Forgive us, our debtors

When James Collins's catering and pub company collapsed in April 1995, he lost more than just his Mercedes, his house and his fiancée. He lost his self-respect and his confidence.

"No one understands how lonely and scary it is being declared a bankrupt," he says. "It is like a depressive illness, it becomes obsessive. It was all I could think about, but I couldn't make anyone understand how I felt. I was used to running my own company, paying my staff well, then all of a sudden I had nothing. For months, I just sat in my room. I was nothing."

Collins spent more than six months trying to save his crumbling company, which got into difficulties because his partner, who had a separate but troubled property business, used capital from Collins' company to bolster the other. Despite his efforts, everything suddenly spiralled downward out of control, and Collins found himself in court, defending himself against angry creditors.

Meanwhile, he was not only penniless but homeless. He turned to the State for support. "I tried to get help from the Benefit Office," he says, "but before they would give me anything I had to get my accounts sorted, and that was going to take months. I ended up finding myself a job as a reservation clerk in a small hotel."

Before running his own business, Collins had been sales manager for a large chain of hotels, and had paid his managers more than £30,000 a year. To rejoin the industry at the bottom was a huge and degrading step for him.

He says: "People look at your CV and ask themselves, ‘What's up with him that he wants to take such a downward step?' No one is impressed with a bankrupt. Yet if you say nothing, they assume you've been in prison."

Gradually over the months, however, his expertise reasserted itself and he has now moved into consultancy. "But still I can't get a bank cheque account, be given credit, or become a director of a company," he says. "Your name is on the bankruptcy list for three years."

Collins is hardly alone in the industry in being declared a bankrupt. His agony is shared by an alarmingly high number of business people from the hospitality sector. According to Simon Freakley, managing partner in one of Britain's leading independent corporate recovery practices, Buchler Phillips Group, catering has the worst record for business failures.

"Catering and restaurants historically have the highest failure rate, compared to any other sector. It is a high-risk investment," Freakley says. "In a normal economy, there are more failures in catering. In a recession, it is even higher."

Insolvencies rising

Figures supplied by the Society of Insolvency Practitioners show that last year the number of corporate insolvencies in other sectors fell by 8%, but the number of hotels and catering companies going into receivership rose by 2% to more than 700. That was the first increase after four years of steady decline from the 1992 peak, when there were more than 1,000 corporate collapses.

Personal insolvencies in the industry are even more numerous. In 1996, there were 1,736 people insolvent, down from 2,437 in 1992. Personal insolvencies in hospitality account for more than 10% of the total.

"The reason there is so much bankruptcy in the hospitality industry is because too many people bury their heads in the sand when things start going wrong," argues Annabel Kay, managing director of employment specialist Irenicon. "People in hospitality tend to be flamboyant, larger-than-life characters. They are great front of house, but hopeless with figures. And when things go wrong they don't seek help quickly enough. They just hope it will go away."

Freakley agrees. Too often, he explains, restaurateurs care more about the menu than about cash flow. "Catering businesses are not asset-rich," he explains. "Usually, equipment is leased and property rented. Also, the majority of costs are fixed. If there are months of poor trading, then it is difficult for the restaurant to recover. Businesses must keep on top of their finances."

The lack of assets is also a problem for hoteliers. Property is usually mortgaged, and businesses have usually put huge financial outlay into initial refurbishment. "Hotel owners end up working all hours just to service their financial commitments," says Freakley, "and they have no spare capital to invest on upkeep. The quality of the business falls and so do the rates. The only way owners can survive is by cutting back staff and working harder."

He expects many smaller hotels to collapse over the next few years because they were bought during the 1980s when speculation was rife, and hotels were valued on how much income they could generate rather than on their underlying assets.

"Supply outstrips demand in Britain," says Freakley, "and over the next five years we will see at least 10% of small hotels, especially those based on the traditional seaside resort, going into receivership."

It is the frequent lack of expertise that is the industry's downfall. "People have a romantic view of what it will be like running a hotel or pub," says Freakley. "They realise capital from savings plans and their homes, but spend it all on refurbishment and then are left with nothing to support the business. And they don't have the expertise to deal with their difficulties."

This is a pattern recognised by John Pyke, joint chief executive of the Association of Licensed Free Traders. "We have contact with an insolvency practitioner which we direct our members to," he says. "Unfortunately, all too often, it is just too late. They come for help after the situation has gone too far and can't be recovered. It is the head-in-the-sand syndrome. The problem is, owners don't keep an eye on cash flow and costs. Our advice to members is to ensure they have accounts done regularly."

Kaye, who has witnessed the collapse of many hospitality companies, argues that the best defence against insolvency is to act immediately there is a problem. "Businesses must put proper monitoring procedures in place," she urges. "They must look not at covers served or beds occupied. They must look at cash flow and check it against outgoings. And importantly, companies in trouble must seek help early."

For Collins, it is too late. He has experienced the stress, loneliness and loss of self-respect and confidence that affect far too many people who go bankrupt. He must wait another year at least before his name is removed from the debtors blacklist, and even then he will probably have difficulty for years in gaining credit.

"I'm not even 30 yet, but I've learned so much in the past few years," he says. "At least I am young enough to start again doing something else. It must be hell for older people, who have been running companies for 20 years. It must be a lot for them to get used to, not being in control."