Government does not anticipate a “tsunami” of businesses looking to be rescued through a restructuring scheme this year, despite lingering cost pressures that continue to bite small firms.
Fiona O’Dea, principal officer at the Department of Enterprise, Trade and Employment, said that, while insolvency levels have recently ticked upwards according to reports by professional service firms Deloitte and PwC, they remain below pre-pandemic figures.
“We don’t believe there’s any clear evidence to support the proposition that we’re facing a serious a serious insolvency situation or a tsunami,” said Ms O’Dea.
She made her comments at an enterprise committee on Wednesday, where she discussed the use of the Small Company Administrative Rescue Process (Scarp), a scheme set up during the pandemic to help viable firms survive during economic volatility.
Ms O’Dea suggested that the recent increase in business failures was driven by firms that emerged from the pandemic in “weak financial condition”.
After the pandemic, Scarp continued to be used by business looking to restructure amid new challenges including inflation, interest rates, and soaring energy bills.
However, Ms O’Dea added that “not all companies experiencing financial difficulties are viable” and that “Scarp is not to be used to prop up economically unviable companies”.
Just 62 firms have entered into the Scarp process since it was established. Of them, 10 Scarp applicants failed and 40 completed the process. There was approximately €21.5m worth of debt on record among the 40 cases that have completed this process and Revenue recovered around 25%, or €5.3m.
Around 600 jobs have been salvaged through the process, according to government figures.
The average cost of Scarp comes in at around €40,000 and is lower than the price tag of a typical examinership which ranges from around €80,000 to €120,000.
It was mostly used last year by firms in the construction, manufacturing, and technology sectors. However, it has become increasingly attractive to retail and hospitality businesses.
Firms can only avail of Scarp once every five years to avoid supporting unviable firms, also known as ‘zombie’ companies.
Meanwhile, businesses continue to avail of other supports in place which may have prevented them from going down the restructuring route.
“The extension of the Revenue debt warehousing scheme might have had an impact on those who decided not to enter into Scarp,” said Ms O’Dea.
Revenue reported a jump in applications for Phased Payment Arrangements (PPAs) ahead of the May 1 deadline to address remaining warehoused debt.
However, Maureen Murray, Revenue’s principal officer level for the management of tax collection, related compliance and enforcement measures, who also attended the committee, said more than 10,000 customers that have not yet put a payment plan in place.
These customers have around €200m of debt warehoused and will not be able to avail of the State implemented 0% interest rate if they do not engage with a payment plan. Almost 60% of these approximately 10,000 customers have balances less than €5,000.
At its peak, back in January 2022, there was €3.2bn in the debt warehouse from over 105,000 customers.
