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For many companies, the recent imposition of a new round of strict measures to control the spread of the coronavirus was seen as a step too far.
Some companies, predominantly in the hotel and retail sector, warned that they would probably never reopen their doors.
However, so far, in the course of the pandemic, the level of business bankruptcies has remained remarkably low.
According to figures from Deloitte, which cover the period to the end of September, the total number of corporate insolvencies in the first nine months of the year was 431, a reduction, albeit very marginal, from the 439 recorded in the same period. year.
“State-backed initiatives to support struggling businesses affected by the Covid crisis, as well as leniency from creditors, including leniency from the banking sector, have played an important role in preventing an early rise in creditors. corporate insolvencies, “David Van Dessel, Deloitte’s partner financial advisor explained.
Indeed, loan repayment disruptions, offered by all major banks since the start of the pandemic, have provided a lifeline for mortgage holders and businesses in what has been a time of crisis for many.
Central Bank Deputy Governor Ed Sibley said last week that around 11,000, or a fifth of all, loans to SMEs (small and medium-sized businesses) were on paid pauses due to the pandemic in early October, just days later. banks would formally stop providing the service to new applicants and promised to deal with companies on a case-by-case basis.
Mr. Sibley said that companies will likely need continued support over the next year and cautioned that many will continue to experience problems in the short term.
“Even when all the supports are taken into account, about one in six [SMEs] it is likely to experience financial difficulties in 2021 as a result of the effects of the pandemic, “said the lieutenant governor.
There are many companies that could be at risk of difficulties in the next year and some of them may not make it.
Artificial environment
Neil McDonnell, CEO of the representative group of small and medium-sized enterprises, ISME, described the current business environment as “artificial”, when all the supports and tolerance measures are taken into account.
“If those supports were not there, you would be seeing a significant number of insolvencies. And we know that the supports cannot continue indefinitely. Do not judge the viability of SMEs using the insolvency figures,” he warned.
Neil Hughes, a managing partner at Baker Tilly, which specializes in exams, said normal restructuring activity had in fact been suspended due to existing supports.
He says it will likely be well into next year before bad debts emerge in greater numbers, a situation that he says would be largely in line with the experience of previous recessions.
“Companies usually have some reserves that will burn out in a crisis period and burn favors in that period. That can take a year or two after the initial recession. Then the company runs out of cash and runs out of the road.”
He points to the latest recession and cites that the unemployment rate peaked in early 2012, some three to four years after the initial economic hit.
“It could be similar here. It could be late 2021 or 2022 before it gets really tough for companies and they start running out of way.”
The evidence so far
According to Deloitte figures, it was the service sector that topped the list of insolvencies in the first nine months with 154 appointments, or just over a third of the total.
Then came retail, where 88 companies went into insolvency, followed by the hospitality sector, which registered the third highest level with 70 incidents.
Of the 70, companies operating in the food service sector accounted for half of the insolvencies.
“Interestingly, there has only been a marginal increase in insolvency activity for the hospitality sector compared to the same period in 2019,” said David Van Dessel.
“That would suggest that the anticipated ‘drop’ in that sector, derived from the financial impact of the various blockades, has not yet materialized.”
However, the retail sector has seen a 40% increase in activity so far in 2020, which, according to Van Dessel, could suggest that the sector was in a more vulnerable position when it was hit by the initial lockdown.
Neil McDonnell believes that the vulnerability has spread to a broader cohort of companies at this time.
“Really, it is any business that has been forced to shut down completely by level 5,” said the ISME CEO.
Expect significant growth in the number of people seeking restructuring, particularly in the hospitality sector, as well as some retail and service companies, such as hair salons and travel agents.
He anticipates that the first signs of movement will come from real estate and from homeowners who can no longer afford to exercise a degree of tolerance.
“We’ve already seen that. There are a lot of commercial landlords for whom the rent complies with a bank agreement. If they can’t collect that rent, then someone else will suffer on the balance.
“Homeowners will probably be the first to sniff out where bad debt will begin,” he said.
The processes
The vast majority of insolvencies in the first nine months, approximately three-quarters of the total, were explained by a voluntary process known as Voluntary Creditors Liquidation.
Corporate syndicates have seen a steady decline in recent years and that trend continued in the first three quarters of this year with 52 companies entering the process, up from 84 in the same period last year, according to Deloitte.
However, the third quarter of this year, from July to September, saw a doubling of court administrations, to 25, compared to 12 in the same three-month period last year.
“There is no indication that this recent surge in debt recovery activity is the result of defaults associated with the impact of the pandemic itself. It is more likely to be a resolution of a backlog of” pre-lockdown cases, “rather than they would have arisen due to a general moratorium on implementation during the second quarter of 2020, “explained David Van Dessel.
A receivership is the end of the road for a business and most will seek to avoid it by going through an informal process with creditors initially before moving on to an examination.
“Tens of thousands of companies have already engaged in informal restructuring in recent months,” explains Neil Hughes.
“Most companies will try to resolve their problems informally. No company becomes an examiner unless necessary. It is not automatically to apply for a company that just wants to reorganize its affairs. It is for companies that need it.”
The examination process is administered through the courts, and SMEs are dealt primarily through the Circuit Court, while larger companies often go to Superior Court.
The process offers protection to distressed companies for up to 150 days, during which it can restructure and rebuild, as well as set up a scheme with creditors to allow the company to emerge at the other extreme.
“The success rate is high,” Hughes said.
“The vast majority of the companies that go through it will survive. About 15,000 jobs have been salvaged as a result of the screening process in the last decade.”
Exam changes are sought
ISME believes that the examination process is not suitable for all companies, especially smaller ones, and has called for changes to the regime to facilitate companies of all sizes.
According to the Income figures, ISME says that the basic cost of an exam is € 80,000 to € 130,000.
“If you are going to spend 130,000 euros in reorganizing the creditors, it will not happen with a company that delivers a couple of million. That excludes the vast majority of SMEs from the plan,” argues Neil McDonnell.
“We have devised a simpler process, which means that not everyone becomes a lawyer at first,” he said.
McDonnell compared the proposed process to the PIP (Personal Insolvency Practitioner) service, which was introduced after the last recession to help people who cannot finance their loans work out repayment arrangements and plans with their creditors.
“It would be a single resolution mechanism run by a single professional per agreement. Instead of going to the Circuit or Superior Court, you would have an insolvency practitioner put together a package and present it to creditors,” he explained.
It is estimated that the proposed mechanism would reduce the cost of the process by more than € 50,000.
The suggestion has been welcomed by the government. The Company Law Review Group has been asked to prepare a report for Tánaiste and the Minister of Business, Commerce and Employment, Leo Varadkar, on a less costly insolvency process for smaller companies and it is understood that the plan is moving forward at a good pace.
Neil Hughes welcomed the suggestion of a streamlined process that could reduce court involvement in certain circumstances, but did not expect such a process to be introduced anytime soon.
It rejected suggestions that the review process was not suitable for smaller companies.
“It is rare for us to say that a company is too small to be scrutinized,” he said.
“The costs of a larger exam can be big, but they can be small for the smallest companies. They are horses for the courses.”
It is an open question whether a new streamlined regime can be put in place before the anticipated surge in companies seeking assistance emerges.
Inevitably, for some, it won’t make any difference. The decision to stop listing will have already been made.
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