Corporate Insolvency activity remains level despite Covid-19 has been saved
Corporate Insolvency activity remains level despite Covid-19
The total number of corporate insolvencies recorded year to date (YTD) as at 30 September 2020 stands at 431, according to the latest insolvency statistics published by Deloitte. This represents only a marginal decrease of 1.8% from the same period in 2019, when the total number recorded was 439.
Commenting on the figures, David Van Dessel, Partner, Financial Advisory at Deloitte said, “State-backed initiatives to support struggling companies affected by the Covid-19 crisis, as well as creditor forbearance, including forbearance from the banking sector, have played a major part in preventing an early surge in corporate insolvencies.
However, it is widely accepted that the Covid-19 crisis will extend into 2021 and ultimately perhaps beyond the limits of creditor forbearance and state supports. In view of this, the advice for company directors is to remain alert to the financial position of their Companies and to ensure they are ready to initiate a timely debt restructuring strategy when faced with the prospect of insolvency.”
Age profile analysis
22% (95) of the insolvencies recorded during the first three quarters of 2020 relate to companies less than five years old, 21% (91) are in the 5-10 years bracket, 32% (137) are in the 10-20 years bracket, 9% (41) are in the 20-30 years bracket, 8% (34) are in the 30-40 years bracket and 7% (33) are over 40 years old. Similar to previous periods, the age profile indicates that there has not been a significant spike in the 0-5-year time period, which is generally considered to be the “start-up” phase. However, the unwelcome but similar prevalence in the 5- to 10-year bracket might suggest that there is equal vulnerability between those two timelines, perhaps with the 5- 10-year time period more at risk from over-expansion with constrained capital resources.
Creditors’ Voluntary Liquidation (CVL) accounted for the majority of insolvencies, as it has done in previous years. 318 CVLs were recorded up to Q3 YTD 2020, representing 74% of overall insolvency numbers (280 / 64% in Q3 YTD 2019).
Corporate Receivership has experienced a steady decline in recent years and this continued into the first three quarters of 2020, when 52 companies (12% of total insolvencies) entered receivership. This compares with 84 (19%) recorded in Q3 YTD 2019. Even though the number of receiverships has continued to decline on a year-to-year basis, Q3 2020 has seen an increase in the number of appointments, to 25 from 12 instances recorded in Q2 2020.
The figures would suggest that financial institutions holding charges over distressed corporate assets are cautiously moving to enforce on their charges. There is no indication that this recent increase in debt recovery activity is a result of defaults associated with the impact of the pandemic itself, and it is more likely to be a resolution of a backlog of “pre-lockdown cases”, which would have arisen due to a general moratorium on enforcement during Q2 2020.
The 2020 insolvency statistics recorded a quarter on quarter decrease in the number of Court liquidation appointments, from 20 appointments in Q2 2020 to 12 in Q3. A decrease has also been recorded on a year-to-year basis, when comparing the 37 instances recorded up to Q3 YTD 2020 to the 50 cases documented up to Q3 YTD 2019.
Reduced activity in 2020 may be associated with the impact of the initial lockdown and Q3 numbers would also be impacted by the High Court vacation period of August and September. Company law has also been amended to increase the threshold of debt in a petition to wind to €50,000 from €10,000 in respect of individual debts (or €20,000 in the case of multiple creditors acting together).
An initial review of the figures would indicate that the number of examinerships in Q3 2020 has increased significantly, from two instances recorded in Q2 2020, to 17 in Q3 2020. However, 12 of the 17 companies that entered examinership in Q3 2020 are part of the same group, namely The Cara Pharmacy Unlimited Company. Therefore, despite its proven effectiveness as a rescue option, the level of examinership during 2020 continues to remain disappointingly low.
Geographically, the highest number of corporate insolvencies in the period was recorded in Leinster, with 71% of total appointments, consistent with the same period last year. Munster had 17% of appointments, Connaught 7% and Ulster 5%. Compared to the same period in 2019, the number of appointments per region has fluctuated, especially in Leinster and Munster. In Leinster, the total number of Corporate insolvencies has increased from 273 up to Q3 YTD 2019, to 305 for the same period in 2020. However, in Munster the number decreased from 107 in 2019 to 75 as at Q3 2020. Connaught also recorded a decline in activity, from 41 in 2019 to 28 as at Q3 2020, while Ulster recorded a slight increase with 23 insolvencies recorded in 2020, compared to 18 in same period in 2019.
Looking at the Top 5 Industry sectors, the service industry once again recorded the highest number of corporate insolvencies in Q3 YTD 2020 with 154 appointments (36% of total insolvencies) with financial services companies accounting for the largest number with 57 instances. On a year-to-year basis, the insolvencies recorded in the financial sector have increased only marginally, with 50 incidences recorded in Q3 YTD 2019.
The health, fitness and beauty industry featured again prominently with 39 insolvencies recorded during the first three quarters of 2020. Real estate agencies and property services companies recorded 17 insolvencies as at Q3 YTD 2020, representing a significant decrease from the same period in 2019, when 29 insolvencies were recorded. This decline is in line with the reduction in the level of insolvencies recorded within the construction sector.
The retail sector recorded the second largest number of insolvency appointments in Q3 2020, with 88 companies entering an insolvency process. Compared to the same period in 2019, the number of insolvencies in the retail sector has increased by 40%.The hospitality sector recorded the third highest level of insolvencies with 70 incidences representing 16% of the total number. This is marginally higher than the level of insolvencies recorded in that sector during the same period in 2019 (14% of total). Out of the 70 cases recorded up to Q3 2020, more than half (54%) related to companies operating in the food services sector (i.e. restaurants, catering companies etc.).
Furthermore, 20 hotels and inns (29%) went through an insolvency process so far in 2020 and 17% (12) insolvencies were recorded for companies operating as bars or pubs.The construction industry is fourth with 45 insolvencies (10% of total). The level of insolvencies in this sector has decreased notably year on year, the numbers dropping by 38% compared to Q3 YTD 2019 (72). Lastly, the manufacturing sector has recorded 25 incidences up to Q3 2020, remaining constant on a year-to-year basis, as the numbers did not change compared to the same period in 2019.
Currently the country is under Level 5 lockdown, which is having a major impact on many business sectors, particularly, the hospitality and retail sectors and all of their suppliers. Interestingly from a statistical point of view, there has only been a marginal increase in insolvency activity for the hospitality sector when
compared to the same period in 2019, which would suggest the insolvency ‘fall
out’ anticipated in that sector, arising from the financial impact of the
various lockdowns, has yet to materialise.
However, the retail sector has seen a 40% increase in activity in 2020, which might suggest that the retail sector was in a more vulnerable position when it was hit with the lockdown.
Both sectors are frantically endeavouring to enhance, and in some cases commence, their online presence, with traditional sit-down restaurants having to pivot urgently to a delivery model and with independent retailers assessing what they can do online to bolster their businesses. Clearly, with such dramatic and rapid changes, there will be winners and losers, so over time one would have to anticipate that there would be an increase in insolvency activity in both the hospitality and retail sectors in the medium term.
On a general note, while the GDP performance of the country has been reported to be resilient, the current level of unemployment must be a cause for concern for domestic demand for goods and services and how that will affect Ireland’s SME sector in the medium to long term.