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November 2011, vol. 13, no. 3 - Business Insolvencies
Many businesses fail because of external shocks and events that are beyond their control. Coming out of the recent financial crisis and the ensuing recession, Canadian businesses have faced many challenges, yet unexpectedly there has been a remarkable decline in the number of business insolvencies.Footnote 1
Figure 4 shows the number of business insolvencies in Canada since the first quarter of 2007. Year-over-year quarterly insolvency levels have been steadily decreasing since 2007, which is different than what has happened in other major economies. The situation in Canada was somewhat unique as the year-over-year decline in business insolvencies continued during the 2008–2009 recession (between the third quarter of 2008 and the second quarter of 2009). This is due, in part, to Canadian SMEs' orientation toward the domestic market (only 9 percent of SMEs were exporters in 20072) and to the fact that domestic demand shrank at a lower rate than export volume during the recession (0.5 percent versus 4.5 percent, on average).
[Description of Figure 4]Source: Office of the Superintendent of Bankruptcy Canada (www.osb.ic.gc.ca).
In the second quarter of 2011, there were 1257 business insolvencies in Canada, a decline of approximately 10 percent from the same quarter in 2010. Given this trend, the Canadian economy is well placed to post the tenth consecutive annual reduction in business insolvencies.
With the exception of the utilities sector, all goods-producing industries experienced a decrease in the number of business insolvencies in the second quarter of 2011 compared with the same quarter in 2010. In services-producing industries, the largest year-over-year quarterly declines took place in management of companies and enterprises, real estate and rental and leasing, and retail trade. At the same time, finance and insurance, and health care and social assistance experienced year-over-year quarterly increases in business insolvencies.
On an encouraging note, industries that typically have the highest insolvency rates are performing well. From the second quarter of 2010 to the same quarter of 2011, the number of insolvencies in construction, manufacturing, retail trade, and accommodation and food services — industries that have historically accounted for over half of all business insolvencies — decreased by 7 percent, 8 percent, 21 percent and 5 percent, respectively, corresponding to an overall decrease of 10 percent.
Footnote 1 Insolvencies include both proposals (i.e., propositions to creditor to restructure) and bankruptcies. Bankruptcies account for approximately 65 percent of insolvency cases.
Footnote 2 Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
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