Corporate insolvencies on the rise after pandemic pause

The number of business failures has risen sharply this year after a precipitous decline in corporate insolvency rates during the pandemic due to the availability of various government supports. Meanwhile, just 22 companies have availed of the new rescue procedure for small businesses, a Deloitte report has highlighted, a take-up rate of only 4 per cent.

Some 500 company insolvencies have been reported in the year so far, an increase of 29 per cent from 2021, when a total of 401 insolvencies were reported for the full year, the professional services giant said on Monday.

David Van Dessel, financial advisory partner at Deloitte, said the figures show the economy is moving towards “pre-pandemic levels of insolvency activity, given the artificially low levels of insolvency in recent years”.

Business failure rates declined to multi-decade lows during the emergency phase of the Covid-19 pandemic due to the roll-out of government supports, including the Employment Wage Subsidy Scheme. These measures helped prop up businesses that would otherwise have failed because of the impact of public health restrictions on trade.

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However, the supports also created “zombie companies”, businesses that were unviable at the outset of the pandemic but kept alive by emergency funding as well debt forbearance. A wave of insolvencies has been forecast for the end of 2022 and the beginning of 2023 as the Government’s tax debt warehousing scheme draws to its conclusion.

There have been 371 creditors’ voluntary liquidations in 2022 so far, 72 per cent of the total, Deloitte said, compared with just 261 last year, a 32 per cent increase.

It is undeniable that the number one factor in a successful turnaround is early action by directors

—  David Van Dessel, Deloitte

The courts have appointed 29 liquidators this year, a decrease of 34 per cent from 44 in 2021. However, Deloitte said the 2021 figures are skewed by 27 court liquidations that were all related to the same company in the fourth quarter of 2021.

“Overall, the general outlook is a ‘return to norm’ in terms of the statistics we are currently seeing,” said Mr Van Dessel. “But I anticipate we will surpass that norm in the near future with increased levels of insolvency activity.”

Meanwhile, the number of examinerships to date in 2022 has declined “considerably”, Deloitte said, to just 10, compared with 18 in 2021.

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However, when examinerships are combined with the 22 companies that have availed of the new Small Companies Administration Process (Scarp) – rolled out this year as a more cost-effective restructuring alternative to examinership – the total number of companies restructured in 2022 rises to 32 this year, a “significant increase” of 78 per cent, Deloitte said.

Scarp allows eligible companies to work out a rescue package and payment arrangements with creditors including the Revenue Commissioners. So far, the process has had a success rate of more than 70 per cent, with some 280 jobs saved. However, just 4 per cent of eligible companies have availed of it, Deloitte said.

“There are undoubtedly several factors influencing the present take-up, with a broad lack of awareness of the process,” said Mr Van Dessel. “A dedicated marketing campaign specifically targeting micro-businesses would be a real benefit in highlighting the existence of the process.”

He said directors are “strongly encouraged” to seek professional advice if they are considering restructuring.

“It is undeniable that the number one factor in a successful turnaround is early action by directors,” he said. “Directors are also urged to ensure they engage an experienced and licensed insolvency adviser.”