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Uncertain future for insolvencies and success stories alike

By Gareth Latimer

Recent insolvency statistics for Northern Ireland have confirmed that there were 2.4% fewer corporate insolvencies in 2015 than in 2014, and that the rate of decline in the last quarter of 2015 was even higher, at 4.4%, from the same quarter in 2014.

The detail underlying the statistics, however, showed that the figures varied across the different insolvency processes, with a rise in administrations but a fall in liquidations.

So, do these figures identify any trends, and can we predict what the remainder of 2016 holds for the economy in Northern Ireland?

Historically (and somewhat ironically) after any period of economic recession, and in a period of recovery, there will tend to be a spike in the number of insolvencies.

The increase in insolvency activity may well be viewed as an indicator of recovery and will tend to be driven by three main factors.

Firstly, as the economy improves and companies embark on a growth strategy, there is an increased risk of corporate failure arising from overtrading or inadequate investment in working capital.

Secondly, businesses that may have survived the recession struggle in an improved economy and are unable to change strategy from survival to growth.

Finally, in a period of recovery secured lenders, including traditional banks or other lenders, need to deal with those companies which cannot survive the normal lending margins in a growing economy.

There are signs, however, that the recovery from this recession may be different. Interest rates are expected to remain low and, despite the rise in economic output, any interest rate rise is now predicted in 2017.

Furthermore, economic growth remains anaemic and the general level of business confidence has not been fully restored. Despite the fact that the Northern Ireland economy has been out of recession for some time, the instability in the global economy, uncertainty over Brexit and the local austerity measures still to be implemented, mean that the local economic outlook remains uncertain.

Locally, insolvency appointments in the first quarter of 2016, including the liquidation of 83 Xtravision shops throughout Ireland, the administrations of MET Steel in Mallusk and Lisburn Glass Group Limited, have arisen for very different reasons.

Even though it may seem like a contradiction, corporate financiers likewise are reporting increases in M&A activity driven by a variety of corporate goals and personal circumstances.

At any stage in the economic cycle we will always expect a certain level of corporate failure. However, if the first quarter of 2016 is any indication, then the remaining nine months will see a high volume of both corporate finance activity and corporate insolvency activity.

We will have to wait and see whether sustainable growth in the economy can be achieved once the current economic uncertainties dissipate over the forthcoming months.

For further information or advice on recovery and reorganisation, Gareth can be contacted at gareth.latimer@ie.gt.com Grant Thornton (NI) LLP specialises in audit, tax and advisory

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