesses such as restaurants and stores hard because many of them had to take on debt to survive the pandemic. That includes the government’s Canada Emergency Business Account loans, which businesses must repay by Dec. 31 in order to have part of the loan forgiven.
“As we move forward, those are going to continue to be challenging for companies that did take those loans during the pandemic to bridge to the other side,” Mr. Bartlett said.
As well, construction has slowed because interest rates have tamped down the housing market, especially for presales.
Sohaib Shahid, director of economic innovation at the Conference Board of Canada, said the Bank of Canada only began to increase interest rates a year ago, and those higher rates usually take 18 to 24 months to have an impact on the economy. With rates expected to remain elevated for some time, he said he expects insolvency numbers to continue trending upward.
“We still haven’t fully felt the effect,” Mr. Shahid said.
The trend in insolvency figures lines up with Statistics Canada’s measurement of the total number of active businesses. After the initial shock of the first wave of lockdowns, the number of active businesses climbed upward until last fall, when it started to drop. Figures for November, which were released last week, showed the largest drop yet, of 4,000 businesses, which was split across many industries. The number of new businesses opening was also lower than the prepandemic average.
Consumer insolvencies have also been trending upward, though not as quickly as businesses. In January, 8,735 people filed for insolvency, an increase of 33 per cent over the same month last year.
Most consumers filed proposals, which are a legal option to offer creditors a partial debt repayment or a longer timeline for repaying. Most business filings, however, were for bankruptcies.
Mr. Lewis said one reason business owners are more inclined to opt for bankruptcies is the higher degree of finality. “The stress of trying to carry on is quite exhausting,” he said. “So having a way out of it, such as a bankruptcy, can close that chapter in their lives.”
Mr. Shahid said one silver lining of the numbers is that they may indicate a reckoning of sorts for unproductive companies that had been limping through the pandemic. Getting rid of some of these companies, sometimes referred to as zombies, could be good for the economy, he said.
“The benefit of this might be that we see an increase in economic productivity as some of these weaker firms, these zombie firms, leave the market.”