“Cannabis enterprises have been forced to consider their options when faced with insolvency. Especially in the U.S., these options are limited by the inability of cannabis enterprises to obtain relief under the United States Bankruptcy Code.”
On 31 March 2021, the State of New York legalized the use, possession, and growth of cannabis by adults. Within the United States, cannabis is now legal in 16 states including Washington D.C., with legalization taking effect in two more states, Virginia and New Mexico, later this year. This state-level trend toward legalization in the United States continues even though cannabis remains illegal at the federal level.1 However, in Canada, cannabis has been legal at both the federal and provincial levels since 2018.
The opening of these markets has generated significant investment on both sides of the U.S.-Canadian border. In January 2021 alone, North American cannabis companies reported more than $1.6 billion in capital raises.2 Despite this activity, numerous cannabis enterprises continue to fail or are currently experiencing financial distress. In many cases, this distress has resulted from oversaturation and a glut of market participants (legitimate and not) or an inability to keep up with (or a mistiming of) an ever-changing regulatory environment in both Canada and the United States. It may also be a sign that the legal cannabis retail market has reached a peak, as reports show potentially sustained declines in month-over-month retail sales of cannabis products.3
Against this backdrop, cannabis enterprises have been forced to consider their options when faced with insolvency. Especially in the U.S., these options are limited by the inability of cannabis enterprises to obtain relief under the United States Bankruptcy Code.4 For multi-state operators doing business in the U.S. and Canada (MSOs), there is therefore no certain process for effecting a compressive cross-border restructuring or liquidation.
The oft-posited solution to this problem is that the MSO first obtain insolvency protection in Canada and then seek recognition of the Canadian proceeding in the U.S. under Chapter 15 of the Bankruptcy Code. To date, this proposed solution remains untested. And while such an approach may be possible in theory under Chapter 15 itself, recent U.S. court decisions involving cannabis debtors under other chapters of the Bankruptcy Code have only created more uncertainty as to whether this Chapter 15 “backdoor” is ever possible in practice.
There is no doubt that the first step – initiation of a Canadian insolvency proceeding – is not only possible, but anticipated, under Canadian law. Indeed, financially distressed cannabis enterprises have increasingly relied on the Canadian insolvency and rehabilitation scheme to address their liquidity and operational issues. For example, in 2016, two years prior to cannabis legalization under federal law, Peloton Pharmaceuticals Inc., a developer and distributor of pharmaceutical-grade cannabis, successfully reorganized under Canada’s Bankruptcy and Insolvency Act.5 In 2018, Ascent Industries Corp. followed by obtaining creditor protection, and ultimately selling its assets, under the Companies’ Creditors Arrangement Act.6 Since then, more than 20 major cannabis enterprises – including at least 10 publicly traded companies – have sought protection under the BIA or CCAA.7
Published: July 19, 2021
Founder & Interim Editor of L.A. Cannabis News