Two years into the pandemic, policymakers struggle to strike a balance between mitigating the ongoing human costs of the crisis and exacerbating the financial strain caused by economic support measures. The 2022 World Development Report (Report) considers the central role that finance will play in enabling countries to recover economically from the pandemic, which in 2020 caused the global economy to shrink by approximately 3% and led to the largest single-year surge in global debt in decades. In the pages that follow, we explore the Canadian application of two key themes emerging from the Report.

  • A sectoral analysis of insolvency activity is insufficient. Problems in one sector can have repercussions for the wider economy through multiple, mutually reinforcing channels that connect the financial health of households, firms, financial institutions and governments. A retrospective analysis of Canadian insolvency data from 2021 highlights the need to consider this interconnection in our efforts to support economic recovery.
  • A sudden increase in non-performing loans and bankruptcies can pose a significant challenge for the capacity of insolvency systems to deal with insolvencies in a timely manner. As illustrated in the Petrowest decision and in our own data from the past decade, alternative dispute resolution (ADR) has emerged as a potential mechanism for addressing shortages in judicial resources in the Canadian and cross-border insolvency context.

2021 Insolvency Data: Analyzing the Numbers

Recently released data on Q4 2021 insolvencies indicate that business insolvencies rose 38.6% from Q3 to Q4, sparking much media attention. Overall, formal insolvency activity reached its lowest level in the summer of 2021 before rapidly picking up in the second half of 2021.

From a geographic perspective, the Q4 spike is largely the result of an increase in business insolvencies in Nova Scotia, Québec, Ontario and Saskatchewan. The increase can be partly explained by the removal of government supports; however, as discussed in our previous issue of Davies Insolvency Now, other factors such as inflation, changing consumer behaviour, supply chain disruption, interest rate increases, geopolitics and, more recently, Russia's invasion of Ukraine and corresponding international economic sanctions will likely contribute to a further upward trajectory in filing numbers.

The upward trend in filings is beginning to emerge. As shown in Figure 1, the number of business insolvencies (bankruptcies and proposals) was much lower in 2021 than in every quarter of 2019.

Figure 1: Total Business Insolvencies in Canada

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For example, the number of business insolvencies decreased by 19.2% in Q4 2021 compared with Q4 2019. And the number of business proposals decreased by 40% in Q4 2021 compared with Q4 2019. In contrast, the total number of business insolvencies in Q4 2021 increased by 9.7% compared with Q4 2020, and the trend holds true when the numbers are broken down into bankruptcies and proposals (as shown in Figures 2 and 3). Individual sectors generally follow the overall trends. However, the number of insolvencies in the accommodation and food services sector increased to 130 in Q4 2021, up from 111 in Q4 2019 (and 93 in Q4 2020).

Figure 2: Business Bankruptcies in Canada

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Figure 3: Business Proposals in Canada

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Bankruptcies and proposals in Canada each decreased by 15.7% in December 2021 compared with the previous month. Overall, the fourth quarter of 2021 looked very similar to the fourth quarter of 2019, suggesting almost a full-circle return to the picture at the start of the pandemic.

Business insolvencies for the 12-month period ending December 31, 2021, decreased by 11.0% compared with the 12-month period ending December 31, 2020. The two sectors that registered the biggest decrease in the number of insolvencies in 2021 were the retail trade and the accommodation and food services sector. Construction, and transportation and warehousing experienced the biggest increase in insolvencies. Utilities, information and cultural industries, educational services and public administration were the most stable sectors in 2021. Not surprisingly, finance and insurance, construction, retail trade and the accommodation and food services sector were the most volatile sectors in 2021.

Figure 4: Total Insolvencies in Most Affected Sectors, 2019-2021

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Figure 4 illustrates the specific timing of spikes and drops over the pandemic period to date. With a view to highlighting the overall trends in this period, Figure 5 demonstrates the trends by quarter.

Figure 5: Total Insolvencies in Most Affected Sectors, 2019-2021 (Quarterly)

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