Insolvencies in the Leisure Sector

2022 has been a bad year for business, with insolvencies continuing to rise each financial quarter across the UK. With a worsening recession, Russia’s war in Ukraine and fears of a looming energy crisis approaching this winter, countless companies have been announcing insolvency measures or closing their doors completely.

The leisure sector has been particularly hard hit, with post-pandemic recoveries failing to materialise at a hoped-for level. This August, the leisure sector took an enormous blow when Cineworld – one of the world’s largest cinema chains – announced that it had become insolvent.

In this article, the team at Irwin Insolvency explains why Cineworld and many other companies in the leisure sector are facing closures. The team also explores the rising number of insolvencies across the UK, before explaining how you can help your company through these tough times.

Cineworld Prepares for Insolvency Proceedings

In August 2022, Cineworld announced that it was instigating insolvency procedures across its UK operations. Although Cineworld is listed in the UK, as a global company they have 751 cinema sites around the world. This means that Cineworld also announced that in the United States it was preparing to file for Chapter 11 Bankruptcy.

The Guardian reported that Cineworld had run up debts nearing £4 billion, which the company largely blames on strict Covid restrictions that saw cinemas closed in the 10 countries where it operates. With pandemic support tailing off in 2022, Cineworld was banking on a cinema resurgence, as film-lovers were able to return once again to movie theatres. However, this hoped-for resurgence has yet to fully materialise, and post-Covid recovery in the leisure sector has been less than optimal.

While the company prepares for bankruptcy in the United States, it’s been reported that in the UK, Cineworld has taken on insolvency practitioners to oversee potential restructuring plans. Unfortunately, the future looks bleak for Cineworld, although there are insolvency options that could save the company or parts of it from liquidation.

As one of the largest single employers in the leisure sector, Cineworld’s potential closure is not good news. It’s also a sign of the rising economic issues facing the UK, and a potential foreshadowing of the insolvency problems many other companies will soon face in leisure, and other sectors.

What’s the Cause of Cineworld’s Insolvency?

Cineworld, like many other businesses in the leisure and hospitality sector, had been forced into temporary closure during the pandemic.

Cineworld’s management reported to the London Stock Exchange that the pandemic was the primary cause of the company racking up huge debts, which are now running into billions of pounds.

These debts – exacerbated by the need to take out loans to keep the business afloat while having little-to-no revenue streams during lockdown – have forced the company into a financially untenable position, and it’s now struggling to cover the exorbitant costs resulting from the pandemic.

As lockdowns ended, Cineworld had staked much of its financial hopes on big summer blockbusters filling cinema seats. It had expected big movies released by Hollywood studios (including films from the Marvel franchise) to draw in the crowds, but ticket sales were much lower than expected in 2022. Low ticket sales could mean that filmgoers are still wary of returning to confined theatre spaces, or it could be that audiences are now used to watching their films at home on streaming platforms.

Either way, a lack of summer income has pushed Cineworld into insolvency and, in the US, has forced it to consider bankruptcy proceedings. However, while debts accrued during the pandemic and a lack of ticket sales are the immediate short-term causes of Cineworld’s insolvency, there are other factors to consider.

As mentioned, film audiences are now accustomed to watching big releases on streaming channels like Netflix and Amazon Prime. In fact, even before the pandemic, cinemas were already facing a downward trend in terms of attendance levels. While Cineworld was still profitable, statistics showed that the attendance of younger audiences in cinemas had fallen by as much as 20 per cent between 2011 and 2017, for example.

Pre-pandemic, cinemas were already struggling to attract consistent customer numbers and were being forced to compete with new platforms. The pandemic simply accelerated this process. Ensuing issues such as inflation and the cost of living crisis may mean that audiences will see cinema outings as an unnecessary luxury, especially when they can watch subscription services from the comfort of their living room.

Cineworld may also have suffered when the UK government began withdrawing its Covid support measures. This includes the furlough scheme, which saw the government paying employee wages when cinemas were closed. The government also withdrew low-interest Covid support loans that Cineworld may have had access to, while moratoriums on leases and business rates would also have expired.

To summarise, the major causes of Cineworld’s insolvency include:

• Withdrawal of Covid-19 support measures
• Lower than expected ticket sales
• Competition from streaming platforms
• Decreased interest in traditional cinema formats

What Does Insolvency Mean for Cineworld?

As a publicly traded company, Cineworld’s huge debts have already caused the company immense problems. The company’s share price has dropped drastically, with the Sun reporting a fall of as much as 81 per cent since its recent insolvency announcements.

The company’s debts now outweigh the worth of the company itself (a classic example of insolvency), with debts standing at £4 billion and the company being valued at just £133.9 million. Without a serious injection of cash from investors, the company is in danger of being liquidated.

Given that Cineworld operates 128 cinemas in the UK, this would put many thousands of employees across the country out of work. It would also have a knock-on effect on their many suppliers, including catering companies that supply food and drink, and cleaners contracted to clean cinemas. Many of these suppliers could also face insolvency if Cineworld is unable to pay the debts it owes. Anyone owning shares in Cineworld will also be affected, and they could find their investments become worthless.

But Cineworld’s insolvent state does not automatically mean that the company will be liquidated. It’s in the best interests of creditors who are owed money for compromises to be made and solutions found that allow Cineworld to continue trading, or else the losses stand to be significant for everyone.

It’s also important to note that bankruptcy proceedings can only be applied in the United States. UK companies cannot become bankrupt, as this is a legal procedure that only applies to individuals in the UK. There are however several other options that could be placed on the negotiating table. These include:

• Company Voluntary Arrangement (CVA) Cineworld may enter into a formal agreement, or CVA, with its creditors. This may result in consolidated debts, new repayment terms and interest rates, or the wiping of some debts completely to keep the company afloat.
• Administration: An administrator may be appointed to take over the insolvent company’s operations. The administrator would then attempt to turn Cineworld around through restructuring or sale of assets.
• Refinancing: The company may try to source new lines of credit or investment that allow it to refinance its operations.
• Corporate Restructuring: To stay afloat, Cineworld will need to restructure. This possibly means downsizing and streamlining operations.
• Asset sales: The company’s assets may be sold to pay its creditors. This could involve the sale of its properties and leases, branding and image rights, or technical equipment. As an international company, Cineworld’s head office may also decide to sell its subsidiaries to keep its major operations in the UK and US afloat at the expense of others.

What Happens If Insolvency Measures Fail?

Many of the insolvency measures that Cineworld could take, including a CVA or going into administration, will buy the company at least 12 months of time to restructure. This could provide the opportunity the company needs to turn business around, reorganise its debts, and ultimately escape insolvency.

If these insolvency measures fail however, the final option is liquidation. Cineworld would have several liquidation options available, while it may be able to liquidate subsidiaries in different countries to pay creditors and save important parts of the business.

In the UK, there are two main liquidation options available to insolvent companies:

• Creditors’ Voluntary Liquidation (CVL): A CVL occurs when the directors agree with the creditors to voluntarily liquidate the company when no other options remain. The directors retain some control over the process, as they sell off assets to pay debts.
• Compulsory Liquidation: If the company refuses to liquidate yet cannot pay its debts, then creditors may force Cineworld into compulsory liquidation. This process can be prolonged, as creditors must seek approval through the courts to have the company liquidated.

The end result of both types of liquidation is the same, as the company’s assets are sold off and any proceeds distributed amongst creditors. In real terms, this would involve the company’s UK operations being wound up, Cineworld theatres across the country would be forced to close, and thousands of employees would lose their jobs.

It may be the case that instead of the assets being sold off in part, the company finds a buyer to take on the business and pay its debts. This would allow the company to continue trading under the same name and branding. If this does not happen, then the liquidated company would be struck from the Companies House register and would cease to exist.

What Does Cineworld’s Case Tell Us About the State of the Leisure Sector?

Cineworld’s insolvency has made headlines because of the scale of the company’s debt, the size of the business and its well-known brand image. However, Cineworld’s case isn’t unique.

Cineworld’s insolvency offers an insight into the wider state of the leisure and hospitality sectors in the UK. Companies are struggling financially as they deal with a multitude of problems brought about or exacerbated by the pandemic, and the UK’s Insolvency Service reports that insolvencies have been increasing dramatically through 2022.

In Q2 of 2022, they recorded a total of 5,629 company insolvencies across the UK. The figures released by the Insolvency Service show that insolvencies in the second quarter of 2022 were up by 81 per cent in comparison to the second quarter a year earlier in 2021. Perhaps even more tellingly, the Insolvency Service calculated that 1 in every 228 active UK companies became insolvent within the last year. To put these figures into perspective, the UK hasn’t seen such a high number of insolvencies since the 2009 financial crisis.

The leisure sector has been particularly hard hit, and there are a number of reasons for this. Many are struggling due to the withdrawal of Covid support measures, including important Bounce Back Loan schemes. The sector also hasn’t seen a return to business as usual, with spending down across the UK as customers are hit hard by inflation and the rising cost of living. Simply put, people have less money to spend, and it’s the leisure sector that suffers first as customers cut back on non-essential goods and services.

Companies may also be facing supply chain issues and uncertainty brought about by Brexit, while Russia’s war in Ukraine has also forced prices up and only added to the uncertain economic climate. Most importantly for businesses going forward is the looming energy crisis. Unless the government brings in caps for businesses, then the exorbitant cost of energy is likely to massively impact companies in all sectors of the economy.

Contact Irwin Insolvency for More Information on Leisure Sector Insolvencies

Many companies in the UK are currently facing financial difficulties, but Irwin Insolvency’s expert team of advisors is here to help.

Our experienced insolvency practitioners can assist your company with all insolvency matters, providing impartial advice that could save you from liquidation.

Contact Irwin Insolvency today for more information on leisure sector insolvencies.