Increase in insolvencies as Government covid supports end

Unviable 'zombie businesses' had been kept open, leading to a rise in closures once supports were removed, says economist

CRIFVision-Net reported a 70% year-on-year increase in insolvencies in the first quarter.

Insolvencies have risen in the first three months of the year, following artificially low levels during the same period in 2022, as the Government wound up supports introduced to help businesses stay open during the covid pandemic.

Economist Jim Power said many “zombie businesses” which were not viable were being kept open through these supports, leading to a rise in business closures once they were removed.

“Up to the end of last year, it was way below what you’d expect in any economic cycle, not to mention the kind of cycle we had last year with a lot of global headwinds,” said Mr Power.

Credit risk analyst CRIFVision-Net reported a 70% year-on-year increase in insolvencies in the first quarter. However, it is not clear if these business closures included members' voluntary liquidations where the company is actually solvent but has decided to wind up so that any remaining assets or cash can be distributed to the shareholders.

Figures from professional services firm PwC, which looks only at formal corporate insolvencies, paint a slightly better picture. In the first three months of this year, 119 companies went into insolvency compared to 97 in the same quarter a year earlier, representing a 23% increase.

On a quarterly basis, separate professional services firm Deloitte saw formal corporate insolvencies decrease from 152 in Q4 2022 to 146 in Q1.

Meanwhile, other indicators point to Ireland weathering the storm of inflation-driven high prices and the impact of the pandemic as the economy continues to rebound.

The Government collected a record €19.7bn in tax revenues in the first quarter, up by €2.5bn from a year earlier, in the latest bumper Vat, income, and corporation tax receipts.

However, the economic environment remains challenging for small businesses, and partner with Deloitte David van Dessel believes that there will be a sharp rise this year in these firms using the Small Company Administrative Rescue Process (Scarp) to avoid liquidation.

The scheme was used by a total of 22 companies in its first year in 2022. In Q1, 12 companies have already used it, said Mr van Dessel.

“If we do a dozen in the first quarter, we’re heading for a doubling of Scarp activity this year,” he said.

Economist Jim Power said many restaurants have  shut down 'because they can’t cope with the staffing issues'. Picture: Gareth Chaney/Collins

A sector particularly at risk of insolvency this year is hospitality, due to high labour costs in addition to soaring bills, including energy, according to Mr Power.

“The reality of the trading environment for the hospitality sector is challenging because business costs are rising strongly, with labour being the biggest issue, recruitment, and retention,” he said.

“I know many restaurants who have decided to shut down because they can’t cope with the staffing issues they’re facing,” he said.

Restaurants Association of Ireland CEO Adrian Cummins said May 1 will be a “day of reckoning” for already struggling hospitality businesses that have to pay back the warehouse tax to Government after the pandemic.

“I’ve seen some, but not a flood of insolvencies. I think the vast majority of indicators [are] pointing towards the end of the year, that there will be an increase in insolvencies,” said Mr Cummins.