Service firms drive jump in insolvency levels as business costs bite

Insolvency levels have not yet outpaced the peak reached in 2012 following the banking crisis.

Small firms in the hospitality and retail sectors continue to be squeezed as business costs take their toll, new insolvency figures show.

Two separate sets of data showed insolvencies are set to rebound to levels recorded before the pandemic, driven by business failures in the service sector.

PwC’s Insolvency Barometer for the first three months of the year predicted insolvencies would likely reach close to 1,000 by the end of 2024, while analysis by Deloitte estimated this figure would reach about 800. Both estimates are above 2019 levels.

PwC Ireland business recovery partner Ken Tyrrell said “subdued consumer demand, international and geopolitical tensions alongside a number of elections in Ireland and globally in the year ahead” are risks that leave vulnerable businesses further exposed to insolvency this year.

Deloitte Ireland turnaround and restructuring partner James Anderson suggested increased labour, insurance and energy costs would be the main financial challenges for business already on the edge of liquidation.

Business failure and restructuring levels have been ticking upwards since the end of the pandemic, as many State-introduced life support measures for so called unviable ‘zombie’ companies were wound up.

However, new figures from professional service firms PwC and Deloitte showed the number of insolvencies this year are quickly returning to pre-pandemic levels, suggesting otherwise viable businesses are struggling to continue operations in the current environment.

Insolvency levels have not yet outpaced the peak reached in 2012 following the banking crisis.

Insolvencies during the first three months of the year reached more than 200, surging 41% on the same period a year earlier, according to the PwC report.

The hospitality and retail sectors made up 40% of the total number of insolvencies, with an accumulative 89 liquidations in this period, up from 68 insolvencies a year earlier.

“In order for some of these businesses to survive at least in the short term, a large volume of businesses in the retail, hospitality and construction sectors, amongst others, will require some form of restructuring during 2024,” said Mr Tyrrell.

Businesses using Scarp, a restructuring process implemented by the Government during covid to help rescue small firms from liquidation, made up just 3% of insolvencies, said PwC.

The organisation also said a large number of businesses are still carrying a significant level of warehoused tax debt on their balance sheets and may still require the use of an examinership or a Scarp process later in 2024.

The professional services firm said it was likely these low numbers were impacted by the extension of the Revenue warehoused tax debt.

More than 5,000 businesses still owe €1.4bn in tax warehoused debt, at an average of €280,000 each. The top 200 companies owe an average of €2.5m each, according to the PwC report.

Since its introduction in 2021, there have been 60 Scarp appointments in total, with a 73% success rate, saving 761 jobs, Deloitte said.