Coronavirus: The impact of insolvency on licensed premises

It’s becoming apparent that despite the government’s intervention with business rate holidays, relief against forfeiture and furloughing of staff during the coronavirus pandemic, many licensed, leisure and retail businesses are in dire straits as a result of closure. Imminent emergency insolvency legislation will provide a breathing space for companies, but this will only help financially distressed, but viable businesses. As a result, it is unfortunate that insolvencies already reported in the press will just be the tip of the iceberg. Many businesses will not have the financial resources to cling on whilst premises remain closed for an indefinite period of time and many will go through some form of insolvency procedure over the next few months.

This article focuses on the issues insolvency practitioners need to be aware of when dealing with premises licensed under the Licensing Act 2003. The breadth of establishments holding premises licences is very broad. It is not simply pubs, restaurants, clubs and bars that are licensed under the Licensing Act 2003. Petrol stations, cinemas, theatres, hairdressers, retail stores, cafes, lap dancing clubs, casinos, town halls, museums and art galleries may also carry out licensable activity and will hold a licence.

In order to sell alcohol by way of retail, play live and recorded music and provide late night refreshment, a premises licence is required. Such licences can be held by individuals or corporate entities. Licences attach to the premises and can generally be transferred from entity to entity.

The default is that a premises licence lasts in perpetuity, unless the licensable activity and licence is only for a finite period (i.e. a ‘pop up’ restaurant or music festival). When not time-limited, there are only three ways in which a premises licence can ‘cease to be’: where the licence is surrendered by the holder; where the licence is revoked following a review hearing; or where the licence lapses. It is the last of these that is particularly important to an insolvency practitioner, as the insolvency of the premises licence holder automatically leads to the premises licence lapsing.

In the Insolvency Act 1986, the definition of insolvency at section 27 is:

(3) For the purposes of this section, an individual becomes insolvent on—

(a) the approval of a voluntary arrangement proposed by him,
(b) being made bankrupt or having his estate sequestrated, or
(c) entering into a trust deed for his creditors.

(4) For the purposes of this section, a company becomes insolvent on—

(a) the approval of a voluntary arrangement proposed by its directors,
(b) the appointment of an administrator in respect of the company,
(c) the appointment of an administrative receiver in respect of the company, or
(d) going into liquidation.

If one of these events occurs to the licence holder, the premises licence itself lapses immediately and no licensable activities can then be legally carried out until the licence has been reinstated. There is only a 28-day ‘window’ in which the licence can be reinstated. After that period, the licence is lost and the insolvency practitioner will be left trying to market unlicensed premises. In the case of pubs, bars and restaurants this needs to be avoided at all costs.

There are two ways in which a lapsed premises licence can be reinstated: either by transferring the premises licence or lodging an Interim Authority Notice (“IAN”).

A lapsed premises licence can be transferred to any person or entity which carries on, or proposes to carry on, licensable activities from the premises. No legal interest is required and, in reality, the ‘nexus’ between the proposed premises licence holder and the carrying out of licensable activities does not have to be a particularly strong. Even a landlord receiving rent from a premises is able to hold the licence (Hall v Woodhouse Ltd v Poole Borough Council [2009] EWHC 1587 (Admin)).

Typically, unless there is to be a pre-pack sale, premises licences are transferred to other entities in the group which are not (and will not become) insolvent, shelf-companies, specialist third-party operators, or individuals connected with the business. If the premises is to remain closed (which in many circumstances is likely for the foreseeable future), there is no risk of any liability and the appointment takers (where applicable) could hold the premises licence.

Transfer applications are typically made online and can be effective immediately. Unlike a ‘normal’ transfer application, the consent of the previous licence holder is not required in this scenario, which simplifies matters. A transfer application can also be made in advance of the insolvency ‘trigger’. With proper planning and a good working relationship between the operator and insolvency practitioner, transfers can be made prior to any licences lapsing on the insolvency event. In this case, the consent of the outgoing licence holder is required. This approach removes the risk of licensable activities taking place after a licence has lapsed, but before it has been reinstated.

The second option, applying for an IAN, is a ‘temporary fix’. The IAN application process is like that of a transfer application, but it only reinstates a premise licence for a period of three months. If a subsequent transfer application is not made within the three-month period, the premises licence will lapse again – this time, for good. Furthermore, only someone with a prescribed interest in the property, or who is connected to the premises licence (i.e. an insolvency practitioner), can apply for an IAN.

Of the two options, on the face of it, the transfer route is the most straightforward option. IAN applications are still made but only where the insolvency practitioner does not intend to carry on licensable activities, if there is no intention to trade and/or where an imminent sale is on the cards.

Notwithstanding which option is taken, it is crucial to remember that if any licensable activity (even selling a single bottle of beer for takeaway) takes place after insolvency but before the premises licence is reinstated, this is a criminal offence, punishable by up to six months’ imprisonment and/or a fine. It is also a criminal offence to knowingly allow a licensable activity to be carried on. This offence could be committed by an insolvency practitioner.

There is no ‘slip rule’ where the 28-day period to take action to preserve a licence is missed. If the premises licence is not reinstated, a new premises licence application will be required. This creates several issues, namely:

• The quickest a new premises licence can be granted is 29 days from the date of the new licence application and up to two months where representations are made leading to a hearing.
• Applications for new premises licences can take time to prepare. Plans which comply with the requirements of the Act’s Regulations need to be submitted and these might not be readily available.
• There is no guarantee that a new premises licence will be granted on the same terms, particularly where council policies prevent new licences being granted for such extended hours. Often operations teetering on insolvency take shortcuts or generally ‘push the envelope’ to drive revenue. Such approaches can lead to increases in crime and disorder and public nuisance – both of which will encourage representations to be made in respect of an application for a new licence. Even if a licensing sub-committee is willing to grant a new licence, it could be on more restrictive terms.

If faced with having to apply for a new premises licence, it is possible for licensed premises to trade without carrying out licensable activity or to trade short-term, using the Temporary Event Notice (“TEN”) procedure. TENs are standalone licences. They can last for up to a week. Only 15 TENs can be applied for in each calendar year and for a total of 21 days. Furthermore, even in the case of expedited TENs, 5 working days’ notice needs to be given and there must be a gap of at least 24 hours between each TEN. Due to these restrictions, TENs are only a short-term fix until a new licence can be obtained.

The impact of insolvency on licensed premises is not simply a theoretical threat. Whilst the wording of the Act might sound draconian (why should entering into a CVA inadvertently lead to a premises licence lapsing?), the law is strictly enforced. We have seen and heard numerous examples of premises being raided, operators being arrested, and insolvency practitioners being sued for professional negligence where appropriate action is not taken to preserve licences in the event of insolvency.

Now, more than ever, insolvency practitioners need to be aware of these issues when dealing with licensed premises. Urgent professional advice from experienced licensing experts is required in advance of insolvency, to ensure that licences are protected and to preserve the value of trading assets.

If you have any questions on the issues raised in this article, please contact Niall McCann or Richard Williams using the below details.