Hospitality Sector Insolvencies in Australia
When your hospitality business faces insolvency in Australia, you must follow strict legal steps. You need to appoint a liquidator, notify creditors, and lodge documents with ASIC. Your tax obligations continue even in financial trouble. Moreover, directors may face personal liability if they trade whilst insolvent under the Corporations Act 2001.
Accounting Times reported that in the 12 months to March 2025, insolvencies in the accommodation and food services industry rose by 57%, with 1,837 businesses becoming insolvent. With this growing concern comes the need for attorneys who know how to handle, or even mitigate, hospitality insolvency.
Macmillan Lawyers and Attorneys has everything you need to know about hospitality sector insolvencies, and the steps you should take if you find yourself in the middle of one.
Key Takeaways
- Your hospitality business is insolvent when you can’t pay debts when they are due, and you must stop trading once you know this.
- Watch for warning signs like unpaid bills, using tax money for expenses, and falling sales so you can get help early.
- If you think your business might be insolvent, get advice from experts right away and stop taking on new debts.
- You can save your business through options like Voluntary Administration or Small Business Restructuring instead of closing down completely.
What is Insolvency in Australia’s Hospitality Sector?
Insolvency in your hospitality business happens when you can’t pay debts when they are due. Your café, restaurant, or hotel may face cash flow problems from seasonal trading, high rents, or rising food costs. Australian law requires you to stop trading once you know your business is insolvent to avoid serious penalties.
Are there Early Warning Signs of Hospitality Insolvency?
Yes, there are early warning signs of hospitality insolvency. These include:
- Struggling to pay suppliers on time
- Bills are piling up
- You can’t pay staff wages
- Using GST money to cover expenses
- Bookings or sales have dropped significantly
If you spot these signs, you should talk to a financial adviser or insolvency practitioner right away. The earlier you get help, the more options you’ll have to possibly save your business.
What Legal Steps Should Be Taken if You Suspect Insolvency?
If you suspect insolvency in your hospitality sector in Australia, you must take legal steps:
- Seek professional advice from an insolvency practitioner
- Stop incurring new debts
- Document your financial position
- Consider voluntary administration
- Directors must avoid trading while insolvent or risk personal liability under Australian law
The hospitality sector in Australia has been particularly vulnerable to financial distress due to seasonal trade, high operational costs and recent economic challenges. Here’s an overview of what you should do from a legal standpoint:
| Legal Step | Description | Why It Matters |
|---|---|---|
| Seek Professional Advice | Consult an insolvency practitioner or legal adviser | Ensures actions are compliant with the Corporation’s Act |
| Stop Incurring New Debts | Cease taking on new financial obligations | Helps prevent personal liability for insolvent trading |
| Document Financial Position | Keep accurate and current financial records | Supports transparency and aids legal and strategic decision-making |
| Consider Voluntary Administration | Appoint an external administrator to assess restructuring options | May allow the business to survive or maximise returns for creditors |
| Notify Stakeholders | Inform employees, suppliers, and key partners of the situation | Maintains trust and complies with disclosure obligations |
| Explore Safe Harbour Protections | Assess eligibility for protection from insolvent trading liability | Offers directors legal protection while pursuing turnaround strategies |
| Review Contracts and Leases | Evaluate obligations under supplier contracts and property leases | May uncover opportunities to renegotiate or exit costly arrangements |
| Prepare for Employee Entitlements | Ensure accurate calculation of staff entitlements and eligibility for FEG | Complies with Fair Work requirements and reduces legal exposure |
What is Voluntary Administration in the Hospitality Sector?
Voluntary administration in the hospitality sector is a legal process when your hospitality business can’t pay its debts. You appoint an external administrator to take control of your business. They assess if your café, restaurant, or hotel can be saved or must be wound up. This gives you breathing space from creditors while a plan is being developed.
What are the Main Insolvency Procedures for a Hospitality Company in Australia?
Your hospitality business in Australia has six main insolvency options. These include Voluntary Administration when you can’t pay debts, Creditors’ Voluntary Liquidation if you choose to close, and Court Liquidation when creditors force closure. You might also use a Deed of Company Arrangement, Small Business Restructuring, or face Receivership when secured lenders take action.
- Voluntary Administration: This gives your struggling café or restaurant breathing space for 20 to 25 business days. An administrator takes control and works out if your business can be saved.
- Creditors’ Voluntary Liquidation (CVL): When your hospitality business is insolvent and can’t continue, you choose to wind it up. A liquidator sells assets to pay creditors in order of priority.
- Court Liquidation: This happens when your creditors apply to the court to wind up your business. It’s often triggered when you haven’t paid a statutory demand within 21 days.
- Deed of Company Arrangement (DOCA): Following Voluntary Administration, this formal agreement with creditors allows your restaurant or hotel to pay debts over time while continuing to trade.
- Small Business Restructuring: If your hospitality business has debts under $1 million, you can keep control while working with a practitioner to develop a debt restructuring plan.
- Receivership: This occurs when a secured creditor (like your bank) appoints a receiver to take control of your business assets to recover money owed to them.
Can a Hospitality Company Restructure Instead of Liquidating?
Yes, a hospitality company can restructure instead of liquidating. Get in touch with Macmillan Lawyers and Advisors and allow us to evaluate your options. This could be through Voluntary Administration, where you pause creditor actions. Your hospitality business might also use Small Business Restructuring if debts are under $1 million, letting you stay in control while fixing your company’s finances.
Hospitality Sector Insolvency FAQs
What is the ‘safe harbour’ provision?
The safe harbour rule protects you as a director while you try to save your business. You need to create a plan that will work better than closing down. You must keep good records, pay staff, and lodge tax forms on time to get this protection. Get advice from Macmillan Lawyers and Advisors so you know you’re doing it right.
How does the ATO impact hospitality insolvencies?
The ATO impacts hospitality insolvencies by causing problems for your hospitality business during the process. They can make you pay company tax debts from your own pocket and can force your business to close if you don’t pay. They might take money from your bank account or stop directors from leaving Australia if the business owes taxes.
Can hotel directors be held personally liable for company debts?
Yes, as a hotel director, you can be held personally liable for company debts. This happens if you keep trading when you can’t pay bills, fail to pay staff super or taxes, or break your duties as a director. Most hotel directors don’t know they’ve signed papers making them responsible for company loans and leases.
Are there industry-specific challenges for hospitality businesses?
Your hospitality business faces money challenges, from seasonal trade and high rent to food costs. You may struggle with staff costs due to weekend rates, while food prices keep rising. Many new cafés and restaurants in Australia fail in the first 3 years because of these challenges. You may also face more competition from food delivery services, and often can’t find enough (reliable) staff.
What happens to hospitality employees during insolvency?
During insolvency, your staff get paid before most other debts if your hospitality business fails. They should get their wages, leave pay, and some redundancy pay. If your business can’t pay them, the Fair Entitlements Guarantee can help. Some staff members might keep jobs during administration, but others will lose them right away.
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