Working with Leisure Businesses - Advice for Insolvency Practitioners

In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at leisure businesses.

This is the summary of that briefing where Malcolm discusses the issues that are affecting leisure businesses and what IPs need to consider when working with businesses in the sector.

If you'd like to watch the webinar back, you can do so below, If not, read on for our summary...

Quick Links:

• Issues affecting leisure businesses in 2022.
• Licenses & how they affect insolvency procedures.
• Landlords & leisure businesses.
• LPA receiverships.
• The Company Directors Disqualification Act (CDDA).

Issues affecting leisure business in 2022:

There are some immediate issues which face such businesses, these include:

VAT for hospitality businesses

• This was dropped to 5% in July 2020.
• It went up to 12.5% from 1 October 2021.
•  And is now back up to the full 20% from 1 April 2022.

The return of winding up petitions

The statutory moratoria ended, meaning that winding up petitions are back. This has an impact on the leisure sector.

From April 1^st 2022:

• The debt threshold has returned to £750, after temporarily being as high as £10,000.
• There is no longer a need for anyone bringing a winding up petition to allow for a 21-day holding off period for debtors.
• Of course, there is still a 21-day period for statutory demands.
• For the next six months, landlords looking to bring winding up petitions to cover protected rent must first offer arbitration.

The return of landlord rights

The end of statutory moratoria didn’t just allow winding up petitions to return. Landlords now have all of their original rights including:

• Suing commercial tenants.
• Forfeiting commercial leases.
• Sending in the bailiffs (CRAR).
• Calling on a rent deposit.
• Winding up a commercial tenant.

Again, for protected rent, landlords must first offer arbitration for the next 6 months.

Other Factors

• The economy, discretionary spending will likely decrease as households disposable income decreases.
• Covid-19, the numbers are still on the increase affecting staff availability and spending habits in the leisure sector.

The importance of licenses

Which businesses need to be licensed?

Under the Licensing Act 2003, businesses that need to be licensed include:

• Businesses selling alcohol whether this be in retail, a club or a bar.
• Businesses that provide entertainment:
  • This includes music, dance, plays and films.
  • It doesn’t include Morris dancing, licensed strip clubs (which are governed by different legislation) and moving vehicles.
• Businesses that provide late night refreshment in the form of food or drink between the hours of 11pm and 5am.

What are the types of licenses for businesses?

There are two types of licenses that are relevant to businesses of this type:

1. The premises licence:

• This authorises the premises for the business.
• And is in the name of the person or company carrying on the business.

2. The personal licence:

• This is only needed where alcohol is sold.
• Held by the designated premises supervisor.

How do the licenses affect insolvency practitioners?

For IPs, the designated premises supervisor shouldn’t be too much of a problem.

The premises licence could potentially be a problem that involves you as there are a number of events that trigger the immediate lapse of the premises licence, including:

• Death of the licence holder.
• Mental impairment of the licence holder.
• If the licence holder loses the right to work in the UK.
• Dissolution of the company that holds the licence.
• If the licence is for a club, and that club ceases to be a ‘recognised club’.
• Insolvency – all insolvency procedures cause the premises licence to lapse immediately upon your appointment.

Which procedures trigger the lapse of the premises licence?

The premises licence lapses at the start of any of the below procedures:

• IVA.
• PVA.
• Bankruptcy.
• Trust deed.
• CVA.
• Administration.
• Administrative receivership.
• Liquidation.

Even if you’re not trading the business, the lapse of the premises licence is likely to affect the value of the business. It’s expensive and time consuming to get a new licence.

What can you do to protect the premises licence?

Although it does lapse immediately after your appointment, you can reinstate the premises licence if you act quickly!

You have 28 days in which you can do one of the following:

• Get an interim authority notice (valid for three months).
• Transfer the licence to yourself.
• Transfer the licence to another person.

Which of the above you choose, depends on the circumstances of the business.

You ought to have a strategy for dealing with the premises licence as soon as you are appointed, especially if you intend to trade the business in administration.

You will not be able to open the business until you have the licence transferred or the interim authority notice in place.

An interim authority notice:

• Reinstates it immediately (for three months); and
• Makes the office holder the licence holder; and
• Gives the police and Home Office very limited rights to object.

As office holder, you’re entitled to an interim authority notice. It takes effect as soon as you deliver the forms to the local authority.

A transfer of the licence:

• Reinstates the licence; and
• Is permanent (until the holder wants to transfer it again); and
• Takes immediate effect (when the forms are lodged); but
• The local authority, police and Home Office all have rights to object.

Local authorities, as a matter of practice, treat the office holder as entitled to have the premises licence transferred into their name.

Landlords and leisure businesses

Remember, as I outlined earlier, landlords have regained the right to take enforcement action, but landlords must first offer arbitration for the next six months where rent is protected.

Protected rent is unpaid rent which has occurred during the time that the business was closed by covid-19 regulations.

How long is the protected rent period for arbitration?

The protected rent period depends on the type of business and its location.

Below, we’ve shown some types of leisure businesses and when they were closed:

What can a landlord do when their tenant owes protected rent?

They have two options

• Wait until September 2022 when the final restrictions are set to be lifted (although, they could be extended).
• Or, start the arbitration procedure as a pre-requisite to legal action to recover the rent arrears.

How does the rent arbitration process work?

To start the arbitration, the landlord must make an offer in good faith which should be their best offer of concession on the protected rent.

The tenant may accept the concession, negotiate, or the parties may not agree.

If they don’t agree, an arbitrator will be appointed to either accept the landlord’s proposals and impose them on the tenant or accept the tenant’s proposals and impose them on the landlord.

Or, the arbitrator may decide that the business is not viable, so the landlord can then enforce their legal remedies.

(That’s assuming the landlord starts the arbitration procedure. The tenant also has the right to start it).

I spoke about rent arbitration in more detail in my last Coffee Break Briefing. You can watch the recording and read the summary here.

LPA Receiverships

The context behind these is that you’ll be looking at businesses who own the freehold of their premises and have a mortgage in place.

A lender with a legal mortgage has the statutory right to appoint a ‘Law of Property Act’ receiver.

What statutory powers do LPA receivers have?

The statutory powers given to an LPA receiver are limited to the collection of rent, and that’s about it.

Businesses that own the freehold and trade from that freehold have no tenant and therefore no rent to collect.  LPA receivers with only statutory powers can do very little in such cases.

For that reason, most commercial property mortgages give receivers extra powers; including:

• Power of sale.
• Power to take possession.
• Power to manage the property.

The issue with LPA receiverships

A receiver is entitled to take possession of the property that is mortgaged to the bank; no more than that.

If the mortgage deed contains a great number of charges, then a receiver appointed under all those charges might be an administrative receiver. A mortgage deed might have charges on the building, the stocks of food and drinks, the intellectual property, amongst other things.  

You must be careful not to appoint an administrative receiver in error, this will render the appointment invalid.

So, the art is to draft the mortgage deed so that it contains enough charges and powers for the receiver to do what needs to be done, but not so much that a receiver will be invalidly appointed.

When are LPA receiverships used most?

LPA receiverships are more useful and more common when dealing with unincorporated businesses, sole traders and traditional partnerships. Such businesses:

1. Cannot create floating charges
2. Therefore, they can’t give their lenders debentures
3. So, the lenders to those businesses can’t hold a qualifying floating charge
4. And therefore, can’t appoint an administrator.

So, the closest that these businesses can get to appointing an administrator would be to appoint an LPA receiver with extended powers.

The Company Directors Disqualification Act (CDDA)

The annual rate of disqualifications is about 1,200; typically about 100 directors a month get disqualified following insolvency.

A disproportionate amount of those disqualified are directors of restaurants and pubs. This is likely the consequence of the nature of the business.

Consider a pub or restaurant with tight cash flow:

• They can’t buy food on credit.
• They can’t buy booze on credit.
• The staff expect to be paid.
• The landlord (or bank) expects to be paid.
• HMRC may be the only credit the owner can take.

If the business now fails, from the CDDA point of view, it is clear that creditors have been preferred and that trading has been at the expense of the Crown – enough to get a disqualification order against the director.

If you’re advising an owner of such a business, you may need to warn them of this risk.

Upcoming Events

Our next Coffee Break Briefing will be held on Monday 9^th May at 10:30am.

The topic is charges; fixed and floating, and debentures.

Our first annual insolvency conference will be on Friday 10^th June.

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We hope you found the briefing useful. If you are an insolvency practitioner who would like to discuss the content of this article further, please do not hesitate to get in touch.