How to safeguard your hospitality business from financial difficulties

The number of company insolvencies remains high. In September alone there were 1,973 company insolvencies, with creditors’ voluntary liquidations accounting for 80% of these. The Government’s Autumn Statement has introduced a range of measures which will be a cause for concern for many businesses, especially in the already struggling hospitality sector.

It is estimated that more than one in ten British pubs are at imminent risk of closure, with 11% of the UK’s pubs classed as technically insolvent. Even larger businesses are struggling, in October, high-street restaurant chain TGI Fridays announced the closure of 35 stores, with over 1,000 jobs lost, following the company’s entry into administration the previous month. Clearly the consistently high interest rates and the cost-of-living crisis has provided a challenge to all businesses in the sector.

Whilst interest rates are dropping, this is overshadowed by the ramifications of the Autumn Statement which will be little comfort to those in the hospitality sector. Costs will only mount for businesses as the employer National Insurance contribution will increase from 13.8% to 15% and the threshold to begin paying these will be lowered from £9,100 to £5,000. Additionally, minimum wage is due to increase by an unprecedented 16.3% for those aged 18-20. This will be particularly felt by the hospitality sector as the industry with one of the highest percentages of minimum wage workers. Many businesses may struggle to afford to keep their employees when these measures come into force in April 2025.

According to Kate Nicholls, the Chief Executive of UK Hospitality, “This Budget is the latest blow for hospitality businesses. Rising taxes, increasing costs and fragile consumer confidence risk bringing growth to a grinding halt … All of this means that 2025 will be painful for hospitality, with an increased annual tax bill of £3 billion for the sector.”

Protecting company directors and creditors

2025 is clearly shaping up to be a difficult year for the hospitality sector. If you are a director of a company which is facing financial difficulties, you should consider taking the following steps, to protect your own personal liability and the company creditors:

• Seek independent advice from a lawyer or licensed insolvency practitioner as soon as you become aware of potential financial difficulties. They can advise you on your options and whether a recovery strategy or insolvency strategy is more appropriate.
• Always keep your director duties in mind. Your actions must comply with these duties and may be scrutinised at a later date by an officeholder if the company enters into a formal insolvency process.
• Only continue trading if it is the best course of action for creditors as a whole and take steps to minimise the loss to creditors.
• Maintain a good and consistent line of communication with all creditors.
• Have regular board meetings to discuss the company’s financial position, keep details and accurate minutes which set out each step taken to improve the creditor’s position or ensure their interests are not prejudiced. Keeping minutes will assist the board should they be required to explain their decision-making later.
• Immediately respond to any demands for payment and legal proceedings served on the company, even if you cannot pay them.
• Ideally every week you should ensure that realistic budgets, forecasts and management and trading accounts are reviewed.
• Ensure accounts are being properly kept up to date.
• Conduct a full review of the costs and expenditure of the company. Consider what non-essential expenditure can be reduced or avoided at an earlier stage.
• Check what insurance cover the company has and review the policy documents carefully, seeking guidance from your broker if necessary.
• If avoiding insolvent liquidation is not an option, you should take immediate advice on instituting a formal insolvency procedure without delay.

If you are concerned about the impact of this or if you are concerned about the financial health of your company, please contact Aman Sehgal.