Any business could face financial difficulties at some point. While the reasons for this can vary widely, there are ways in which a business might approach the matters in order to remain solvent. This is illustrated in the situation faced recently by a Canadian steel company.
Essar Steel Algoma recently announced that it plans to seek protection under the Companies’ Creditors Arrangement Act. There are certain requirements that a business must meet to be eligible for the CCAA. In addition to having indebtedness of at least $5 million it must also be insolvent on a balance sheet or liquidity basis.
According to Essar’s president, there are multiple reasons why the company needs to seek creditor protection. One of the largest is the lack of iron ore pellets. Last month, several of the suppliers of the iron ore pellets terminated their long-term supply agreements. Naturally, as a part of that cancellation, they stopped delivering the product. Essar characterizes that cancellation as a “wrongful cancellation” and plans on taking legal action.
As a result of that contract cancellation, the company had to obtain iron ore from a more expensive supplier, even though, the price of steel is the lowest it has been in six years.
Essar will continue to produce steel while going through the restructuring and the president indicates the business will exit the process stronger than before.
Financial issues likewise do not necessarily mean the end of a business. Working through the insolvency process can often result in a successful restructuring.