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Jamies Italian – A Timely Reminder of Insolvency Risk in the Hospitality Industry

Jamies_italian_restaurant_Adelaide_dinner_plate_and_glass_of_red_wine

On 28 June 2016, receivers and managers were appointed to the Keystone Hospitality Group. A number of well-known bars, pubs and restaurants owned by Keystone were subject to this appointment, including six Jamie’s Italian restaurants located in Sydney, Perth, Adelaide, Canberra, and Brisbane.

According to the receivers, Ferrier Hodgson, the appointment was made by the secured creditors of Keystone after they were unable to reach agreement with Keystone’s board of directors about the financial structure of the group.[1] Media have quoted Keystone directors as saying that the substantial debt incurred to fund Keystone’s recent business expansion (which included the acquisition of the Jamie’s Italian franchise), as well as changes to Sydney’s lock-out laws, contributed to the Group’s financial distress.[2]

Keystone follows a number of hospitality insolvencies that have occurred in Adelaide in recent years, including the Stag Hotel and Chesser Cellars. It serves as a timely reminder that, despite the appearance of being an iconic and well-attended venue, a terminal inability to pay debts may be infecting the underlying business.

Amongst those at great risk in these circumstances are suppliers of products, such as wine and other alcoholic beverages, on credit terms. If a supplier has not taken simple measures to protect itself from the insolvency of its customer, it faces the prospect of not being paid any outstanding debt and, in addition, losing any stock supplied but not yet paid for.

In order to protect themselves from the risk of insolvency, suppliers of products on credit can take simple and inexpensive steps. These include:

  • Preparing and providing to their customers appropriate terms and conditions of sale, including a carefully drawn “retention of title” clause. This can be as brief and simple as a one-page document which, if drafted correctly, will confer upon the supplier a valid and enforceable security interest in stock provided to its customer.
  • Registering its security interest on the Personal Property Securities Register (“PPSR”). A registered security interest affords protection against other creditors of the customer in the event of insolvency. If a customer entered receivership or another form of insolvency administration, a correctly registered security interest will ensure the supplier does not lose priority to its stock, or any book debts or proceeds realised from the sale of its stock, to any other secured creditor. Given the low cost involved in registering a security interest on the PPSR, and the disproportionately large loss that might be incurred if a supplier did not register against a customer who later became insolvent, registration is generally a worthwhile, and often necessary, investment.
  • Actively pursuing debts when customers have exceeded credit terms. If a supplier routinely allows its customers to pay late or infrequently, it may find its debt having grown to a substantial sum which has no or little prospect of being repaid in insolvency. A simple, yet properly drafted, letter of demand can be a very effective and inexpensive means of recovering such amounts.

In addition to the above, suppliers of products on credit may wish to take out an appropriate credit insurance policy which might help mitigate the risk of customer insolvency.

The receivers and managers of the Keystone Hospitality Group are seeking a sale of the Group’s assets, either as a whole or through a break-up.

If you would like to discuss steps that your business could take to protect itself from customer insolvency, or if you have any queries regarding this Alert, please contact Lewis Gentry or Will Taylor.

[1]https://www.ferrierhodgson.com/au/media-and-publications/media-releases/keystone-group-in-receivership

[2]http://www.smh.com.au/business/property/keystone-collapse-jamie-oliver-jp-morgan-banker-former-ten-boss-and-wallaby-emerge-from-rubble-20160629-gpuhy6.htm

 

This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.

 

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