Corporate insolvencies rising but no ‘tsunami’ on the horizon

The deluge of corporate insolvencies that some had predicted would follow the Covid-19 pandemic has yet to materialise despite a steady rise in the number of business failures over the past year, according to insolvency experts.

In a new report published on Wednesday, Interpath Advisory, the Dublin-based restructuring and corporate advisory firm founded last year by former partners in Deloitte and KPMG, said the Revenue Commissioners’ debt warehousing scheme (DWS) coupled with the lax approach that creditors are taking to debt recovery is allowing for relatively subdued insolvency activity.

Some 499 insolvencies were reported in the first three quarters of the year, according to the report, a sharp rise of more than 50 per cent from the same period in 2022.

But Ken Fennell, managing director of Interpath, said the “deluge of insolvencies” that some had predicted after the Government wound down its Covid-19 supports has not materialised. “Instead, the increase in corporate failures has been much more incremental,” he said.

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“This is perhaps a little surprising, given the various headwinds seen in recent times, from interest rate increases, sticky inflation and a cost-of-living crisis, coupled with geopolitical turmoil in Ukraine and now the Middle East.”

However, the report highlights the impact of the DWS, which has been extended several times since its roll-out at the height of the pandemic.

Under the scheme, eligible businesses can ‘park’ a portion of their tax debts for a period after which they have to repay the debt or work out a phased payment arrangement with the Revenue.

Initially, the tax authority did not charge interest on the repayments but since February, a 3 per cent interest rate has been in place. Given the trajectory of market interest rates over the past 12 months, Interpath said the 3 per cent rate “represents an unintended inexpensive finance facility for many businesses” and has contributed to the relatively subdued insolvency rate.

Meanwhile, creditors continue to take a pragmatic approach to debt recovery, Interpath said, preferring to restructure debts than enforce them through the courts and other avenues.

However, it said this attitude is beginning to wane against the backdrop of rising interest rates and “fragile consumer confidence”, which may lead to an uptick in business failures over the next 12 months.

“The Irish economy has continued to show remarkable and indeed admirable resilience, however, businesses should be mindful of the persistent headwinds that continue to gather and how these could negatively impact their ability to continue trading,” said Interpath director Brendan O’Reilly. “In particular, we would point to the likelihood of a prolonged high interest rate environment as a major concern and this, coupled with stubbornly high inflation, could pose a genuine risk to growth.”

Mr Fennell said the next 12 months are expected to be busier for restructuring firms but that “quick and early action” can be the difference between survival and failure for businesses.