Business Insolvencies Surge to Highest Levels Since 2008 Financial Crisis

Business insolvencies in Canada have reached alarming levels not seen since the 2008 Great Recession, with an 87.2% year-over-year increase in the first quarter of 2024. According to data from the Office of the Superintendent of Bankruptcy, the total number of business insolvencies hit 2,003, with 1,599 of those being bankruptcies. This marks the largest year-over-year surge in business insolvencies in 37 years of records.

Why this matters: The surge in business insolvencies has far-reaching implications for the overall economy, threatening job security and consumer spending. If left unchecked, this trend could lead to a ripple effect, impacting entire industries and exacerbating the economic challenges faced by individuals and families.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) attributes this distressing trend to a combination of factors, including pandemic debt, higher costs, declining consumer spending, and rising interest rates. Small and medium-sized businesses are particularly vulnerable, with fewer options for restructuring, leading some to shut their doors instead of pursuing formal insolvency proceedings.

André Bolduc, chair of CAIRP, highlighted the challenges businesses face, stating,"Now that the CEBA loan deadline has passed, businesses have the added financial burden of monthly loan repayments and their accompanying interest payments. These new debt obligations may make the future more difficult to navigate. "Bolduc also warnedof a"perfect storm of economic challenges"brewing, with high mortgage renewal rates, soaring rental prices, and elevated costs of everyday necessities compounding the financial strain on Canadians.

Consumer insolvencieshave also risen sharply, reaching their highest level since the last pre-pandemic quarter. In the first quarter of 2024, consumer insolvencies totaled 33,885, a 14% year-over-year increase, with the majority being proposals. Bolduc emphasized that"the risk of insolvency still looms large for many Canadians,"as they grapple with insurmountable debt burdens.

The surge in business insolvencies is not limited to Canada. In England and Wales, company insolvencies increased by 10% in the third quarter of 2023 compared to the same period last year, with 6,208 registered company insolvencies between July and September. Construction and real estate firms have been hit particularly hard by rising interest rates, with a 25% hike in businesses in 'critical' financial distress.

In the United States, bankruptcy filings surged by 18% in 2023, reaching 445,186, driven by higher interest rates, tougher lending standards, and the continued runoff of pandemic-era backstops. Commercial Chapter 11 business reorganization filings rose by a staggering 72% to 6,569 from 3,819 in 2022. Michael Hunter, vice president of Epiq AACER, noted that the increase in filings was anticipated as bankruptcy volumes normalize to pre-pandemic levels.

The alarming rise in business insolvencies across Canada, the United Kingdom, and the United States serves as a stark reminder of the ongoing economic challenges faced by businesses in the wake of the pandemic. With over 40,000 businesses in critical distress in the UK and nearly half a million bankruptcy filings in the US, it is evident that the road to recovery will be long and arduous. As interest rates remain high and debt burdens continue to mount, it is crucial for governments and financial institutions to provide support and guidance to struggling businesses navigating these turbulent times.

Key Takeaways

• Canada's business insolvencies surge 87.2% YoY in Q1 2024, highest since 2008.
• Small and medium-sized businesses are most vulnerable due to pandemic debt and high costs.
• Consumer insolvencies in Canada rise 14% YoY, reaching highest level since pre-pandemic.
• Business insolvencies also surge in England and Wales (10%) and the US (18%).
• High interest rates, debt burdens, and lack of support threaten business recovery.