Hospitality

Rescue Stories From the Hospitality Sector

Case Study 1 – A company operating a restaurant and catering service was facing significant financial difficulties.

Despite a turnover of £351,600, the business incurred a loss of £38,500. The main problem was a loss sustained from the purchase of a leasehold public house 2 years earlier, which operated as a second restaurant. Although this pub accounted for about 50% of the company’s income, its high running costs were having a detrimental effect on the overall business, making it an unsustainable burden. The company had significant rent arrears on the premises, with 3.5 years remaining on the lease. The company had unsecured debt of £164,500, with HMRC accounting for a substantial 78% of that debt. The directors, both of whom had a history with a previous insolvency, were under pressure to find a solution to their cash flow problems and debt.

The Solution

One of the directors contacted RMT, who was appointed to assist with a Company Voluntary Arrangement (CVA). Recognizing the unsustainable nature of the pub, the directors, in consultation with RMT, decided to vacate the premises and signed a lease surrender. This was a crucial step to eliminate the source of the business’s losses. The CVA proposal was designed to reflect this radical restructuring. The forecast for the first year of the CVA was a reduced turnover of £161,000, but with a projected net profit of £26,000, demonstrating the viability of the core business once the unprofitable pub was removed. The directors, as connected creditors, agreed to waive their claims to £50,000 in loans they had made to the company. The CVA proposed a dividend of 53p in the £1 to unsecured creditors.

The Results

The CVA was successfully approved at the creditors’ meeting. The approval of the CVA provided the company with a formal and legal framework to restructure its finances and deal with the fallout from the unprofitable pub. The plan was a success in that it saved 15 jobs, with only four redundancies necessary, and provided a structured repayment plan for creditors. Although the directors had personal guarantees on the lease, the landlord had verbally agreed not to pursue them, which provided a significant relief. This case demonstrates how a CVA can be a powerful tool for a company to shed an unprofitable arm of its business, restructure its finances, and return to a viable and profitable position. The directors’ willingness to take radical action, combined with RMT’s expertise, was key to saving the core business and its employees.

Case Study 2 – Food Company with Six Outlets Forced to Shut During Pandemic

A specialty food company with six outlets and a central kitchen in London faced a devastating crisis when its business was forced to close in March 2020 due to the COVID-19 pandemic. The complete lockdown caused substantial and unexpected losses. When the company carefully reopened some sites in July 2020, its turnover was only 15-20% of pre-COVID levels, as customers continued to work from home. This situation was unsustainable, with the company’s landlord owed a staggering £349,000 in rent arrears by December 2020. This was in addition to a debt of £650,000 in director’s loans. The company, which had sales of £3.5m before the pandemic, needed a radical solution to deal with its mounting debt and adapt to a fundamentally changed market.

The Solution

The company engaged RMT, who advised that a Company Voluntary Arrangement (CVA) would be the best course of action. The CVA was designed to allow the company to negotiate deals on its outstanding rent and HMRC arrears. We approached each of the landlords and negotiated a new payment structure based on a turnover model for a period of six months. This provided a crucial financial lifeline during a period of reduced footfall. The CVA also bound the rent arrears, which would be managed under the arrangement. The directors’ loans were treated as unsecured creditors, and they agreed to waive their claims, a common practice to ensure the CVA’s success. The CVA also included a provision for additional payments to creditors if the company’s turnover and profitability increased in the future.

The Results

The CVA was successfully approved, with the company’s landlords receiving 32p in the £1 on their rent arrears. The initial six-month turnover-based rent plan provided the company with the breathing room it desperately needed. As working from home continued to impact business in 2022, KSA successfully negotiated a six-month extension of the turnover-based rents and is currently seeking a further extension in light of the cost-of-living crisis. So far, a number of the landlords have agreed. This case is a powerful example of how a CVA can be a flexible and effective tool to help a company navigate a crisis caused by a fundamental shift in its market. The CVA not only restructured the company’s debt but also provided a dynamic and adaptable framework that continues to save the business by allowing it to adjust to new market realities.