Insolvency in the Hospitality Sector

There was a 53% increase in insolvencies in the hospitality sector in 2023. Restructuring & Insolvency partner, James Morrin discusses some of the challenges facing the sector and sets out some of the options and key considerations for directors of companies in financial difficulties.

The number of company insolvencies in 2023 increased by over a third compared to 2022. The hospitality sector was particularly badly affected, with 53% more insolvencies than in 2022.

It appears that 2024 will be similarly challenging for companies in the hospitality sector. The Restaurant Association of Ireland (RAI) has set out the main challenges faced by the industry, including increased energy and labour costs, and the VAT rate reverting to 13.5% after having been reduced to 9% during the covid-19 pandemic.

Many hospitality businesses also owe significant debts to the Revenue Commissioners, having availed of the Revenue Debt Warehousing Scheme during the pandemic. Repayments on warehoused debts are due to start in May of this year. While the government has indicated that it will intervene on this issue and allow certain companies a longer period to repay warehoused debts (it is reported, at the time of writing, up to 10 years) companies are nonetheless obliged to agree a repayment plan by 1 May 2024, failing which the warehoused debt becomes immediately payable in full on that date.

Economic headwinds, combined with the extent of warehoused debt, may nonetheless result in many hospitality businesses becoming “balance sheet insolvent”. This is when a company’s assets are less than its liabilities when contingent and prospective liabilities are taken into account.

Directors’ duties when insolvency is likely

Directors who believe, or have reasonable cause to believe, that their company is, or is likely to become, insolvent owe duties to the creditors of the company. These include the duty to have regard to the interests of creditors and to carefully consider whether it is appropriate to continue trading. Should directors fail in their duties, they risk being made personally liable for some or all of the debts of the company.

The Corporate Enforcement Authority (CEA) has published guidance on the early warning indicators which may signal to directors that a company is heading toward insolvency. We have written more extensively about this CEA guidance here.

Restructuring options for directors of insolvent companies

There are a variety of options available to viable businesses facing financial difficulties but wishing to restructure and avoid being wound up. These include the Small Companies Administrative Rescue Process (SCARP), examinership, and informal agreements with creditors. These options can be availed of in appropriate circumstances to help businesses restructure debt and survive periods of financial difficulty.

Conclusion

The key takeaway for directors in the hospitality sector is to pay close and continuous attention to finances, and to seek professional advice at an early stage if they believe their business is heading toward insolvency. These are difficult times for the hospitality industry. However, in the right circumstances, viable businesses have a variety of ways to potentially restructure their affairs and get back to trading profitably.

For more information and expert advice on the various restructuring options available to companies in distress, contact a member of our Restructuring & Insolvency team.

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The content of this article is provided for information purposes only and does not constitute legal or other advice.