Deloitte predicts an increase in the use of Examinerships as a consequence of Covid-19.
While corporate insolvencies had been generally on the decrease since the 2008 financial crisis, consulting giant Deloitte predicts they will increase in the near future because of Covid-19.
However, while it anticipates an increase in Examinership as a way of facilitating restructures, the insolvency process is likely to be hindered by the current lockdown.
“It is arguable that the current crisis has created the most significant challenge for otherwise viable Irish companies”
For example, creditors meetings, which are a key part of the insolvency process, will be difficult to facilitate and video calls may be a solution.
Covid-19 battle will reverse fortunes of many businesses
The total number of corporate insolvencies recorded in Q1 2020 stands at 159, according to the latest insolvency statistics published by Deloitte. This represents a decrease of 18pc from the same period in 2019 when the total number recorded was 195.
Almost a quarter, 24pc (39), of the insolvencies recorded during the first quarter of 2020 relate to companies less than five years old, 25pc (40) are in the 5-10 years bracket, 24pc (39) are in the 10-20 years bracket, 8pc (13) are in the 20-30 years bracket, 8pc (13) are in the 30-40 years bracket and 9pc (15) are over 40 years old.
Similar to the findings recorded in previous periods, the age profile indicates that the majority of insolvent companies are in the 5-20 years old bracket rather than in the start-up sector, which is generally considered to be companies under five years old.
“Irish corporates have been faced with having to take extremely difficult measures in doing their part in the battle against Covid-19, which will obviously have a major impact on their finances,” said David Van Dessel, Partner, Financial Advisory at Deloitte.
Van Dessel cited a recent Chambers Ireland survey where more than 60pc of Irish companies have discussed an extension of payment terms with creditors, particularly with landlords, banks and the Revenue Commissioners and 20pc of companies have laid off their entire workforce.
“In response to the economic impact, the Government has been quick to launch a suite of state-backed support initiatives to assist struggling companies in the context of this crisis. However, the severity of the economic impact presents very challenging circumstances for company directors, particularly those of companies that may not be adequately capitalised to support a sustained period of inactivity.”
Van Dessel said that while the figures show a decrease in insolvencies for this period, changes in circumstances mean that we can reasonably expect an increase in Q2.
“It is arguable that the current crisis has created the most significant challenge for otherwise viable Irish companies and it may therefore be the case that as the year progresses, the Irish business community will experience an increase in the utilisation of Examinership as a process to facilitate corporate restructurings in companies with a reasonable prospect of survival.
“However, as things stand the mechanics of many insolvency processes are hindered by the current lockdown. An example of this is the meeting of creditors, which are an integral part of most insolvency processes, including personal insolvencies. In light of the current crisis I think it would be an opportune time to amend the requirement for creditors meetings to be ‘only physical’ and for a virtual option to be introduced.
“Virtual meetings of creditors would enable directors of struggling companies and their advisors to engage with corporate rescue options without having physical meetings, thus removing the unnecessary risk of spreading the virus, as well as bringing the logistical, time and energy saving advantages of a virtual meeting.”
Van Dessel added that what will undoubtedly be a key theme is the protection of employment during a very challenging period for the Irish economy.
“Before this pandemic, vulnerable companies were advised to get external professional advice as soon as they became aware that their company was facing financial challenges and in light of the current crisis, that advice remains valid. Adopting a strategy of early action will always provide businesses and their directors with the greatest suite of options, from refinance to restructuring, and will have them ready to act quickly once the next ‘new normal’ materialises.”
Insolvencies by sector
Looking at the top four industry sectors, the service industry once again recorded the highest number of corporate insolvencies in Q1 2020 with 54 appointments (34pc of total insolvencies). Financial services companies accounted for the largest number with 20, compared to 17 financial services insolvencies in Q1 2019.
Personal services companies featured prominently with 15 insolvencies recorded during the quarter. Nine operated in the health and fitness industry and six were beauty services providers. The real estate and property services companies recorded four insolvencies in Q1 2020 representing a significant decrease of 66pc from the same period in 2019.
The retail sector recorded the second highest level of insolvencies with 34 incidences representing 21pc of the total number. However, 11 of the 34 insolvencies refer to related entities within one group. Taking this group as one entity, the figure for Q1 2020 for the retail sector would be 23.
The hospitality sector recorded 23 incidences, representing 14pc of the total number of insolvencies. This is marginally higher than the level of insolvencies recorded in that sector during the same period in 2019 (13pc).
The construction industry is fourth with 15 insolvencies (9pc of total). The level of insolvencies in this sector has decreased notably year on year, with the numbers dropping by 48pc compared to Q1 2019 (29).
Other notable movements in insolvency numbers have been observed in the wholesale sector, which recorded an increase of 150pc from a low of four corporate insolvencies in Q1 2019 to 10 in Q1 2020, and in the motor sector, which recorded a decrease from seven corporate insolvencies in 2019 to two in 2020.
Written by John Kennedy (email@example.com)
Published: 27 April, 2020