The legalization of recreational cannabis in 2018 opened the doors for Canada to be a first-mover in what analysts predicted would be an exciting and lucrative industry. Although the cannabis industry has experienced significant business growth, recent headwinds have resulted in some cannabis companies starting to encounter short-term liquidity challenges as they grow their operations.
Faced with such challenges, licensed cannabis producers need to be mindful of restructuring issues and challenges, especially since the legislative environment, at both the federal and provincial levels, is new territory for business people and their professional advisors.
The legal and regulatory landscape varies across the provinces, which can be of particular concern to companies operating in multiple jurisdictions. The federal government, through Health Canada, controls licensing throughout the country. However, the individual provinces control the distribution of cannabis within their respective region and the applicable provincial laws differ considerably throughout the country.
This legislative complexity compounds when the fragmented cannabis regulations intersect with the federal insolvency legislation. The value and method by which the assets of a cannabis business may be realized can vary considerably, from one region to the next.
Consider the value of a cannabis licence. Some jurisdictions, like BC and Saskatchewan, designate licences as a form of personal property under legislation. This designation as property may allow the company to pledge the licence as security for financing. However, licences in Ontario or Alberta are not designated as personal property in the same way, so the value of the cannabis licence as security is less clear. The result is that lenders in some jurisdictions may be able to take security in and realize upon licences in some jurisdictions but not others.
In the event of a restructuring, a receiver or bankruptcy trustee may also face challenges realizing on a company’s cannabis inventory, depending on which provincial laws apply. Typically, a trustee in control of the sale and liquidation has the same powers as the debtor company had while solvent. This may mean that the trustee can sell the company’s inventory in accordance with applicable laws to recover the value of the product. But the trustee will have to find a buyer, which may prove difficult in some jurisdictions. In the limited instances of cannabis insolvency thus far, sources suggest that Health Canada has refused to buy a bankrupt company’s inventory. Therefore, the only option may be to sell to another licensed retailer or provincial government intermediary. Finding a purchaser may be easier in jurisdictions where private wholesale is allowed, but may prove more difficult in provinces like Ontario and Alberta where a government intermediary has the exclusive right to distribute cannabis to retailers.
In the context of restructuring, the full ability to realize on a licensed producer’s assets remains relatively untested. In the face of the new and fragmented legislative regime, care must be taken to gain the most value for a licensed producer’s unique assets. Given the complexity of the legislative landscape, cannabis producers and their stakeholders would be most likely to benefit from more flexible restructuring tools available under the Companies’ Creditors Arrangement Act (Canada) (the CCAA), rather than the more commonly used tools available in a bankruptcy, proposal or receivership. In contrast to bankruptcy or receivership, a restructuring under the CCAA would permit the company to remain in possession of its assets, while its existing management team remains in control of the business with a view to preserving the business if possible. The greater degree of influence and control potentially available to the restructuring cannabis company in a CCAA scenario may make it a preferable vehicle for the company in the event of an insolvency.
As the legal cannabis market is relatively new, there have been few “test cases” for restructuring.