Why the Irish service sector has a real insolvency issue

Deloitte expert recommends companies seek assistance before its too late....

The Irish service sector saw an increase in the number of terminated businesses in 2016, despite the overall number of insolvencies declining in line with strong economic growth.

There was a 65% rise in service firms folding, with 329 insolvencies recorded compared to 200 in 2015.

David Van Dessel, Partner in Restructuring Services with Deloitte, believes the contrary situation is a working capital issue.

He told Business Breakfast:

"A lot of the service sector companies would be an SME size. These companies would typically tend not to have a lot of equity finance. They tend to be debt capital reliant and ... the banks – although they've been very supportive of companies during the recession – are in a scenario now when they're issuing new debt, they must be careful [that they're] they're lending to viable entities."

Van Dessel believes companies are striving to avail of the opportunities an improving economy presents, "pushing things too far and falling over the edge" in the process.

What kind of companies are going to the wall? Van Dessel believes Deloitte will see "a mix" when it digs deeper and age profiles the affected firms.

"I've little doubt there's going to be a cohort of recently-formed companies that have not been able to stay in business. When I say recent, I'm talking about companies that may have been formed two or three years ago that haven't been able to recover the capital outlay to get by and into a more sustainable working capital situation."

Positive picture for economy as a whole

The latest published insolvency figures also show that the overall number of insolvencies fell by 2% in 2016 to 1,032. It is still far higher than the base level seen during the final years of the Celtic Tiger, though Van Dessel believes that the period of prosperity was "an outlier".

 

"Pre-recession it was less than 400 in any one calendar year," he said, calling that situation "an extreme". He anticipates future rates to fall somewhere between the two, at approximately 700 per annum.

He also had some advice for struggling businesses.

"Less than 2% of insolvencies are opting for examinership route," Van Dessel noted, despite the fact that Examinership Lite was introduced several years ago, as well as addition SME rescue legislation.

"It has certainly made the process cheaper, more flexible and convenient. People may not know about it...

"Directors, when they are in financial difficulty, do take a long time before they pick up the phone to get the financial assistance that they need.
It's fully understandable. It's their business. They've created it and they're running it and they've a future in sight for it. And they deal with problems on a day-to-day basis. I think if they were to pick up the phone earlier and get the financial assistance and professional advice that they need earlier... it could really help them.