Corporate insolvencies up 22% with cost inflation and higher interest rates burdening firms

Corporate insolvencies in the Republic rose by 22 per cent in the first quarter of 2023, according to Deloitte. The consultancy said there were 146 business failures recorded in the first three months of the year, up from 120 in the same quarter last year.

However, Deloitte noted the number of insolvencies was marginally down from 152 reported in the final quarter of 2022, “which means we are not currently experiencing a steep increase in corporate insolvency activity, which many have forecasted”, it said.

“Recent levels of corporate insolvency activity would suggest we are getting back to pre-pandemic levels of activity,” said David Van Dessel, financial advisory partner at Deloitte.

Coronavirus effect

“However, taking 2019 as a previous ‘norm’, we are not yet seeing a material fallout from the economic impact of Covid, or that of increased interest rates and current inflation,” he said.

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However, Mr Van Dessel indicated this may change.

“Given the economic impact of Covid 19 has yet to be fully reflected in corporate insolvency activity and in light of both cost inflation and higher interest rates there is an expectation that insolvency activity is more likely to exceed pre-pandemic levels,” he said.

Similar to previous quarters, the “services sector” recorded the highest number of corporate insolvencies in the first quarter at 46, representing just under one-third of all insolvencies, followed by the construction sector (21), hospitality sector (19) and retail (16).

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The highest number of corporate insolvencies in the first quarter were recorded in Leinster, with 114 (78 per cent of total —up slightly from 74 per cent in 2022). Munster had 18 (12 per cent of total), Connaught 11 (8 per cent of total) and there were three in Ulster (Republic counties only).

Creditors’ voluntary liquidations (CVLs) accounted for more than two-thirds (68 per cent) of the insolvencies in the first quarter, with 100 CVLs while corporate receiverships accounted for 16 per cent, the Deloitte report indicated.

The level of court liquidations remained low with seven recorded in the first quarter.

‘Highest number’

Deloitte also noted as of March there was €2.3 billion of warehoused tax debt (a measure introduced by the Government to assist businesses during the pandemic) that remained outstanding. This balance relates to 67,000 businesses but the bulk of that balance relates to less than 10 per cent of the businesses, it said.

“When looking at corporate insolvency figures from the last six months (Q4 2022 and Q1 2023), there were a total of just under 300 insolvencies. Assuming this level of insolvency activity is to continue for the remainder of the year, we are likely to have in the region of 600 corporate insolvencies,” said Mr Van Dessel.

“This would represent the highest number of insolvencies since 2018 (768) and a return to the pre-pandemic insolvency activity level (568 in 2019). It is uncertain whether the activity will continue to increase or whether it will stagnate in the 600-700 range,” he said.

“In all situations of financial distress, early action by company directors dramatically increases the chances of avoiding foreclosure and with the successful introduction of the (Small Company Administrative Rescue Process) Scarp, directors of struggling SMEs now have a restructuring process that is bespoke for the SME sector,” he said.