Licensing: The murky world of insolvency

The end of September marked the expiry of the Coronavirus (Scotland) Act 2020, a piece of emergency legislation which remained with us far longer than anyone could have anticipated. 

Its scope was necessarily wide, but in the licensing context there were a few important provisions which allowed licensing board business to continue during the early days of the pandemic. This included the invaluable authorisation to hold both civic and liquor licensing hearings remotely, and extended timescales for various applications. 

While the option to hold hearings remotely has been made permanent by the Coronavirus (Recovery and Reform) (Scotland) Act 2022, which commenced on 1 October, all other licensing provisions have now ceased to apply. This is undoubtedly a positive step forward in the recovery process, but it is important that operators and their advisers are not left exposed where timescales have reverted to the pre-pandemic rules. One area where this is particularly important in the current climate is in relation to the licensing process following an insolvency.

The licensed trade, and especially the on-trade hospitality industry, has arguably suffered more than any other sector over the past two years. The threat of insolvency is sadly very real for many businesses struggling to survive post-pandemic and in the current cost of living crisis. Despite recent Government interventions on energy and VAT, the hospitality sector is considered to be at breaking point. Combine this with the financial threat posed by the raft of new measures and schemes on the horizon, including the lack of business rates relief, the proposal for single use cup charges, the Deposit Return Scheme, short term let legislation and the uncertainly over planning permission for external areas, and you sadly have the perfect storm.

Minefield

Where a business, partnership or individual holding a premises licence is deemed to be insolvent, s 34 of the Licensing (Scotland) Act 2005 provides that a transfer to an insolvency practitioner (“IP”) must be lodged within 28 days. Insolvency is defined by s 28 and includes a creditors’ voluntary agreement, which we see being used more and more frequently to assist businesses in trading out of their position. The temporary extension which permitted a late application on grounds associated with coronavirus is no more, and the amended provisions due to be brought forward by the Air Weapons and Licensing (Scotland) Act 2015 are unlikely ever to see the light of day, at least in their current form. (Many will argue this is no bad thing.)

Having reverted to the pre-pandemic position, if the application for transfer is not submitted timeously the licence once again ceases to have effect. Licences have a value which an IP has a duty to realise, but in some recent cases the late submission of applications (absent a coronavirus related reason) has meant they have been rejected and that value has been instantly stripped out.

With an increased number of insolvencies, more unusual scenarios are emerging, and the straightforward back-to-back transfer from insolvent licenceholding company, to IP, on to new operator is becoming less common. IPs are understandably cautious about holding licences for extended periods, and with buyers not always easy to come by, the deployment of temporary licenceholding companies is becoming more frequent. 

There is nothing wrong with this practice in principle, but it occasionally leads to questions about liability during the 28 day and transfer processing periods. A company which is insolvent cannot be liable, but the holding company hasn’t taken on the risk at that point. In a recent case a sitting tenant saw this as a prime opportunity to take advantage, and the licence was put at risk as a result.

Tenants bring an additional dimension to transfers. The property owning company may have been liquidated, but the tenant holds the premises licence despite no longer having a right to occupy the building following the termination of their lease. How does an IP realise the value in a property where they have no control over the licence? Many historic leases have minimal or no licensing provisions. How does a clerk approach this where there is no consent from the licence holder to transfer the licence but the bank requires the asset to be sold? It has even been argued that were the licensing board to act without consent, it would breach article 1 of Protocol 1 to the European Convention on Human Rights. Conversely, what about an insolvent licenceholding tenant, leading to a competent transfer to an IP, leaving a landlord with no control? Unravelling a complex debt, lease and licensing puzzle can be an absolute minefield.

The transfer provisions continue to be far from perfect, and only workable due to the goodwill and pragmatic thinking of licensing board clerks. The Scottish licensed trade needs support and there have to be measures put in place which raise confidence in Scotland and the industry. Until then, we deal with insolvency in licensing in the only way we know how – with a focus on the timescales and with our fingers crossed!