Insolvencies continue to decrease in 2019 but companies reacting too late for recovery options
State-backed advisory and advocacy services could be considered to provide support to corporates facing insolvency
The total number of corporate insolvencies recorded in Ireland in 2019 was 568, a notable decrease of 26% from the total of 767 in 2018, according to the latest insolvency statistics published by Deloitte. When compared with 2012, during which 1,684 insolvencies were recorded, the 2019 figures represent a 66% decrease in corporate insolvencies over the past seven years.
The majority of corporate insolvencies occurring in 2019 were in the services sector, representing 37% of the total, particularly in financial services (12%). This was followed by the construction industry (17%) and the retail (15%) and hospitality sectors (14%). The manufacturing sector accounted for 7% of insolvencies in 2019, a decrease of 30% from 2018; similarly, the wholesale sector made up 3% of the total, a decrease of 45% year-on-year. Conversely, the real estate and property services sector saw an increase, with 7% of the total in 2019, up from 2% in 2018.
Commenting on the figures, David Van Dessel, Partner, Financial Advisory at Deloitte said,
Whilst Ireland has a robust legal system with a variety of restructuring options for struggling companies, including our important SME sector, the very high prevalence of liquidation and receivership continues to show that such tools are not being utilised by directors of struggling companies. It is vital to ensure that directors of Irish companies are equipped to take the necessary steps to either avoid insolvency, or to at least mitigate its impact on creditors and other stakeholders.
To this end it is worth considering a state-backed support service to offer free and impartial guidance is worthy of consideration. Whilst Ireland currently provides advisory and advocacy services for individuals in financial difficulty such as MABS, no such facility exists for corporates facing insolvency. Furthermore, at a European level, the “Early Warning Europe” Initiative is already in operation in several EU countries; the introduction of such a scheme in this jurisdiction would likely have a positive impact on companies in financial difficulty and would help to promote a culture of corporate recovery.
Whilst trading difficulties caused by a range of external and internal factors continue to play a notable role in corporate insolvency numbers across all sectors, legacy debt issues and over-exposure to the property market and property crash of 2008 continues to be a prominent feature.
From an age profile perspective, 22% (122) of all insolvencies recorded during 2019 relate to companies less than five years old, 23% (133) are in the 5-10 years bracket, 26% (149) are in the 10-20 years bracket, 16% (92) are in the 20-30 years bracket, 6% (35) are in the 30-40 years bracket and 7% (37) are over 40 years old.
“The age profile indicates that the majority of insolvent companies are in the 5 to 20 years old bracket rather than in the start-up sector,” said Van Dessel. “This might suggest that a cohort of companies encounter financial difficulty when endeavouring to expand an established small business. Clearly there is a myriad of factors at play but from experience, expanding a business can often lead to a severe stretch on the financial resources of a company, particularly for SMEs, with directors endeavouring to fund the expansion from current working capital as they do not have the ability or the appetite to raise the necessary finance from external sources. In such scenarios, it is fully understandable as to why a business owner would be reluctant to reduce their equity holding but such a strategy does incur additional risk when attempting to expand a business.”
The Creditors’ Voluntary Liquidations (CVL) process accounted for the majority of insolvencies in 2019, as it has in previous years. A total of 364 CVLs were recorded in 2019 representing 64% of overall insolvency numbers (down from 70% in 2018).
Although the corporate receivership process, the second most common type of corporate insolvency recorded, had previously seen a decline in recent years, its incidence has remained broadly constant as a percentage of overall insolvencies, with 94 (16%) recorded in 2019. This compares with 125 (16%) recorded in 2018.
The level of High Court wind-up petitions has increased year on year from 8% recorded in 2018 to 14% in 2019. Of these, a liquidator was ultimately appointed in 70% of cases.
The number of examinership appointments in 2019 represents 3.6% of the overall figures and is in line with 2018 levels.
Geographically, the highest number of corporate insolvencies in the period was recorded in Leinster, with 63% of total appointments. This is consistent with 2018 when Leinster had 66% of all appointments. In 2019, Munster had 24% of appointments, Connaught 9%, and Ulster 4%. Compared to 2018, the number of appointments has dropped in all regions, which is in line with the overall fall in corporate insolvency activity. In Leinster, the total number of corporate insolvencies dropped by 31% from 518 in 2018 to 358 in 2019; in Munster the number decreased from 152 in 2018 to 134 in 2019 (12%); Connaught recorded a significant decline from 74 in 2018 to 54 in 2019 (27%); while Ulster remained relatively constant with 22 insolvencies recorded in 2019, compared to 23 in 2018.
Van Dessel concluded:
It is evident that corporate insolvencies are continuing in a downward trajectory, which we expect to continue in 2020. This is not surprising given the current economic climate, but what has not changed is a continued reluctance within the business community to adopt corporate recovery options when faced with significant financial challenges. While taking steps to engage in such a process is very difficult for the business owner, companies have the best chance of avoiding liquidation or receivership if the company directors act early, despite their difficult circumstances. With less than 4% of our corporate insolvency activity falling into the corporate recovery bracket we are lagging well behind our peers in the UK and the USA.
It is likely that as we move into 2020 and beyond and as the economy continues to grow, legacy debt insolvencies will continue to be displaced by more ‘traditional’ business failures, rooted in factors such as poor trading performance, weak cost control and inadequate working capital management. As a result, it is important that directors of companies facing such difficulties seek appropriate advices in a timely fashion in order to be in a position to implement viable turnaround strategies.
In 2020 there are number of widely reported potential risks to the Irish economy, which is accepted as being an open economy exposed to global factors, including trade wars and geopolitical risks. Domestically the dark clouds of Brexit remain, although the ultimate impact cannot yet be determined and there is the continual advance of disruptive technologies, which while being positive for the deliverer of the disruptive technology, can have negative impacts on incumbents, for example, the retail sector. Against this backdrop, the introduction of a support service would be very welcome.
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