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Coronavirus - Distress in the leisure and hospitality sector

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COVID-19 has had a catastrophic effect on the economy and one of those hardest hit has been the leisure sector, with many attractions, venues and hospitality establishments being forced to close their doors overnight. This will clearly be causing many in the sector severe financial distress as although the government has introduced some measures to ease the effect, not all have been able to access these and businesses major overheads will have remained static with cashflow being significantly reduced.

At present, there is a moratorium on landlords being able to act against tenants for non-payment of commercial rents and this is currently due to end on 30 June 2020. Once this measure is lifted it is anticipated that landlords will be seeking to recover unpaid rents which will obviously make matters worse for those already struggling. Also, the furlough scheme is due to be phased out by the end of October which again will add to the difficulties being faced.

It appears that the sector may be able to start reopening at the beginning of July, but it is anticipated for many the damage may have already been done. If you are in this sector and are experiencing financial difficulties, you should seek to obtain professional advice as soon as possible in order to afford yourself the best possibility of successfully operating going forwards.

If you do have financial concerns and are unable to raise finance to support your needs, there are a number of options available to allow you to restructure and put you in the best position to trade going forwards. These are namely Company Voluntary Arrangements, Administration or Liquidation.

What is a Company Voluntary Arrangement (“CVA”)?

A CVA is in essence a contractual arrangement between you and your creditors whereby you agree to pay back a proportion of your debt over a period of time by way of either regular contributions or a lump sum payment. 

All unsecured creditors are treated equally and receive the same percentage payment of their debt.  The CVA is overseen by an insolvency practitioner who is appointed as the Supervisor and the CVA is approved if 75% of your creditors in value voting vote in favour of it.

The benefit of a CVA is that it deals with your debts globally and generally allows you to pay back a reduced sum is an orderly manner.

What is Administration?

Administration is a rescue procedure for companies who are facing financial distress, but ultimately their underlying business is viable.

The process is generally lead by the directors of a company with an insolvency practitioner being appointed as administrator. The administrator takes over the running of the company on their appointment and it is their job to realise the company’s assets for the benefit of its creditors.

There are two main types of administration, being a prepack, whereby the administrators sell the business on immediately on appointment, and a trading administration where the administrators trade the business for a period of time whilst they try to find a purchaser.

The benefit of an administration is that it can allow you to restructure your business by possibly closing sites or divisions if there are certain elements that are loss making, with the core business being rescued.

What is Liquidation?

Liquidation is a terminal process whereby the company is closed down and assets sold off. An insolvency practitioner is appointed as the liquidator who realises the assets for the benefits of the company’s creditors.

Again, dependent upon your structure, this can assist with restructuring as it may be that you have a group structure with different sites operating via different trading companies meaning that, if appropriate, loss making companies could be placed into liquidation.

If you are facing financial distress, dependent upon your circumstances, there are several options available to you. It is however important to explore these as soon as possible in order that you can proactively plan any process as opposed to having to react to creditor pressure which may limit your options.

If you would like to discuss these further, please do not hesitate to contact the Business Restructuring and Insolvency Team.  

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.