Rangers FC - The issues facing the administrators as the closing date for bids looms

Today is the closing date for offers for Rangers FC plc. Duff and Phelps say they expect to have 4 or possibly 5 bids which they will consider before announcing their preferred candidate and entering a more intensive period of negotiation. So how will they choose between the bidders?

They have said their preferred exit route from administration would be via a CVA but they must ensure that a company voluntary arrangement will deliver a better outcome for creditors than they might expect if the company were to go into liquidation.

So how can they assess this?Press reports suggest that the bids on the table range from around £25m to around £8m.The largest bidder seems to favour a ‘newco’ scenario in which the business and assets of Rangers FC will be sold to a new company, the administration will come to an end and Rangers FC will go into liquidation.Other bidders prefer the survival of the original football club and an exit from administration via CVA.One of the bidders is reported to have secured a deal whereby one of the largest creditors, Ticketus, would be taken out of the picture and form part of the group which would acquire the majority shareholding in the club.

On the face of it, that seems to be an attractive proposition but a very rough draft of the numbers gives an indication of the difficulties the administrators might face if they were to accept it.  

However, there are significant variables which could switch the outcome in this very complex case.  

The calculation shown takes no account of potential liabilities following the outcome of the tax case.  If the decision were to go against Rangers,that would not bode well for a CVA as the sums owed by the club would increase substantially, even taking into account the deal with Ticketus which would take them out of the picture.  

Current estimates suggest that losing the tax case could increase the club’s liabilities by around £50m. Reports suggest that the level of bids which support an exit by CVA stand somewhere around the £8m level. Distributing almost £7m among creditors of £25m provides a decent outcome as the statement above shows.However, if the same amount has to be shared among £75m of creditors, they will get less than 10p in £.

In a newco scenario, with £25m on the table and with Ticketus claiming £25m, creditors would still get around 29p in £.  

And then there’s the issue of whether Rangers Group Limited will either sell its shareholding for a nominal sum or not. A liquidator need not concern himself with a shareholder but if Rangers FC is to survive in its current form, Craig Whyte needs to agree.

Finally, there’s the question of what value the securities held by the holding company actually has. If they have value, then they need to be dealt with before the interests of ordinary creditors (including Ticketus and HMRC) can be acknowledged.The securities confer a priority to Group over ordinary creditors.Technically, Group might insist they are worth £18m, which is the sum Group paid to the bank and in return for which Group received an assignation of the securities held by the bank.However, that could be challengeable.  

Today the administrators have to weigh up the bids on the table and they have to give notice of their proposals by next Wednesday.Their proposals must deliver the best outcome for creditors generally.Given the huge uncertainties still surrounding the club, they have an unenviable task.  And as we speak, Club 9 Sports seem to be putting themselves out of the running.The roller coaster for fans continues.  

(Please note – the figures we have used are for illustrative purposes only.We have no inside knowledge on the state of Rangers’ finances and no indication of how much the club actually owes.We have only used the known liabilities to HMRC and to Ticketus to provide an example of how bids could be assessed.Equally, we have no knowledge of how the bids are framed nor of what they actually contain.We have used publically available information for the purpose of putting clarity around the decision making process.)

Maureen Leslie from MLM Solutions will be appearing on Newsnight Scotland this evening at 11pm to discuss all of today's events. 


"Like" our Facebook Page to keep up with all the latest news from the Rangers tax case.

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

Maureen Leslie BBC Newsnight Scotland Interview

Maureen Leslie from MLM Solution joins BBC Newsnight Scotland to discuss the current situation at Rangers FC and give her opinion on what's going to happen next with the club. To view the video please follow this link ow.ly/9L8ga

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.