"You are not good enough to sing to us" is self aggrandising and offensive.
Put as bluntly as that, it certainly would be, but that's not what I understood from Jim's post. Unless you are a performance venue, as the Lincs club seems to be, then - as Jim says - you stand or fall by the standard of the regulars.
What's needed is subtlety and slectivity on the part of organisers to ensure that people who can't sing don't become part of the aural furniture. We all know singers and clubs where one particular person taking the floor is the cue for the regulars to head for the bogs or the bar.
You would actually be doing the bad singers a favour (let alone the long-suffering audiences) a favour if you were to say. "Look, if you get here half an hour early we can do a workshop on technique."
The unquestioning acceptance of any standard of performance, however bad, does no-one any favours and opens both performer and organiser up to ridicule.
To me there's nothing wrong or elitist in creating a system where people feel they have to earn the right to be floor singers and be encouraged on that path.