Hotel in administration, what now for suppliers ?

I am a supplier to hotel’s so this article is largely based on the hospitality sector, but most of the points can be applied to any business.

Before I get into the ‘action plan’ for dealing with hotels or companies that have gone into administration, you need to know a little about the administration process.

Many people panic when they are doing business with a company and they hear that it has gone into administration, administration is very different to bankruptcy.  Bankruptcy is when a company has no possible way of survival and everything is lost.  Administration is a process of survival.

A company can be placed into administration by one of more companies that it owe’s money to.  Typically in the hotel business, the two main culprits who place hotels into administration are banks (who are owed a large amount of money in a mortgage or overdraft) and the Inland Revenue who are maybe owed a large amount of cash in VAT or PAYE payments.  A company may also place itself into administration if it thinks things have gone to far.

The company responsible for placing a company into administration, then appoints an Administrator.

The administer is a company specialist in this sort of thing, they act on behalf of the company owners, the people the company owes money to and the general running of the day to day business.

With hotels it is usually normal practice for the administrator to appoint a ‘hotel management company’ to do the day to day stuff which lets them concentrate on the future of the business.  The original owner of the business’s involvement mainly depends on the how the administrator feels about how they have ran the business up to the point it went into administration.  It is common enough for the administrators to pay the owner a salary to stay involved in the interim, in some cases the owner will not be allowed on the premises for any reason.

The company will not stay in administration for-ever but the time can vary from one month to 3 years (or more) dependent on the debt levels, current turnover and future plans.

There are a number of potential outcomes to administration.

1.  Complete bankruptcy, the company has no future and is wound down.

2.  Break up, in the case of a hotel, the property and land might be sold in chunks to developers.  The fixtures and fittings sold at auction etc, this is common if the month to month business is simply un-viable moving forward.  In hotel chains, it is common for the individual hotels to be sold off or the group to be split into smaller groups.

3.  The company is sold to another company, this is generally the quickest way out of administrator where another company see’s a bargain and grabs the hotel for a cut down price.

4. The hotel can work it’s way out of administration and return to the original owners, this is also not un-common and a situation were the administrators gets the company running correctly again, cutting all dead weight, re-structuring the debt and sailing on.

5. Management buy-out.  Not as common in today’s market but in times when credit is more freely available, management who were not previously owners can club together with the help of investors and banks to buy back the company.

So what do you do, if you supply a company that goes into administration.

The ‘Action Plan’

1. Firstly, you need to get to know your industry.  Thankfully, I am well connected in the hotel industry so I hear about these things (in most case’s) before they go public, this means conversations can take place ahead of the news.  Have you ever tried calling a business the day bad news is broken?  It’s not a good idea.

2. You need to know the law and your rights as a supplier.  You have a contract with BIG HOTEL LTD and on 21st May 2011, BIG HOTEL LTD goes into Administration,  You are owed every single penny up until 21st May, thats not to say you will get paid that money but you are owed it.

3. You need to cut the credit to BIG HOTEL LTD, if you continue to supply credit to this company there is a good chance you won’t get paid because that company on paper does not trade anymore

4. Speak to the management, the administrators, your contacts, the doorman, the bank, the neighbours dogs, whoever you like.  The point of this conversation is three fold, firstly that you are happy to continue to supply them, secondly to agree new terms (ie, reduced credit, a DD mandate, payment up front, whatever you are comfortable with) and thirdly to GET THE NEW COMPANY DETAILS.

The new company details will generally be BIG HOTEL (IN ADMINISTRATION) LTD with the same company registration number and all of your documents, invoices and agreements need to reflect this.

5. Set up a new agreement but be careful who sign’s it, it can be signed by the following people

a) BIG HOTEL (IN ADMINISTRATION) LTD, co-signed by the administrators

b) The administrators themselves

c) The new management company, appointed by the administrators.

6.  You need to treat the debt owed to you by BIG HOTEL (IN ADMINISTRATION) LTD and BIG HOTEL LTD as two separate things, if you are like me, you will probably be well down the pecking order for getting paid but you might agree to settle the balance for less.  The Government and the Banks will always get their money first, thats just the way it is.

7.  Chill out, follow the process and be happy.  It is in everyone’s best interest for the company to survive, do your part to make it happen!

Russell