Restructuring options for hospitality
10 February 2021
Many businesses in the restaurant and bars sector will likely exit lockdown with over-leveraged balance sheets and restricted access to liquidity requiring them to restructure. A popular tool prior to the COVID-19 pandemic for restructuring a business with a significant leasehold estate was a Company Voluntary Arrangement (CVA), which enables a company to make proposals to its unsecured creditors to compromise their claims. However, in the past year there has been an increase in the number of Pre-pack Administration sales whereby the company is marketed via an accelerated M&A process with the business sold immediately upon appointment of Administrators. As mentioned in the M&A article, examples of this being the sales of Carluccios, Le Pain Quotiden, Azzurri Group and Bryon to name but a few. The reason for this could be a perceived stronger negotiating position with landlords following an administration although control of the business may well no longer sit with the prior directors.
The main liabilities on the balance sheets of businesses in the sector will be the build-up of rents arrears, debts to HMRC and secured lending which may include CBILS, CLBILs or bounce back loans. The treatment of certain debt due to HMRC changed with effect from 1 December 2020 whereby the Crown Preference was restored in relation to certain taxes including PAYE, VAT and employee National Insurance Contributions. The reinstatement of the Crown Preference may impact on the number of CVAs approved where there is significant HMRC debt as you cannot compromise a preferential creditor’s claims without their consent. HMRC in our experience take some persuading to compromise any claims. Their position as we come out of lockdown, and confidence in the economy, is rebuilt will be followed with interest.
Newer restructuring options for Hospitality
Newer options for Hospitality can be found in the new The Corporate Insolvency and Governance Act (known as CIGA for short) which came into effect on 26 June. This legislation was fast-tracked as a result of the pressing need to support UK businesses in light of extensive COVID-19 disruption. CIGA introduces a number of powerful measures to improve the potential for distressed companies to survive, stabilise and prosper:
- Protection from creditors for viable companies: a standalone moratorium that leaves the directors in charge of delivering a solution (under the supervision of a qualified ’monitor’) while providing a standstill from a wide range of historical obligations. The key issue for moratoria in the hospitality sector is that certain liabilities including rents need to be paid as they fall due during the period of the moratorium.
- A new debtor-led compromise procedure: the ‘restructuring plan’, modelled on a scheme of arrangement with scope for greater flexibility, including the power to prevent dissenting creditors if certain circumstances are met from obstructing a viable restructuring.
- Protection from supplier disruption: a prohibition on termination clauses being triggered by the new moratorium, restructuring plan or other formal insolvency proceedings.
Benefits of the new measures
These reforms represent the biggest change to the UK’s restructuring and insolvency legislation since the Enterprise Act which came into force in 2003. The measures go to the heart of many of the components of a successful turnaround, including encouraging early engagement with stakeholders, and an acknowledgement that reaching out for support should not mean having to give up control. The new moratorium allows strong boards with credible plans to act early and drive company rescue, supported by turnaround professionals with valuable situational experience. The greatest barrier to an optimal outcome is often ‘runway’. The new measures afford companies enhanced scope to develop and deliver structured turnaround plans with an increased opportunity to drive operational and financial restructuring.
The most high profile use of the new legislation case in the sector is that of Pizza Express. Here a restructuring plan effected a major financial recapitalisation and de-leveraging, together with a CVA to effect an operational restructuring of its leasehold liabilities.
More widespread use of the new legislation was likely delayed as a result of the Government’s continued support measures, particularly with regard to the restrictions on actions by landlords. However, as we exit lockdown more business owners will need to explore all options available to them which will likely vary dependant on the specific circumstances of each business but may well include one of the tools introduced by CIGA.
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