Economic damage from fresh restrictions will play out in Scarp deals next year

State’s new system for low-cost SME restructurings will be put to work in 2022

If there is to be a glut of restaurant and bar insolvencies it is likely to come next spring as these businesses run out of cashflow after their failure to fatten for the rest of winter as they traditionally do over Christmas. Photograph: iStock

If there is to be a glut of restaurant and bar insolvencies it is likely to come next spring as these businesses run out of cashflow after their failure to fatten for the rest of winter as they traditionally do over Christmas. Photograph: iStock

 

The decision this week by Government to accept recommendations from its public health advisers for further restrictions on hospitality businesses is likely to push some of them closer to the brink. If there is to be a glut of restaurant and bar insolvencies, it is likely to come next Spring as these businesses run out of cashflow after their failure to fatten for the rest of winter, as they traditionally do over Christmas.

Only then will it be possible to assess the effectiveness of the State’s new system for low-cost, no-court restructurings, the Small Company Adminstrative Restructuring Process (Scarp). It has barely been used since its introduction in July. Unfortunately, that is likely to change in coming months.

Scarp is aimed at companies with revenues of less than €12 million, balance sheet assets of less than €6 million, or staff numbers of less than 50 – qualifying companies must meet two of the three criteria.

Under the scheme, insolvent businesses can appoint a qualified adviser to propose a scheme to write down debts without going to court. It avoids wasting cash on expensive legal fees, leaving more assets to divvy between creditors, who still can launch a legal objection if they wish.

Government subsidies for the hospitality sector have, so far, prevented most troubled businesses from going to the wall – insolvency numbers in 2020 were no higher than a normal year, despite several lockdowns. Meanwhile, recent figures from Deloitte suggest the number of insolvencies in 2021 until the end of September were down 36 per cent.

No sector can withstand the battering hospitality has taken over the last 20 months without eventually incurring casualties. They will come. Taxpayer subsidies have so far, prevented the shakeout, but when subsidies are phased out next spring, reality is likely to dawn for the weakest operators.

It is likely that the State is currently subsidising certain companies – zombie businesses – that inevitably will go bust anyway. Cash that currently flows to them from taxpayers ultimately may be used to defray debts owed to non-subsidised suppliers, via a multitude of Scarp schemes.

It seems like a waste of State resources. But given the decisions the Government is making on restrictions, such waste may be unavoidable.

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