BUSINESSES SUCH as shops, pubs and hotels are likely to be most vulnerable to failure over the year ahead as the recession and increased VAT rate hit consumers’ spending power, according to one leading insolvency practitioner.

Last year, 1,638 businesses went to the wall, entering some form of insolvency process, either liquidation, receivership or examinership. This was a 7 per cent increase on 2010 and a 16 per cent jump on 2009, figures produced by specialist firm, Kavanagh Fennell show.

In keeping with the trend established at the beginning of the recession four years ago, construction was hardest hit, and accounted for 452 insolvencies – one in four of all insolvencies.

The picture was slightly better than in 2010, when insolvencies in this sector hit 472. Kavanagh Fennell last year suggested that, while failures in the building business would continue, the rate would level off somewhat. The 2011 figures indicate that this may have happened.

Ken Fenell (pictured right), one of the firm’s partners, believes that while the overall rate at which companies fail will increase slightly this year, there will be a shift in the trend.

He warns that 2012 will again be a tough year for Irish business, but singles out the retail and hospitality sectors, which he believes will see a significant number of failures this year.

The firm’s figures for the last three years show that, taken together, retailing and hospitality (which includes pubs, restaurants and hotels, and so on) have been increasingly vulnerable.

In 2009, these sectors accounted for a total of 355 insolvencies. That figure rose to 371 in 2010 and hit 432 last year, a near 20 per cent increase over 2009.

There were a number of high-profile failures in hospitality in particular. Ashford Castle, in Cong, Co Mayo, which has hosted visiting heads of state and provided the backdrop for the John Ford movie, The Quiet Man, went into receivership in November.

Fennell notes that the picture within retailing alone could be worse than that indicated by official figures, as these only cover the failure of companies, and not sole traders or partnerships.

Retailing accounted for 228 insolvencies in 2011, up from 177 the previous year. Fennell says that the rate of retail failure is no surprise, as the most obvious consequence of general business failure is unemployment, which leads to less trade and spending.

But he predicts that other factors will come into play this year, making it tougher again for the retail and hospitality businesses.

“Recent budget changes to VAT rates and the failure of Government to deal with upward-only rent reviews will have a significant impact on both these sectors,” he says.

The Government increased the top rate of VAT to 23 per cent from 21 per cent, a near 10 per cent increase in the actual rate at which the tax is charged.

The Minister for Finance, Michael Noonan, opted for this approach over hitting incomes directly, in the hope that it would encourage people to keep spending.

The measure is designed to generate €10 billion for the State. Last year’s VAT take fell €500 million short of its target and, following the publication of the December Exchequer returns last week, some economists suggested that the increase would be counter-productive and lead to a shortfall in the tax take.

In the budget, the Government admitted failure in its efforts to tackle upward-only rent reviews. The problem has been blamed for a large number of retail and other business closures and Fine Gael specifically promised to abolish it during the election.

Many existing commercial leases are based on legislation that only allowed rents to be increased when they came up for review between the parties.

The last administration changed the law so that upward-only reviews would not apply in future leases, but said that it would be constitutionally impossible to do so for existing agreements.

In a joint statement, issued on budget day last month, Noonan and his Minister for Justice colleague, Alan Shatter, also agreed that the change could result in the State having to make potentially unlimited compensation payments to landlords. As a result, the Government could not tackle the problem.

Examinerships have provided one way of dealing with upward-only rent reviews. This is a court-supervised corporate rescue mechanism that gives companies a three-month breathing space to negotiate with creditors.

The law allows companies in this process to exit leases where landlords are charging excessive rents.

But Kavanagh Fennell’s figures show that few troubled businesses opted for examinership in 2011. Of the 16 that did, DVD rental and electronics retail chain, Xtra-Vision, successfully emerged from examinership.

The process allowed Xtra-Vision to deal with excessive rents. That company subsequently confirmed that it has returned to profitability.

Kavanagh Fennell’s numbers show that the majority of insolvent businesses opted for liquidation in 2011, meaning that they were wound up. Of the total, liquidations accounted for 1,338.

Receiverships, where secured creditors appoint someone to take charge of either a business or its assets, came to 284. State agency Nama was responsible for 37 of these. It moved on a number of one-time big players in property, including Derek Quinlan, Seán Dunne and the Grehan brothers.

Note: Last week, figures for the first 11 months of 2011, produced by company information service Vision-Net, showed 1,930 companies became insolvent during that period.

The difference is accounted for by the fact that Kavanagh Fennell counts a group made up of several different companies as one insolvency, while Vision-Net counts each company failure as an individual insolvency.