While the numbers of insolvencies in Ireland are falling, research from Deloitte suggests mature companies rather than start-ups are failing in greater numbers. Why is this and can these insolvencies be prevented?

The number of corporate insolvencies recorded in Ireland in 2019 was 568, a notable decrease of 26pc from the total of 767 in 2018.

According to Deloitte this represents a 66pc decrease compared with 2012 when at the height of the recession in Ireland some 1,684 corporate insolvencies were recorded.

The majority of corporate insolvencies occurring in 2019 were in the services sector, representing 37pc of the total, particularly in financial services (12pc). This was followed by the construction industry (17pc) and the retail (15pc) and hospitality sectors (14pc).

“Legacy debt issues and over-exposure to the property market and property crash of 2008 continues to be a prominent feature”

The manufacturing sector accounted for 7pc of insolvencies in 2019, a decrease of 30pc from 2018; similarly, the wholesale sector made up 3pc of the total, a decrease of 45pc year-on-year.

Conversely, the real estate and property services sector saw an increase, with 7pc of the total in 2019, up from 2pc in 2018.

Alarmingly the age profile of companies that go into insolvency are in the five to 20-year-old bracket rather than the start-up space.

According to Deloitte: 22pc (122) of all insolvencies recorded during 2019 relate to companies less than five years old, 23pc (133) are in the 5-10 years bracket, 26pc (149) are in the 10-20 years bracket, 16pc (92) are in the 20-30 years bracket, 6pc (35) are in the 30-40 years bracket and 7pc (37) are over 40 years old.

Do we need a MABS for businesses?

David Van Dessel, partner, Financial Advisory at Deloitte said that directors of struggling companies reacting too late for recovery options.

“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.”

Van Dessel said that there is a need for the State to provide firms with guidance and knowledge on the supports that are available to prevent business closure.

“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 (Money Advice and Budgeting Service), 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,” Van Dessel said.

Commenting on the numbers that indicate older companies rather than start-ups are closing in greater numbers, Van Dessell said: “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.”

Written by John Kennedy (john.kennedy3@boi.com)

Published: 10 January, 2020

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