Unsecured creditors lose out as insolvencies soar

With predictions of a bloodbath in the restaurant sector earlier this year, it would be easy to overlook the difficulties being suffered by many hotel groups. Gemma Sharkey reports.

Figures released by consultancy firm PricewaterhouseCoopers (PWC) in April showed a 200% rise in hotel insolvencies for the first quarter of the year, compared with 2008.

The Real Hotel Group (RHG) was one of the casualties, in January. The UK-based group, which comprised 19 separate limited companies, had assets including 39 hotels under the brands Purple, Stop Inn, Quality, Clarion and Comfort Inn as well as the jewel in the company's crown, the New Connaught Rooms, in London's Covent Garden.

RHG, formerly CHE Group, first showed signs of struggle in 2006 when it reported £7.9m losses and then a further £8.3m loss in 2007. The company was then forced to suspend its shares from the Alternative Investment Market on 13 January this year, before calling in administrator BDO Stoy Hayward.

BDO has sold at least 15of the hotels, while a deal to sell the New Connaught Rooms to the Principal Hayley Group is understood to be on the table.

UNPAID DEBTS

But while preferential creditors Royal Bank of Scotland (owed £20.2m) and Prudential Trustee Company (owed £14m) will see a return after the sale of RHG assets, non-secured creditors will not be paid for the debts incurred before the group entered administration.

In a document outlining the RHG case, seen by Caterer, BDO said: "Based on present information, the companies have insufficient property to enable a distribution to be made to unsecured creditors (other than the prescribed part in some companies) and consequently we do not propose to call a meeting of creditors to consider the proposals."

Although it referred to a "prescribed part" of the funds allocated to unsecured creditors, which amounts to about £9.3m before administration costs, BDO said there was no money left for unsecured creditors.

One such unsecured creditor is Tony Hailwood, managing director of recruitment firm Capital People, owed more than £50,000 for temporary staff at the New Connaught Rooms.

"Clearly this is unfair to unsecured creditors, bearing in mind RHGwent into administration owing millions but with decent assets," he said. "It's inconceivable with the properties in the portfolio that there's nothing left after all the business has been sold."

Forth Wines is another unsecured creditor (owed £211,063), but Andrew Macdonald, national credit and commercial assessment manager at the wine merchant's parent company, Constellation Brands Incorporated, was more philosophical.

"We've been dealing with RHG for seven years and we've never been paid late so there was no indication it was going under," he said. "It's the sad story of a company that has been poorly managed that has gone bust and people lose out."

Other non-secured creditors included food service company 3663 (£482,247); laundry service The Sunlight Service Group (£240,047); and Coors Brewers (£139,297).

ADMINISTRATOR OUTCOME

"In my 15 years' involvement with hotel and other hospitality-related insolvency cases, I can remember only one occasion when I have seen a substantial return to unsecured creditors and even then it was only around 50p in the pound," said Stephen Broome, director at PWC.

Peter Sargent, president of R3, the trade body for insolvency companies, stressed that this was not the outcome that the administrator would want to see."Insolvency practitioners are often called in late in the day when the business is under pressure from creditors," he said.

Guvinda Singh, managing consultant at consultancy KPMG, suggested that there should be more legal protection for non-secured creditors. "It's something that needs to be looked in to," he said. "The problem is that smaller, unsecured creditors don't have enough power or leverage to take on the banks and make sure they become secure creditors."

But Sargent insisted the law was fit for purpose because there was an "order to who was paid when" and that "any change in the law could have unintended negative consequences for the business environment and funding".

It looks like, for the time being at least, unsecured creditors are on their own.

UNSECURED CREDITORS

"Debts due to unsecured creditors are frozen at the date of the administrator's appointment. If the outcome of the administration is survival of the company, the management of the business and assets can be returned to the directors on the conclusion of the administration. The directors and staff of the company will then deal with unsecured creditors' pre-appointment claims. If survival of the company is not possible, but sufficient sums are realised from the sale of the company's business and assets to enable funds to be distributed to unsecured creditors, the administrator may be able to deal with their claims and pay them a dividend but he may do so only with the permission of the court."

Source: The Insolvency Act (1986)