Navigating Insolvency in the Hospitality and Leisure Industry

The Chancellor has 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 business's 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.

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.

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.

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.