Thursday, 29 March 2012

Rangers Ticketus Deal Decision

In a previous blog, we looked at the purposes for which Duff and Phelps have been appointed to Rangers FC plc, namely, to rescue Rangers FC as a going concern, failing which, to achieve a better result for Rangers’ creditors as a whole than would be likely if it were wound up (i.e. liquidated) without first being in administration.

The Administrators face huge difficulties in rescuing Rangers as a going concern, not the least of which is ‘the Big Tax case’.  But they also face another difficulty – the Ticketus agreements.  Basically, that deal involved the sale of season tickets by Rangers to Ticketus for 5 seasons starting in 2011 and ending in 2015.  Under the agreement, Ticketus would receive around 60% of Rangers’ expected income in each of these seasons.

Why is this problem? 

Fairly simply, it presents difficulties on a number of levels. The Administrators want to sell the company as a going concern and exit administration by proposing a compromise arrangement with its creditors (Company Voluntary Arrangement).  To do this, the administrators need to be clear about the company’s assets and income, as well as its liabilities.  Leaving aside the difficulty in determining what its liabilities actually are – the elephant in the room being the ‘Big Tax case’ here – the Administrators faced a further problem in that it seemed that a big chunk of future income had been pledged to Ticketus. 

The Administrators’ preferred route to achieving their objective is to issue new shares in Rangers and sell these along with Craig Whyte’s existing holding.  (Or more accurately, Rangers Group Limited’s holding).  The problem for a purchaser is how to value these shares.  One of the most common ways to value a company (or its shares) is to look not just at its assets but also its expected future income.  If 60% of that belongs to a third party, this makes the shares considerably less valuable.

The Administrators want to exit administration using a CVA.  A CVA is a very flexible solution and can take many forms.  Often, it combines a lump sum payment with an on-going contribution from a company’s future income.  If the Ticketus deal stands, the lump sum payment is likely to be much less than it would be without Ticketus.  Therefore the sums available to the Administrators to structure the CVA would also be less.  This might make a CVA unattractive to Rangers’ creditors.  If the deal stands, there could be no contribution going forward either because the club would only be receiving around 40% of the income it was actually generating.

Initially, Duff and Phelps invited prospective purchasers to frame offers on the assumption that “no future income need be committed to Ticketus”.  It would seem that Ticketus took issue with that assumption and the Administrators issued an amended memorandum which envisaged the possibility that the Ticketus deal stood. 

So, the Administrators went to court to ask for guidance.  Initially, they asked the court to say whether they could be prevented from breaching the contract with Ticketus.  This is only a little short of asking the court to provide up front approval for walking away from the deal.

Not surprisingly, Ticketus argued that this approach was far too wide so the question to the court was reframed.  

The questions the Administrators then put to the court were as follows:

- What is the legal nature of the rights given to Ticketus in the agreements both in respect of the Stadium and of future income?

- What legal test should be applied by the Administrators in determining whether they can be prevented from breaching the agreements?

Both questions are extremely technical and both parties engaged some of the finest brains in Scotland to debate them in court. 

The first question relates to the nature of the rights conferred on Ticketus in the agreement.  Basically, the Ticketus agreements purported to create a Trust over future income from season ticket sales and a Trust gives the creditor secure rights which the Administrators could not overturn. 

However, the agreements were drawn up under English Law which is different from Scots Law in this area.  Basically, the Judge concluded that Scots Law should prevail and Scots Law would not agree that a Trust had been created because you can’t create a Trust in Scotland over something which is not yet in existence, namely future income.

This means the Ticketus deal is just a normal contract and Ticketus has no greater rights than any other creditor.

This brings us to the next question then.  

When can an administrator breach a contract?

The Judge’s view was that the law says an administrator has to act in the best interests of the company’s creditors as a whole.  He added that there would be circumstances where an administrator would have to breach a contract (or decline to perform it) if performing the contract would conflict with that overriding duty to act in the best interests of the creditors as a whole. 

Confused?  Well basically the Judge has said it would be ok to walk away from the Ticketus deal if doing so would result in a better deal to ALL the company’s creditors, including Ticketus. 

How would that work?  If the Administrators do not honour the Ticketus contract, Ticketus will become a creditor like any other in the case, including HMRC.  They would make a claim in any CVA and expect to receive a partial pay-out like the other creditors. 

Ticketus would be entitled to claim not just what they had lent to Rangers – close on £25,500,000 – but they would be entitled to claim damages as well.  So including Ticketus with the ordinary creditors would have a significant impact on how much creditors could all expect to get in a CVA.

To make things even more confusing though, Ticketus are part of a consortium which has noted an interest in acquiring Rangers.  Presumably on the basis that they are entitled to future revenue anyway?  So the administrators have to weigh up the competing bids and work out what delivers the best outcome to Rangers’ creditors as a whole.  And they still don’t know the outcome of the Big Tax case! 

And in the latest turn, Craig Whyte seems to be refusing to sell his shares to Paul Murray’s consortium, which includes Ticketus.  This case looks like it could run and run and there is every chance the administrators could find themselves back in court in future.  All very interesting for insolvency practitioners but very confusing indeed for fans

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