Navigating Insolvency in the Hospitality and Leisure Industry

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Vicky Biggs - Legal Director

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Insolvency for Hospitality and Leisure Restaurants v2

The 2024 Autumn Budget introduced substantial changes to employer national insurance contributions (NICs) that will have a far-reaching impact on businesses, particularly in the hospitality and leisure sector.

Set to take effect on 6 April 2025, the changes include an increase in the employer NIC rate from 13.8% to 15% and a reduction in the threshold at which NICs become payable, from £9,100 to £5,000.

Alongside these changes, the National Living Wage will rise on 1 April 2025, adding further financial pressures.

These adjustments have raised serious concerns, especially within the hospitality and leisure industry, where leading figures have warned of the severe consequences these tax hikes could have on business viability.

In an open letter to Chancellor Rachel Reeves, industry giants such as Stonegate Group, Fuller's and Whitbread have expressed fears that the additional £3.4 billion in costs will lead to widespread closures and job losses, particularly among small and medium-sized businesses.

Furthermore, a recent survey by hospitality trade bodies highlights the depth of these concerns, revealing that 25% of businesses have no cash reserves left, and the upcoming financial burdens could force 70% of hospitality and leisure businesses to reduce the size of their workforce.  

The survey also indicates that 75% of operators may cut staff hours, and one-third are considering staff redundancies, with small pub businesses particularly vulnerable to becoming unprofitable.  

With cost increases already looming for April 2025, these challenges are compounded by rising operational costs, creating a perfect storm for the sector’s financial stability.

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The Impact of the Budget Changes

The Chancellor said that the increase in employer NICs will generate £25 billion, which will aid the funding of public services, including the NHS.

However, hospitality businesses have argued that they will not be able to pass on the increased costs to customers, as this would fuel inflation and hit customers who are already grappling with the ongoing cost-of-living crisis. 

Businesses have said that they will have to reconsider their investment plans and potentially reduce the number of their employees and/or their employees' working hours, with the changes potentially forcing some businesses into administration or liquidation. 

Contract caterers, who provide catering services for schools, hospitals and prisons, have warned that the changes may make it difficult for them to meet their contractual commitments. 

Lowering the NICs threshold will also impact thousands of part-time or lower-income earners who were never previously affected by the tax.

The open letter to the Chancellor indicated that the changes will impact flexible working practices and are "regressive". 

It points out that someone earning £100,000 will see their employer NICs rise by 13.6%, whereas someone earning £25,000 will see a 36.7% increase, and a part-time minimum-wage worker will see a 74.5% rise.

Hospitality and leisure businesses face high overheads, such as rising energy costs.  According to reports, energy prices have surged by up to 70% since late 2021. Some restaurants and bars have already reduced opening hours to reduce running costs. 

The Budget tax increases, alongside other financial challenges, make it likely that businesses’ operating margins will reduce, making it difficult for them to stay solvent.

In their open letter, hospitality businesses have put forward two measures to the Government to mitigate the impact of the changes:

  1. Creation of a new employer NICs band from £5,000 to £9,100 with a lower rate of 5%; or
  2. Implementing an exemption for lower band taxpayers working fewer than 20 hours per week, targeting support for part-time and lower-paid workers.

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The Impact of Rising Costs

The hospitality and leisure sector is facing mounting financial pressures, exacerbated by escalating operational costs and economic instability.  

Recent findings from the British Beer and Pub Association, the British Institute of Innkeeping, Hospitality Ulster, and UKHospitality highlight the gravity of these challenges, particularly with significant cost increases set to take effect in April 2025.

As mentioned above, a joint survey conducted by leading hospitality trade associations reveals that no less than a quarter of all businesses have no cash reserves left, underscoring the dire financial strain many operators are under.  

These businesses are already struggling to absorb rising costs, and the looming financial burdens could well drive 70% of hospitality businesses to reduce the number of staff that they employ.  

The survey further indicates that some three quarters of all operators may cut staff hours, 40% may reduce opening hours and around one-third are considering making redundancies.  

Small pub businesses, in particular, are highly vulnerable, with 80% expected to become unprofitable, potentially leading to the closure of at least one in four pubs.

These alarming findings highlight the critical need for hospitality businesses to engage in proactive financial planning and restructuring.  

With cash reserves depleted, seeking professional legal advice is essential to navigate the complexities of insolvency and restructuring and explore viable options for sustaining operations during these challenging times.

Signs That Insolvency May Be on the Horizon

Cash flow issues

If a business is running low on cash on a daily basis and cannot pay its debts, creditors may commence court action to recover what they are owed. Late debt payments and/or the inability to meet liabilities can be an early indication that a business is in financial difficulty.

Inability to meet tax obligations on time

When a business is unable to meet its tax and National Insurance obligations as they fall due, HMRC will chase the unpaid debts owed, often by commencing winding up proceedings. This is usually a sign that a business is insolvent or on the brink of insolvency. 

High levels of borrowing

If the business is operating at the limit of its overdraft and having difficulties obtaining additional credit, then this can indicate that it is having financial difficulty.

More recently, hospitality and leisure businesses have specifically struggled due to higher interest rates escalating their debt burdens, which is not being compensated for by increased sales revenue due to the cost-of-living crisis impacting how much disposable income customers have to spend.

Hospitality and Leisure A Battle of the Forms v2

Delays in producing and providing financial information

Overdue accounts or changes to account filing periods indicate that a business could be in financial difficulty.

Sometimes, businesses delay producing their accounts to try to mask financial issues.

It could also indicate a lack of money to pay accountants for their audit and other services.

Failure to pay staff wages

Failure to pay employee wages on time, which is a top priority, is also deemed a failure of a business to pay its debts when due, making it technically insolvent. 

Staff are likely to stop working until they are paid in full, or they may leave the business. 

If directors also stop paying themselves a salary or taking a dividend, this suggests underlying financial problems and that the business is becoming unsustainable.

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What Insolvency Options are Available

How to Navigate Financial Difficulties

If your hospitality business is facing financial difficulties, it is imperative to seek professional advice as soon as possible from a solicitor and (potentially) a licensed insolvency practitioner to discuss restructuring options and potential recovery.

We have set out below brief details of various insolvency procedures available for distressed hospitality and leisure businesses. 

Administration

Here, a financially distressed company is placed under the control of a licensed insolvency practitioner, who is appointed administrator either through a court order or (more usually) via an out-of-court appointment.  The administrator, once appointed, manages the company's affairs and property to achieve one of three objectives:

  1. Rescuing the company is a going concern.
  2. Achieving a better result for creditors than liquidation would (without the company first being placed in administration).
  3. Realising property to distribute to secured or preferential creditors.

Administration gives a company breathing space by protecting it from creditor actions.  

This protection allows the administrator to either trade the company's business temporarily or, in the run-up to being appointed as administrator, to negotiate a pre-packaged sale of the business and assets of the company either to an unconnected party or to existing management (subject to certain additional regulatory safeguards). 

A pre-pack sale, or trading the company in administration whilst seeking a buyer for the company's business and assets, is only considered where rescuing the company as a going concern is not feasible.

Administration typically lasts for 12 months but can be extended with the agreement of creditors or through an application to court.  Exit routes from administration include Creditors' Voluntary Liquidation, Company Voluntary Arrangement, a restructuring plan or dissolution.

Company Voluntary Arrangement (CVA)

A CVA is a flexible option for hospitality companies, allowing them to reach a debt repayment agreement with their creditors, usually over an extended period of up to five years.

A CVA is initiated by a company's directors, its administrator or its liquidator.  

The CVA proposal must first be reviewed by a licensed insolvency practitioner (acting as the nominee), who assesses whether the CVA has a reasonable chance of success.

If approved by more than 75% of creditors (in value), the CVA becomes binding on all unsecured creditors, even if they voted against it.  Secured creditors are only bound if they agree.

Once approved, the nominee becomes the supervisor, overseeing the implementation of the CVA.  A CVA can end either by successful completion of its terms or by termination if the company fails to comply, often leading to another formal insolvency process.

Creditors' Voluntary Liquidation (CVL)

As a last resort, a company may enter CVL, bringing its affairs and existence to an end.

A CVL is initiated when a company cannot pay its debts and its liabilities exceed its assets.

The company's directors convene a shareholder meeting to pass a resolution to wind up the company.  

This resolution requires a 75% majority, after which creditors are invited to approve the shareholders' choice of liquidator, or they can nominate another liquidator.

Once the liquidator is appointed, the company ceases trading and the liquidator takes control of its affairs, realising assets and distributing proceeds to creditors.  Once the winding-up process is completed, the liquidator's final report is filed with Companies House, and the company is usually automatically dissolved three months later. 

Time to Pay Arrangement with HMRC

Although not a formal insolvency procedure, a "Time to Pay Arrangement" can be agreed between HMRC and the business in relation to the repayment of outstanding crown liabilities.  As long as the company complies with the terms of the arrangement, it is not considered insolvent.

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Proactive Steps for Hospitality Businesses to Consider

Renegotiating lease terms

Although a landlord is not obliged to agree changes to an existing lease, some landlords will choose to support a struggling tenant. 

Attempting to recover arrears of rent can be expensive and, if a business tenant moves out, the landlord will then have to pay empty property rates until it finds a replacement tenant. 

Typical changes to a lease include reducing the rent or the size of the demised premises and/or paying rent on a monthly basis, instead of quarterly, to ease cash flow pressure. 

A CVA can also assist through providing for  the termination or renegotiation of leases for underperforming outlets, thereby providing relief for struggling businesses.

Reviewing supplier contracts

Negotiating the terms of supplier contracts can help a hospitality company to get a better deal, thereby reducing costs.

Regularly reviewing supplier contracts will identify whether the contract properly meets the business's needs.  This will also ensure that no overpayments or unnecessary payments arise.

If a business is likely to default on payments, negotiating extended payment terms can help to ease cash flow pressures and reduce or prevent interest being paid on late payments. 

Reviewing the prices of competitor suppliers could be used as a bargaining tool when renegotiating terms. 

In addition, moving suppliers to get a better deal can often help to save a business money.

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Contact our Hospitality and Leisure and Insolvency & Restructuring Solicitors

If you own and/or manage a hospitality and leisure business and are concerned about your company's financial position, please contact our Hospitality and Leisure and Insolvency & Restructuring Solicitors for advice. 

We have excellent working relationships with many national, regional and local independent insolvency practitioners who can be introduced to provide their professional input and assistance as and when required. 

01619414000

Vicky Biggs's profile picture

Vicky Biggs

Legal Director

Vicky has over 13 years of experience acting as a Dispute Resolution and Insolvency solicitor. Vicky has specialist expertise in contentious insolvency matters, advising insolvency practitioners, directors in relation to both corporate and personal insolvency issues.

About Vicky Biggs