Insolvencies in Ireland have increased during the first quarter of 2022 following a period of artificially low levels during the same period last year, as the government wound up supports that were introduced to help businesses stay open during the pandemic. Economist Jim Power has noted that many “zombie businesses”, which were not viable, were being kept open through these supports, leading to a rise in business closures once they were removed. Credit risk analyst CRIFVision-Net reported a 70% year-on-year increase in insolvencies in the first quarter. However, it is not clear if these business closures included members’ voluntary liquidations where the company is actually solvent but has decided to wind up so that any remaining assets or cash can be distributed to the shareholders.
On the other hand, figures from professional services firm PwC, which looks only at formal corporate insolvencies, paint a slightly better picture. In the first three months of this year, 119 companies went into insolvency compared to 97 in the same quarter a year earlier, representing a 23% increase. Meanwhile, separate professional services firm Deloitte saw formal corporate insolvencies decrease from 152 in Q4 2022 to 146 in Q1. Despite this, the economic environment remains challenging for small businesses, and partner with Deloitte David van Dessel believes that there will be a sharp rise this year in these firms using the Small Company Administrative Rescue Process (Scarp) to avoid liquidation. The scheme was used by a total of 22 companies in its first year in 2022. In Q1, 12 companies have already used it.
The hospitality sector is particularly at risk of insolvency this year, according to Jim Power, due to high labour costs in addition to soaring bills, including energy. “The reality of the trading environment for the hospitality sector is challenging because business costs are rising strongly, with labour being the biggest issue, recruitment, and retention,” he said. “I know many restaurants who have decided to shut down because they can’t cope with the staffing issues they’re facing.” Restaurants Association of Ireland CEO Adrian Cummins said May 1 will be a “day of reckoning” for already struggling hospitality businesses that have to pay back the warehouse tax to the government after the pandemic. However, he noted that he has seen some, but not a flood of insolvencies. He thinks that the vast majority of indicators are pointing towards the end of the year, that there will be an increase in insolvencies.
Despite the challenges faced by small businesses, other indicators point to Ireland weathering the storm of inflation-driven high prices and the impact of the pandemic as the economy continues to rebound. The government collected a record €19.7bn in tax revenues in the first quarter, up by €2.5bn from a year earlier, in the latest bumper Vat, income, and corporation tax receipts.
In conclusion, while the hospitality sector and small businesses continue to face challenges, Ireland’s economy is showing signs of resilience. However, the rise in insolvencies during the first quarter of 2022 highlights the need for continued support for businesses as they navigate the ongoing impact of the pandemic.