Cannabis businesses and insolvency – a whole new frontier

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The legal cannabis industry is a relatively new addition to the Canadian economy since its introduction in November 2018. Until December 2019 there had been very few insolvency proceedings commenced by cannabis companies but 2020 has seen at least 6 such insolvency proceedings ranging from receiverships to BIA proposal proceedings to CCAAs. With the onslaught of the COVID-19 pandemic and the economic instability it has caused, it is an unfortunate reality that insolvency proceedings will likely be a necessity for more cannabis businesses.

Like most new additions, the legal cannabis industry has its own unique requirements that have created legal and procedural gaps that insolvency practitioners and the courts have been left to grapple with.

Licensing Obstacles

One such requirement involves licensing requirements. Cannabis companies are very heavily regulated and must obtain licences from the federal government – Health Canada and CRA, which each require their own licences and protocols to be followed – the provincial government – which requires and controls retail licences – and the municipal government – which requires and controls business permits. Of particular relevance to insolvency professionals and proceedings is that Health Canada will not grant a licence without the key people who are employed by that cannabis company obtaining security clearances. These key people are necessary in order to maintain the licences, which are not transferable or assignable.

This generally means that insolvency professionals are unable to take possession of the cannabis assets as they aren’t able to transfer the licences nor are temporary licences available at this time. Any insolvency professional who becomes involved with a cannabis business, whether as receiver, trustee or monitor, will need to work with the various regulatory bodies and key employees to be able to deal with the assets. If the licences are not maintained, then the cannabis products must be destroyed.

Help for Cannabis Companies Facing Financial Crisis

If you are the owner of a cannabis company facing insolvency, we can help. Contact us to discuss your situation and we can review your options and help you sort out your next steps.

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