It is no surprise that hospitality businesses have been significantly impacted by the COVID-19 pandemic and the resultant government policies. The uncertainty of governments enforcing restrictions of movements or lockdowns has had hospitality businesses struggling to keep afloat.
These businesses were previously relying on JobKeeper and the government mandated rent relief negotiation to prevent them from going under.
With these government policies no longer in place, many business owners are now are finding themselves struggling to keep up with their debt obligations.
Risks for hospitality business owners
Below we summarise some general risks for hospitality business owners who’s businesses are struggling financially.
Personal guarantees for leases
It is not unusual for landlords to require directors to provide personal guarantees when entering a lease agreement. Once a tenant defaults, the personal guarantee allows the landlord to pursue the director for debts owed by the tenant. Needless to say, directors who provided personal guarantees for leases for a hospitality businesses should be very careful when looking at options available for their business.
Personal guarantees for other financiers or creditors
Personal guarantees are also provided to various trade creditors or financiers. These personal guarantees have the same effect as lease guarantees, in that directors are liable for the debts if the company does not pay them.
It is therefore important for business owners to know who they have provided guarantees to and to make sure they are on top of payment of these debts.
Director penalty notices
Failing to keep up with tax obligations may result in the ATO issuing director penalty notices (DPNs) against the directors.
More information about the different types of DPNs and their effects can be found here. However, in general, DPNs make directors personally liable for a company’s PAYG Tax, GST and superannuation liabilities and in certain cases liability cannot be avoided.
Whilst our previous articles provide more information on DPNs, it is important for hospitality business owners to pay superannuation when due and/or if they cannot pay superannuation, PAYG Tax or GST at all time make sure necessary lodgments and reporting requirements are made on time.
What Can Be Done?
Negotiating for a rent reduction
While government mandated rent relief negotiations are no longer in place, try and negotiate rent reductions with a landlord. Landlords may be receptive to negotiations, especially with the risk of a tenant going into liquidation and having the premises vacant for a significant time.
Sale of business
Another option for these business owners is to sell their business. This can result in certain creditors being paid, particularly any unpaid superannuation and secured creditors, it will also result (if done properly) in guarantees for lease and certain other debts being extinguished.
Business turnaround and negotiations with creditors
Businesses can appoint a professional to provide guidance in terms of strategies moving forward to turn the business around. Once the issues are identified, several methods can be employed to solve the financial issues which a business has.
Where appropriate, a business may also negotiate and enter into settlements with its creditors. If this is achievable it can reduce overall debt and allow a business to continue trading
Sometimes liquidation can be the best option for struggling businesses. And it is also the proper thing to do if a company is insolvent with no realistic prospect of trading out of its financial problems.
Contact Us For Assistance
Not all the options discussed above alleviate personal risks of the directors. To discuss the options applicable to you individual circumstances, contact us for an obligation-free consultation.