Administration Or Not? The Latest From Rangers FC

So, is Rangers Football Club in administration or not?  On 9 March, the then administrators returned to the Court of Session seeking an administration order against the company.  But the company had already entered administration on 14 February.  Or had it?

On 9 March, the court issued an order, appointing Mr Clark and Mr Whitehouse of Duff and Phelps, ‘Joint interim managers’ of the club.

So what’s going on?  Are Rangers in administration or not?  You will look in vain on either the club’s website or the interim managers’ website for the answer.  There’s a black hole where information should be.

The interim manager is a strange and unusual beast.  The Court usually makes such an appointment when it has been presented with a petition asking for an administration order but in circumstances when it does not have enough information to allow it to make a decision.  However, the court recognises that if such a petition has been presented, it may be prudent to appoint a person to take control of the company and manage its affairs until such time as the court hears all relevant evidence which will allow it to decide whether an administrator should be appointed.  And people appointed under these circumstances are known as ‘Interim Managers’.

And that’s what Messrs Clark and Whitehouse now are.  However, normally an insolvency practitioner would move from being appointed Interim Manager to being appointed as Administrator.  But Messrs Clark and Whitehouse appear to have gone backwards!

So, in layman’s terms, what on earth does this mean for Rangers Football Club?  It’s difficult to say.

It seems that Rangers Football Club was previously registered with the Financial Services Authority, most likely in connection with the Rangers Credit Card.  If a company is registered with the FSA, it must notify them before it appoints administrators and have the FSA’s agreement to the appointment.  This formality appears to have been overlooked. 

The return to Court of Session by the erstwhile administrators is likely to be an effort to obtain retrospective ratification of their appointment.

But where does that leave them meantime?  In a statement to the press, they say that “It is envisaged that this hearing is a formality and that the process will not impact in any way the progress of the insolvency”.  .In the meantime, they remain interim managers.

The terms of the court order certainly gives them the same powers as administrators but experts in insolvency law take the view that the role of the interim manager is not without its problems. In a text book co-authored by one of Scotland’s foremost insolvency judges, he notes that ‘interim managers are likely to be within the definition of shadow directors……and as such may be exposed to an action for wrongful trading if they allow the company to trade for any significant length of time, given that it is insolvent.’

Shadow directors are defined as people ‘in accordance with whose directions or instructions the directors of the company are accustomed to act’.  So, although they may have the same powers as administrators, and that would include a power to sell the club, it could be argued that they are considerably more exposed than an administrator would be.  There is no doubt Rangers is an insolvent business.  If the interim managers are to sleep easily in their beds, we can only hope that the salary cuts agreed by playing and non-playing staff are enough to stem the losses of £1m per month.  Otherwise, a disgruntled creditor might just decide to argue that the interim managers are acting as shadow directors and not as administrators and to hold them liable for losses in the meantime should the club go into liquidation. 

So, is the club in administration or not?  Arguably not.  Although an administration order was made, it is not valid, or at least, the purported administrators have not been validly appointed.  Does that mean the actions they have taken since February 14 can be challenged?  Probably not, but most insolvency professionals will be breathing a huge sigh of relief that they are not in the centre of this complex web of confusion.

What's Next For Rangers Football Club?

That’s the question fans of Rangers Football Club should be asking this morning after the club’s administrators failed to reach agreement with players about cost savings they say are vital if the club is to complete its remaining fixtures this season. 

There are only 4 means to exit administration:

1.    By returning the club back to its owners

2.    By agreeing a CVA with the company’s creditors

3.    By going into liquidation

4.    By dissolution of the company

Option 1 can only happen if the club is returned to solvency.  It is hard to see that happening any time soon.  Duff and Phelps say the club is losing around £1m per month.  Three weeks after they were appointed, little appears to have been done to stem those losses.

CVA’s depend on the survival of the company.  If creditors are going to agree to write off a portion of their debt (which is what happens in a CVA), they need to be reassured that the company is financially viable going forward.  This means it has to be profitable. 

Duff and Phelps say they are now considering ‘accelerating’ the sale of the club.  But what do they have to sell?  Craig Whyte (or one of his companies) is described as a ‘secured creditor’.  What kind of security does he have?  If he holds a standard security (a mortgage) he cannot be forced to surrender it for less than he is owed.  If it’s a floating charge, which is secured more generally against the Rangers FC plc’s assets, the administrators have a little more freedom to act but they cannot afford to ignore Mr Whyte.

Unless the Ticketus deal can be challenged or reversed – and there’s no sign that it could be – any prospective purchaser is looking a significant depletion of working capital for the next 4 years. 

And then there’s the squad.  An administrator has 14 days to decide whether or not he will adopt contracts, including contracts of employment.  If he adopts the contracts, he assumes personal liability for payment if the company finds itself unable to do so.  Given that Rangers’ wage bill is somewhere around £22m per annum, we presume that the administrators have issued letters of non-adoption to the playing staff at least.  If that’s the case, there are no contracts and the players would be free to walk away.  Duff and Phelps were seeking agreement to some kind of short term variation of employment contracts, but this strategy is now in disarray. 

Finally, there’s still no clarity around the issue of the tax case.

So, what is it that the administrators will be selling?  And what would a purchaser be buying in to?

Rangers’ fans should be asking some hard questions of the club’s administrators.  For appointments of this magnitude and importance, it would be normal for an Insolvency Practitioner to have done his homework before he takes office.  He would have at least the rudiments of a roadmap to guide him through the initial stages of his appointment.   And some idea of how to get out of the process. 

Following Craig Whyte’s take over last year, he was advised by a partner in MCR (formerly Menzies Corporate Recovery).  Duff and Phelps acquired MCR in in late 2011.  Paul Clark, one of the Joint Administrators, has said “MCR was asked to provide consultancy advice to Rangers post the takeover of the club last year……………...This work included assessing cost and staff structure, revenue forecasts, liaising with HMRC and options for the club should an insolvency arise. This included concerns in relation to the first tier tax case.”  So Duff and Phelps was no stranger to Rangers.  Given that they were advising on ‘options’ in the event of insolvency, fans of the club are surely now entitled to ask them to be more specific about how they intend to resolve the club’s current plight

Can A CVA Save Rangers

CVAs or Company Voluntary Arrangements are at the forefront of the sports news in Scotland but they are one  of the least used restructuring tools in an Insolvency Practitioners toolbox.  In Scotland, there are only around 5 every year.

So, what is a CVA?  Essentially, it’s a compromise arrangement between a company and its creditors. The company is saying “We’re sorry but we can’t afford to pay our creditors in full.  However, we’d like to make you an offer to pay a percentage of our debt and for you to accept that in full and final settlement.”  So, essentially, it is a deal between a company and its creditors.

A CVA is contractual in nature but the contract has some peculiar features.  It cannot vary the rights of secured or preferential creditors without their consent.  Secured creditors are those who hold either a Standard Security over the company’s property or who hold a Bond and Floating charge over moveable assets – debts due to the company, for example.  Intellectual property like Trademarks or Brands can also be secured.  Preferential creditors are usually employees for unpaid wages or holiday pay.

However, provided the requisite majority is obtained, it is binding on ALL creditors, even those who object to it.

Finally, unlike any other UK insolvency process, the directors remain in control throughout the entire procedure.

So, how would you go about putting a CVA in place?

Having identified that an Arrangement is a suitable option for a client, the first thing you have to do is identify key stakeholders – usually the company’s bank and any other secured creditor.  You’ll remember that the rights of secured creditors cannot be varied without their consent so it’s important to get them on board from the outset.  So you’d also be talking to any HP and leasing creditors in respect of key items of kit.

The directors need to consult an insolvency practitioner.  Why?  The IP acts as a ‘Nominee’ and it is the Nominee’s job to put forward the Directors’ proposal to the company’s creditors.  You should note that it’s not the IP’s proposal but the directors’ proposal.  The role of the IP at this stage is to review the proposal and to put it forward only if he/she considers that it is reasonably likely to be accepted by creditors and to be achievable.  The Directors will be responsible for achieving key milestones  to make the deal work– whether it be cost cutting, relocation, boosting sales or whatever – it’s down to the company’s directors to deliver.

So what would a proposal for a CVA actually look like and what would it contain?  By nature, since the company is asking its creditors to write off some of the money which they are rightfully due, there is a requirement to make full and frank disclosure of the company’s financial affairs.  So as well as details of its assets and liabilities, creditors should expect to receive some information about the background to the company and its current difficulties , as well as financial projections – cash flows, forecast P&Ls etc - to allow them to assess whether the company is fundamentally sound or has a reasonable prospect of survival in the longer term.

The proposal is then sent to ALL the company’s creditors, including HMRC, the Bank or any other secured creditor and any HP or Leasing companies.  Because the CVA is contractual in nature, creditors are allowed to propose modifications which are voted on at the meeting which is called to approve it.  In practice, the IP and the directors would identify the key stakeholders and ensure that they are happy with the proposal and prepared to vote in favour of it BEFORE the meeting.

The CVA is approved if 75% by value of those voting at the meeting vote in favour of it.  Votes can be cast in person or by proxy.

In the case of Rangers Football club, it’s likely that HMRC will have a key role to play in deciding whether a CVA should be approved simply because they seem to be a significant creditor.  So, besides a proposal which would see a significant payment being made to them, what might they and other creditors want to see in a proposal?

MLM does not work with such large businesses but we do CVAs for smaller companies.  So, what would we look for before putting forward a CVA proposal?  We’d be looking for a sound underlying business with reasonably dynamic management ready and willing to do whatever is necessary to allow the business not just to survive but to thrive.

We’d expect to see some or all of the following:

Good strategy and good management

•  Management remain in control of the business so stakeholders need to have confidence in their ability to   deliver
• Is there a business plan in place?
• Is it realistic?

Good business

• Is there a profitable core business?
• Is the problem an isolated occurrence, a one-off event?
• Will key creditors back a rescue plan?

Financial Control and Management Information

• Is there enough cash to meet immediate needs?
• Is there good Quality financial and/or management information?
• Are there realistic budgets and can management stick to them?

Misc

• Any litigation pending?
• How much luck will we need?

CVA is not an easy option.  They usually involve some tough business decisions but if the will to survive is strong enough, they’re a great tool to shake off historic problems and face a more profitable and successful future.

Merry Christmas

We would live to wish all of our valued clients and partners a Merry Christmas and a Happy New Year.

Edinburgh Insolvency Discussion Group

Antonia McIntyre, an MLM Director attended Wednesday evening's talk for the Edinburgh Insolvency Discussion Group, which was presented by Alasdair Baijal of BBM Solicitors,  who discussed the impact of the Bribery Act 2010 on Insolvency Practitioners.  Alisdair provides some useful hints and tips to help IP's avoid falling foul of the legislation! Contact Alasdair at agb@bbmsolicitors.co.uk if you have any questions for him! He loves to be put on the spot!!

Personal insolvency within the Finance, Employment and Sustainable Growth portfolio

Our new, majority, SNP government has been in place for 5 months now.  One of the more interesting allocations – well, interesting to the insolvency community at least – is that while Mr Fergus Ewing retained responsibility for the development of policy and law in personal insolvency, this is now being developed under the umbrella of Mr Swinney’s Finance, Employment and Sustainable Growth Portfolio.  Mr Ewing is responsible for Energy, Enterprise and Tourism.

Perhaps strangely, in shifting responsibility from the Justice portfolio to Sustainable Growth, the new SNP government paralleled the position in the Westminster parliament, where responsibility for all aspects of insolvency lies with the Department for Business, Enterprise and Skills. Perhaps this is a sign of a maturing Scottish Government, a government not afraid to acknowledge where Westminster has actually got things right.  But has it?

The positioning of Bankruptcy within the Enterprise portfolio in England and Wales is a bit of a hangover from  Mr Mandelson’s love affair with all things American in the insolvency arena. The reforms he put in place, actualised in the provisions of the Enterprise Act 2003, were based on the premise that entrepreneurism could only thrive if it were supported by a ‘friendly’ or ‘soft’ insolvency regime (amongst other things of course).  However, our colleagues south of the border recognised very quickly that personal insolvency has very little association with entrepreneurism or even self employment.  It is all about consumerism.

So, would it not be more mature of the Scottish Government to recognise the error of Westminster’s ways and move Personal Insolvency back into the Justice portfolio and concentrate on developing a fully internally coherent regime for Scotland’s consumer debtors?  Or, if our government genuinely believes that Personal Insolvency belongs in Mr Ewing’s Enterprise portfolio, why not spend some time developing a workable insolvency solution for all our hard working joiners, electricians, publicans and so on – a Scottish version of the English Individual Voluntary Arrangement (IVA), rather than waste time on further watering down the rights of creditors in the existing regime?

Business Rescue and Recovery - Strategic Partnerships

One of the frustrations of being an insolvency practitioner is that, although we have a set of tools which allow us to help distressed businesses, people approach us when the situation has become critical and our options are very limited.

Why don’t people get in touch sooner?  Well, I suppose most of us would be upset if the undertaker turned up at the door when we thought we simply had a bad cold.  At MLM, we want to get the message out that we really are here to help.  So we’re joining with some like minded people, all of whom are committed to Scottish business, to make sure we’re armed with more than just insolvency restructuring tools.  We’ve got part time Financial Directors, turnaround specialists, HR people who can help you manage a downsizing and we’re meeting on the 28^th of this month to plan how we can make harassed company directors more aware of what we can do for them.  Watch this space