Hotel, hospitality and leisure: start negotiating with creditors now

18 January 2022 / Insight posted in Article

Somehow, many hotel, hospitality and leisure businesses have survived the last 20 months or so, but that hasn’t been easy. Many have been supported by government schemes, and the legal changes brought in by the Coronavirus Insolvency and Governance Act 2020 which ensured no creditors could force closure due to overdue Covid debt.

Many businesses in this heavily impacted sector have built up a significant amount of debt in this period. Creditors (but crucially not commercial landlords) can now petition the courts to wind up these businesses, who can no longer fall back on the government schemes which prevented a tsunami of failures last winter.

Combined with business failure, comes personal risk for directors if they continue to trade and worsen the position of creditors. Directors need to take early advice and carefully monitor cashflow over the coming winter months. They would be wise to start negotiating with creditors now, and not wait for them to commence action.

Transparent discussions may find a sensible way forward, but it won’t be easy, and action should be taken to reduce costs now where possible – staffing, catering, laundry, marketing – will all need to be reviewed and cut with a sharp knife, where possible. Many are already battling staffing issues and supply chain delays, which further complicate the situation.

Owners need to diversify to find other sources of income and try to find long term investors, thus giving up a stake in their business. All businesses are suffering and the latest Covid spike from the Omicron variant and related measures could not have come at a worse time for the hotel, hospitality and leisure industry.

The emergence of Omicron and the following restrictions put pay to much of the pre-Christmas trading period which businesses were so relying on to plug some of its cash shortfall. Additionally, travel restrictions and what amounts to city closures under the “work from home” directive are back and although the government has provided some additional levels of support to the sector (VAT reductions, rates relief and support payments), trading conditions remain poor and businesses are once again experiencing severe cashflow pressure. With the opening up of the Courts to commercial landlords on 1 April 2022, that tsunami of insolvencies is once again on the horizon.

Q4 figures were almost 40% down on pre-pandemic figures for the same quarter and in some city centres the figures were far worse. Trading levels were static in December compared to November, when it would be usual to expect large increases in spending patterns in restaurants and on leisure spend generally, and there is no sign that any improvement is around the corner. Indeed, most hotels are hoping that a sense of normality will return to occupancy rates by mid-2024 and even that may prove difficult when you take into account the fact that travel has been so badly hit, and that many nations are behind the UK with vaccination keeping many borders closed.

Contact our business recovery and insolvency team if you would like more information regarding the topics covered in this article.

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