September 5, 2017

Although the headline in this (linked) Reuters article refers to “bankruptcy protection” that is not quite the case.  The Cash Store actually filed a Companies’ Creditors Arrangement Act (“CCAA”) proceeding which is a court driven restructuring process administered by a trustee in bankruptcy.  In order to file a CCAA the company must owe its creditors more than five million dollars and generally meet the criteria of being insolvent – being unable to pay its obligations as they become due. 

The aim of invoking a CCAA proceeding is to facilitate the restructuring of the company and allow it to carry on business.  Sometimes that business is reformed by selling off or consolidation less profitable operations.  In any event, the CCA allows the court to provide an initial “stay of proceedings” which prevents creditors from taking or continuing with legal action while the company attempts to come up with a viable repayment plan.  The initial stay period is only for thirty days but may be extended by the courts for much longer periods allowing the company to develop its plan

Usually the eventual plan will allow the company to receive major concessions from its creditors which typically include the abatement of interest and the reduction of the face value of the debts and terming out repayment arrangements.  If the CCAA were to fail (being rejected by the creditors) then the company would undoubtedly end up filing a formal bankruptcy proceeding that would allow the trustee to liquidate its assets and distribute the resulting funds amongst the company’s creditors

In our view the CCAA proceeding makes a lot of sense to all affected parties in this situation.  CCAA provides a mechanism for reorganization, allows employees to maintain jobs, provides an ongoing service to a marginalized sector of the community and allows for landlords and other creditors to continue to be paid for services rendered.   By contrast if the Cash Store went bankrupt it would no longer be able to lend money and it would be more challenging for the trustee to recover monies already out on loan.

Collecting money owed to an insolvent company is always more of a challenge than collecting money owed to a company that is not facing financial distress.   This may be particularly true of the Cash Store due to the nature of its operations.   The Cash Store is essentially a high street pay-day loan company, a lender of last resort, its clients are typically people who have poor credit ratings and are denied access to other mainstream credit facilities.   Basically the clients will often have problems repaying their loans. The Cash Store and its competitors make profits from the high interest charges and loan deferral fees.

If a bankruptcy did result from a failed proposal offering it is doubtful that the trustee or creditors of the estate would be willing to spend too much time and money on collecting many of the outstanding receivables. The amounts are relatively small, have little or no security and the volumes are huge with a very low chance of full recovery.  In short collecting the type of account we have described would be a logistical nightmare and the cost to benefit would be difficult to estimate.

Trying to continue the operations with a reduced debt load seems to make a great deal of sense.  This will be an interesting case to follow to see what the company will look like as it emerges from the process.   It has been reported in the news that the company’s stock has been in decline for a few years, likely affected by an adverse economy and changing regulations.  Stay tuned to the unfolding story. 

CCAAs can be a highly effective tool in the arsenal of bankruptcy trustees, just one more option for restructuring distressed companies.  In time we will see if the Cash Store maintains or sells off some of its operations or reforms into a new business model altogether.