It’s been a difficult last few years for the licensed trade and the hospitality and leisure sector generally, both in terms of recovery from the Covid-19 pandemic and, more recently, the wider economic challenges facing the industry.
The threat of insolvency looms large and with it comes various regulatory considerations for insolvency practitioners (IPs): firstly, liquor licensing considerations that might arise post-appointment and, secondly, broader health and safety issues that can shift into sharp focus.
Premises licences
Where liquor licences are involved, there are important statutory timescales for IPs to bear in mind. By failing to get the timescales correct, there is a risk of the premises licence – which is a valuable asset for an insolvent business – lapsing.
Upon appointment, an IP should identify all premises licences that are relevant to the assets that form part of the administration or liquidation.
Thereafter, an IP should identify who the premises licence holder is – it may be that the licence is held by the company in insolvency; in the name of a separate landlord or tenant; or an entirely separate management company. The identification of the premises licence holder ought to be a priority.
If the premises licence is held by the individual or corporate entity that is now insolvent, section 34 of the Licensing (Scotland) Act 2005 provides that a transfer application in favour of the IP must, within 28 days, be lodged with the relevant Licensing Board.
Failure to make the necessary transfer application within 28 days will mean that the premises licence lapses and is of no effect. It would no longer be an asset in the insolvency and would therefore lose its potential commercial value.
The reason that this issue could become particularly significant to IPs is because of the potential value that a licence may have to purchasers of a business. With many of licensing boards (such as Dundee, Edinburgh, Glasgow, and West Dunbartonshire) implementing areas of overprovision where there is the presumption against the grant of new licences, it is becoming harder and harder for businesses to acquire new licences.
As such, it’s far preferable that steps be taken for an existing licence to be kept alive, rather than undertaking the painful and costly process of applying for a new licence afresh. An insolvency practitioner is unlikely to apply for a fresh licence and an unlicensed premises could be an unattractive prospect for a potential purchaser.
Prior to the pandemic, it would have been quite typical for the licence held by an insolvent business to be first transferred to the IP and then transferred on a back-to-back basis to the purchaser. That approach has the benefit of limiting the exposure an IP could have to potential liabilities under the Licensing (Scotland) Act 2005.
However, in the current climate, if the insolvent business has entirely ceased to trade and there is no obvious purchaser at the time, what then? Understandably, IPs will be hesitant to hold premises licences for extended periods of time.
If the business is not trading, there should be limited risk to the IP of potentially breaching licensing laws. But it may be neater for the IP to take a transfer of the licence, and arrange for the subsequent transfer of that licence to a temporary holding company.
The landlord/ tenant relationship can also introduce a layer of complexity. Careful consideration needs to be given where it is the landlord’s company that enters insolvency but the tenant continues to hold the licence (despite its lease having been terminated on insolvency); or where the tenant (as premises licence holder) enters insolvency, properly transfers the licence to the IP, but leaves the landlord with no control over that licence. Early advice should be sought either way.
Health and safety duties
An equally important, and sometimes complex, topic is the health and safety issues that can arise following appointment to an insolvent company.
In terms of relevant legislation, it is imperative to be familiar with the Health and Safety at Work Act 1974 (“the 1974 Act”) and subordinate regulations. The 1974 Act sets out the broad health and safety duties which apply in a work context, as well as the enforcement regime for ensuring duties are properly discharged.
The 1974 Act is supplemented by regulations that set out prescriptive obligations which must be adhered to when dealing with the management of health and safety functions. Awareness of the legislation (and the Health and Safety Executive (HSE) codes of practice) is important, since not every regulation will be applicable for every insolvency.
It’s important for IPs and their employees to get this right, as much of the health and safety legislation is backed by criminal sanctions. It’s also important to be aware that proceedings may, where the public interest demands it (which often occurs in the most serious of cases), still be brought against insolvent companies (or dissolved companies that are restored). Although an insolvent company is unlikely to have the funds available to meet any court fine, there is still a deterrence value (to others) in bringing the proceedings.
As IP’s take appointments personally, this means it could result in personal criminal liability (against which it is not possible to be indemnified or insured against). The penalties for the IP or insolvent company can be significant: for the most serious offences, the Courts have sentencing powers that allow judges to impose unlimited fines and/ or up to two years’ imprisonment.
Of course, there will be some circumstances where the IP, while still carefully considering the health and safety position, may have reason to be more confident that there will be fewer issues (such as in a "pre pack" scenario).
In assessing the question of risk, particular regard should be had where the business or industry sector involved is inherently dangerous, for example if construction work is being undertaken or where there may be asbestos present or where multiple duty holders are involved. In the latter case, it is crucial to make sure that just because one of the other parties (duty holders) appears to be dealing with a particular issue, that the IP ensures their own duties are being discharged regardless. Upon appointment, a careful review of the available documentation is a prudent first step.
It is not just the question of personal liability. Any assets affected by such health and safety investigations may not be realised at full value. Resolving these health and safety issues may become very time consuming and drain resources. The insolvency could take longer than first anticipated, or there may be adverse publicity.
By taking health and safety matters seriously, and having a proper approach to dealing with them, the IP should be better placed to identify possible areas of concern when they do arise and deal with them appropriately. Systems should be in place to make sure red flags or serious issues can be widely reported throughout the team.
While all of these are important considerations, it is worth noting that the HSE's approach to enforcement is generally not to take action against IPs personally when the IP has had a proper regard to health and safety matters. It is the failure to take appropriate action that can result in the HSE knocking on the IPs door.
The more evidence that is available to show the IP was aware of and has appropriately dealt with the issue, the better.
If this article has raised any questions or queries for you, please contact our licensing team.