Recent business insolvency statistics for the first quarter of 2022 show that the number of business insolvencies continues to rise. The figures show that creditors’ voluntary liquidations are the most common procedure followed by compulsory liquidations – the number of which is more than twice as high as in the previous quarter, although still below pre-pandemic levels.
This was expected given the end of government tax measures designed to help businesses through the pandemic, such as the furlough scheme, and the lifting of some of the winding-up restrictions on September 30 last year. This trend is set to continue in Q2 2022 with the expiration of commercial lease forfeiture restrictions from March 25, and a return to the previous debt threshold (£750) to seek liquidation of a business from April 1st.
As the worst effects of the pandemic have passed, commentators have predicted that now is when businesses will struggle the most, with the accommodation and restaurant sectors among the industries set to find things particularly difficult. . The latest statistics indicate that this industry suffered the most bankruptcies in the first quarter behind only the construction and wholesale and retail trade sectors.
But the current challenges go beyond the pandemic and work-from-home issues. Other challenges include rising inflation, rising energy costs, supply chain delays (aggravated by the war in Ukraine) and staffing issues. So what can hotel companies do to avoid financial problems in the months ahead?
Some have indicated that the Commercial Rents (Coronavirus) Act 2022 offers some relief, but this will be quite limited. The law introduces a six-month window for tenants and landlords to refer “protected rent debts” to arbitration. These are arrears that came due during the pandemic when some businesses were forced to close. The scheme does not extend to times when these businesses might reopen, or to unoccupied premises due to when businesses followed government advice to work from home. Landlords can now exercise their usual options for dealing with unprotected rental debt, including the power to change the locks on the premises by way of forfeiture of the lease.
While shops, restaurants, pubs and hotels can benefit from the arbitration scheme provided by law, early indications are that few are doing so. This likely reflects the fact that many tenants have already reached agreements with their landlords regarding unpaid rent arrears. The requirement to assess the “viability” of the tenant’s business and provide financial information, as well as the possibility of a public arbitration hearing can also be off-putting. There may be a final rush to make referrals to this program as it draws to a close on September 24, 2022 (subject to any further extensions), but we expect that to be unlikely. , except perhaps for tenants looking to further delay potential enforcement action. when the sponsorship period ends.
There are, however, other potential options to consider for those with problematic balance sheets. These may include the restructuring of external bank loans (perhaps, for example, to extend maturities, change prices or relax mandatory prepayment triggers), revise payment terms of major contracts with customers or suppliers, or reconstituting the debts of investors (such as converting debt to equity). It may also be possible to explore divestments of non-core assets or attract new third-party investment.
In the worst case scenario, business owners can consider appropriate insolvency proceedings. Company Voluntary Agreements (CVAs) appear to have fallen out of favor in recent months (perhaps partly due to the return of corona preference), with CVA numbers in the first quarter of 2022 down 24% on compared to the previous quarter. Administrations, on the other hand, have remained at a fairly consistent level over the past two quarters and offer a viable path to corporate rescue for those looking to rescue the good part of a business from the bad. Additionally, for those willing to venture into relatively uncharted waters, there is the option of seeking a stand-alone moratorium (to buy time while negotiating a broader restructuring with major creditors) or pursuing a restructuring (a court-sanctioned restructuring that provides the ability to bind dissenting creditors). This second option has been largely unused by midsize businesses to date, but increased activity in this area is expected in the coming months.
For companies that have not yet reached the end of the road, early dialogue with major creditors is always recommended. At the moment, key stakeholders, including HMRC and banks, generally remain reluctant to pull the plug and therefore engaging with these creditors can be crucial in securing a payment deadline or similar compromises.
This article was first published in News Caterer, Licensee & Hotelier and is available here.