Overview of current and potential insolvency landscape

In the current edition of Stubbs Gazette, Declan Hanly, a director with our corporate recovery and insolvency team, provides an overview of the current insolvency landscape and the possible impact of government supports being withdrawn.

From a business perspective, one of the strange aspects of the Covid-19 pandemic has been the low number of corporate insolvencies over the last 18 months. Normally when you have a big economic decline, as experienced during the pandemic, you get a large increase in the number of companies going out of business, as was the case following the financial crash of 2008. Surprisingly during the Covid-19 pandemic, despite having the biggest economic contraction on record globally, the Irish government has been effective in supporting businesses and we’ve actually seen a decrease in corporate insolvencies during this period. Recently published statistics showed that there have been 36% fewer corporate insolvencies in the first three quarters of 2021 compared to 2020. 

However, it is very unlikely that this trend will continue, and a number of factors point to a likely increase in corporate insolvencies coming down the tracks.

Phasing out of government supports

While the two main supports in place for businesses, the Employment Wage Subsidy Scheme (EWSS) and the Pandemic Unemployment Payment (PUP), remain in place, it is planned to phase these out over the coming months. These supports have been corporate life buoys for tens of thousands of companies and hundreds of thousands of employees. In total, over the 16 months of its existence, the EWSS has been drawn down by 51,500 employers and used to pay a total of 670,800 employees. As recently as September, there were 27,200 businesses still using the scheme with 309,900 workers benefiting.

According to analysis carried out by the Department of Public Expenditure and Reform as part of Budget 2022, as many as 220,000 employees on average will continue to be supported by the EWSS until it ceases in April 2022. Reading between the lines of this analysis, if the businesses that employ these 220,000 staff are still relying on the EWSS up to April 2022, it is hard to see how they will continue to trade thereafter. As a consequence, it is likely that we will see a sharp rise in corporate insolvencies from May 2022 onwards. 

There has been much commentary on how unevenly Covid-19 has impacted the corporate world. On the one hand, businesses in pharma, software, tech, etc., have grown strongly during the pandemic, while hospitality, retail, personal services, etc., have been negatively impacted. Recently published Revenue figures on EWSS recipients provide further evidence of this. Revenue’s report shows 19% of all employers availing of the EWSS are in the accommodation and food services sector, followed by 14% in wholesale and retail trade and 11% in construction. When we look at the figures for employees who are dependent on the EWSS, 35% are in accommodation and food services. Geographically, approximately one third of employers and employees are based in Dublin and the rest are spread across the country. 

Therefore, when the EWSS ends, while the impact may be more acute in certain sectors of the economy, it appears that the effects will be felt across the country as a whole. 

Warehoused taxes 

Another key support for businesses during the pandemic has been the option to ‘warehouse’ VAT and payroll taxes. Revenue’s scheme is aimed at assisting businesses experiencing cash flow and trading difficulties due to the Covid-19 pandemic, allowing them to defer payment of VAT and PAYE (employer) tax liabilities. Revenue confirmed that there are about 86,000 businesses availing of the scheme. 

While the warehousing scheme has been a great assistance to businesses during the pandemic, allowing them to free up cash flow for trading purposes, the tax liabilities incurred remain in place and will need to be paid back to Revenue. This has the potential to cause a serious issue for many businesses when the time comes to start repaying this debt. Businesses will be required to reach an agreement with Revenue for the repayment of the taxes over a number of months, alongside the possibility of an up-front payment of approximately 25%. Plus, in order to remain tax compliant, the business will also need to ensure its current taxes are paid up to date. 

This has the potential to cause major cash flow difficulties for many businesses, who may be still in the process of recovering from the economic effects of the pandemic and for whom the requirement to meet current taxes and an instalment payment for 18 months of back taxes may be too much. 

Under the current scheme, repayment of warehoused taxes will commence on 1 January 2023, and it is likely therefore that we will see another spike in corporate insolvencies following this. 

Lack of enforcement during pandemic

As outlined earlier, the number of corporate insolvencies in the first three quarters of 2021 is reduced compared to the same period in 2020, while the total number for 2020 (575) was in line with that of 2019 (568). This has been mainly due to the government supports discussed above, which have been a life-saver for many companies, but an unintended effect of these supports is that they have probably kept afloat many companies that were struggling before the pandemic and would not have survived without the government supports. Had the pandemic not occurred, some of these businesses would have ended up in an insolvency scenario. 

While the removal of the government supports will likely cause the insolvency of many businesses that were trading successfully before the pandemic, it will also bring to the surface all of those companies that were in a difficult financial position in early 2020. The spread of these companies is unlikely to be as sector-agnostic as those who have become insolvent as a direct result of the pandemic. 

In addition, there has been a general moratorium on enforcement action taken by company creditors. An enormous amount of goodwill has been shown by trade creditors, landlords, banks, etc. towards liabilities due to them, and in addition the Revenue Commissioners have had a blanket ban on enforcement during the pandemic. With the reopening of the country and the economy, the patience shown by these creditors is unlikely to persist and this will clearly result in an increase in enforcement, resulting in more winding-up petitions and the appointment of receivers. 

Evidence of the recent lack of enforcement can been seen in recently released statistics for 2021 which show that there have only been 15 liquidators appointed by the courts on foot of winding-up petitions in the first three quarters of the year (there were 49 in total in 2020 and 67 in 2019). There were however 31 winding-up petitions presented to the High Court in July and August alone, which is evidence of a likely increase in court liquidations in the coming months. 

Summary 

All of the above points to an impending large number of corporate insolvencies in the short to medium term. One aspect of the corporate insolvency landscape that was not in existence when we underwent the financial crash in 2008 is the Small Company Administrative Rescue Process, or SCARP, which was recently signed into law and is expected to be enacted by the end of the year. This is a new corporate rescue process that is aimed at SMEs, and it is hoped it will be a cheaper and more readily available process than examinership. 

The SCARP allows company promoters to maintain control of their business and it can be commenced and completed without the automatic need for court intervention. It is hoped that that the SCARP will provide a survival option for SMEs in difficulty as government supports are removed over the coming months. 

If you find your business in financial difficulty, the best move is to seek early advice from an insolvency practitioner. There are more recovery options available to businesses at the early stages of difficulty than if left too late. Talking to an insolvency practitioner does not mean that a business will end up being wound up. The foremost intention of any insolvency practitioner is to try to save your business and to explain the various available options. 

At Crowe, we have a team of experienced insolvency practitioners who can advise you on the best course of action, depending on your business’s circumstances. We can provide a free and confidential initial consultation for any businesses experiencing distress or for business owners seeking an exit.