Marginal increase for corporate insolvencies in 2020 despite economic challenges - Deloitte

“The Irish government has deployed a broad range of measures to support struggling companies and their employees throughout the COVID-19 crisis. Protection from creditors has also been improved through an increase in the minimum level of debt – €20,000 to €50,000 – necessary for a ‘winding up petition,’ from 21st August 2020.

“In addition to government supports, many struggling companies continue to
receive support from their banks, landlords and trade creditors, as the uncertainty caused by the pandemic has resulted in high levels of creditor
forbearance. Furthermore, the Office of the Director of Corporate Enforcement
has confirmed that it will have due regard to the impact of COVID-19 on companies who entered insolvency during the pandemic.

“The combination of all of these factors has, in our view, played a significant role in preventing a surge in insolvencies as company directors continue to attempt to weather the storm.

“Having said that, it is clear that 2021 will pose significant challenges for companies, particularly as we have entered a higher level of lockdown since January. It is difficult to foresee how long this level of restrictions will be in place, and we expect some level of restrictions to apply for the first quarter of this year. This will have an impact on companies and their ability to survive.” 

Insolvency Process

Creditors’ Voluntary Liquidations (CVL) accounted for the majority of insolvencies in 2020, as it has in previous years. A total of 427 CVLs were recorded in 2020, representing 74% of overall insolvencies, up from 364 (accounting for 64%) in 2019.

Corporate Receivership has decreased as a percentage of overall insolvencies, with 70 (12%) recorded in 2020, compared to 94 (17%) recorded in 2019, which equates to a notable year-on-year reduction of 26% in Receivership activity. The pandemic restrictions on commercial activity could explain this notable reduction.

The level of High Court wind-up petitions has decreased year-on-year from 14% of total insolvencies recorded in 2019 to 8% (44 incidences) in 2020. This may be as a result of restrictions introduced in respect of statutory demands and winding up petitions due to the COVID-19 pandemic, including protection
from creditors being improved through an increase in the minimum level of debt (€20,000 to €50,000) necessary for a ‘winding up petition’ from 21st August 2020.

The number of Examinership appointments in 2020 represents 6% of the overall figures and is broadly in line with 2019 levels (5%).

Van Dessel stated: “Directors are reminded that where a restructuring process is not available to them, perhaps due to insufficient capital, a Liquidation does not have to mean the end of the underlying business. Where there is a viable business within an unviable Corporate entity, with the assistance of an independent liquidator and subject to proper notice to creditors, it is possible for the business and assets of an unviable Company to be acquired from the Liquidator and incorporated into a new entity.”

Sectoral Analysis

The Services sector recorded the highest number of corporate insolvencies in 2020 at 225 representing 39% of total insolvencies.

Within the Services sector, Financial Services experienced 85 insolvencies – however 11 of these relate to a single group. When normalised for these 11 related companies, the level of Financial Services insolvencies stood at 75 (13% of total), which is only a marginal increase on 2019 figures, with 71 Financial Services insolvencies recorded. Financial services insolvencies include Holding Companies (24 insolvencies), Business and Management Consultancy Companies (14), Pension and Fund Management Companies (12) and Aircraft Leasing Companies (6).

Also within the Services sector, there were 40 insolvencies recorded in Health, Fitness & Beauty (7% of total insolvencies). This is an increase on 2019, which saw 26 insolvencies in this sector (5% of total insolvencies). Real Estate &
Property Services insolvencies decreased marginally from 37 (7% of overall
insolvencies in 2019) to 35 (6% of overall insolvencies in 2020).

Outside of the Services sector, Retail saw the second-highest number of insolvencies recorded at 103, representing an 18% increase when compared to 2019. “High street retail – which had already faced challenges due to changing consumer behaviour, a high fixed cost base and competitive pressure from online alternatives – was affected particularly badly by the pandemic,” said Van Dessel. “2020 saw a number of high-profile UK high street retail and department store brands failing, which resulted in their Irish operations entering insolvency processes.”

The Hospitality sector remained relatively constant when compared to 2019 with 88 insolvencies recorded in 2020, 15% of overall insolvencies. Of these, 49 (56%) related to companies operating in the food services sector (i.e. restaurants, catering companies etc.), 25 (28%) related to hotels and inns and 14 insolvencies (16%) were recorded for companies operating as bars or pubs.

The Construction sector saw 65 insolvencies in 2020 (11% of total), a decrease of 31% when compared to 2019, when 94 incidences were recorded (representing 17% of total). Commenting on these figures, Vincent Sorohan, Director, Real Estate Advisory at Deloitte said: “Unlike other sectors such as Hospitality and Retail, the Construction sector continued to operate effectively in line with public health guidelines once sites reopened in mid-May 2020, following the initial six-week shutdown. The outlook for the Construction industry as a whole for 2021 remains mixed, with some sub-sectors such as Housing, Logistics and Infrastructure expected to perform well, while the performance of others such as Commercial Office and Hospitality are likely to be adversely effected by the economic effects of the pandemic.”

The Wholesale sector (3% of total insolvencies) and manufacturing sector (6% of total) remained constant when compared to 2019 figures.

Van Dessel commented: “The sectoral analysis reinforces the fact that although the Hospitality, Retail and Health, Fitness & Beauty sectors have been at the forefront of the commercial impact of COVID-19 restrictions, this has not as yet resulted in a notable increase in corporate insolvencies in those sectors.”

What happens next?

What happens when the support ends?

“The latest insolvency statistics are likely to conceal the true level of corporate distress, particularly among sectors highly impacted by the pandemic, such as Aviation, Hospitality and Retail,” said Van Dessel. “There will likely be a delay and a resulting accumulation of corporate insolvencies, particularly for the companies affected who are benefiting from support measures and creditor forbearance, which are therefore surviving artificially in the short term. As government support measures are ultimately phased out and the limit of creditor forbearance is reached, the true extent of corporate insolvency will
become known.

“It is therefore vital that company directors take action as early as possible, to either avoid insolvency or to at least mitigate its impact on creditors and other stakeholders. Early action by directors is the single most influential controllable factor in corporate restructuring.”

Age Profile

From an age profile perspective, 20% (116) of all insolvencies recorded during 2020 relate to companies less than five years old, 21% (120) are in the 5-10 years bracket,
32% (182) are in the 10-20 years bracket, 13% (74) are in the 20-30 years bracket, 8% (46) are in the 30-40 years bracket and 6% (37) are over 40 years old. The age profile analysis, which reflects a similar position to that observed in 2019, reflects an even prevalence of insolvency for companies under 5 years old up to 20 years old.

Regional Focus

Geographically, the highest number of corporate insolvencies in the period was recorded in Leinster, with 73% of total appointments. This is an increase from 2019 when Leinster had 63% of all appointments. In 2020, Munster had 17% of appointments, Connaught 5%, and Ulster 5%. Compared to 2019, the number of insolvencies has dropped in these regions. 

For Further Information Please Contact

David Van Dessel

Deloitte

01 417 8805

dvandessel@deloitte.ie

Orna Clarke

Murray

01 498 0300

087 677 0360

oclarke@murraygroup.ie

Fiona MacCarthy

Deloitte

01 417 2542

086 8250027

fmaccarthy@deloitte.ie

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