Is exit from Administration in sight for Rangers FC?

As Rangers enter the 11th week of administration, we offer some thoughts on how the process has been conducted to date.

The overriding duty of an administrator is to exercise responsible care for the company whose property has been entrusted to him.  To do this, he has some wide ranging powers which include the power to carry on the business of a company,  to establish a subsidiary of the company and to transfer to any subsidiaries ‘the whole or any part of the business and property of the company’ (Schedule 1, Insolvency Act 1986).  We’ll return to that a little later in this blog.

This overriding duty does not mean that the administrator has to save the company at any cost.

There are 3 objectives of administration:

1. Rescuing the company as a going concern
2. Achieving a better result for the creditors as a whole than would be likely if the company were wound up (without first being in administration)
3. Realising property in order to make a distribution to one or more secured or preferential creditors.

These purposes are hierarchical, so you can only move to purpose 2 if it becomes clear that saving the company is not practicable.  The report published by Duff and Phelps on 5 April specifically refers to these purposes in Section 6.

Although saving the company is the first purpose of administration, this cannot be pursued at any cost.  Administrators have a statutory duty to perform their function in the interests of creditors as a whole. (1)

Administrators are further limited in how they may exercise their powers by the proposals approved by creditors at the meeting called to consider them.

In the case of Rangers, the administrators published their proposals on 5 April.  They indicated that the meeting of creditors would be conducted by correspondence and they invited creditors to vote on 5 resolutions before 20 April.

These resolutions, simply stated, were as follows:

1. That Duff and Phelps continue the administration process until that process comes to an end and that they exercise the powers of an administrator as they see fit in order to achieve the purpose of the administration
2. That they be allowed to propose a Company Voluntary Arrangement 
3. That they be empowered to take steps to put the company into liquidation “when it is anticipated that no better realisations will be made in the Administration than would be available in a winding up”
4. That their fees should be determined with reference to the time spent on the case
5. That the proposals should be approved without modification


What does all this mean for Rangers?

There are 2 offers on the table for Rangers FC this morning.  The Blue Knights’ bid appears to require a transfer of shares from Craig Whyte and exit via a CVA.  Bill Miller’s bid seems to propose a newco route.  Can one of these bids now be ‘preferred’ and the process of due diligence commence?

The Blue Knights bid clearly envisages the survival of The Rangers Football Club plc.  If successful, the first purpose of administration would be achieved, that is, the survival of the company as a going concern.  However, the stumbling blocks for the Blue Knights’ bid remain the problem of Craig Whyte’s shareholding and the probability of a CVA being accepted.  As we understand it, the Blue Knights’ bid proposes that Rangers’ bondholders will forego their claims in the CVA, presumably in the expectation that the Knights will honour the club’s obligations to them.

This creates a problem for HMRC whose guidelines suggest they will reject an arrangement which excludes creditors “who are entitled to receive the same treatment as all others within their class.”  If you are interested, you can read the guidelines in full by following the link at (2) below.

The other outstanding issue for a CVA is the quantification of the liability to HMRC – that is, the outcome of the tax case.

Bill Miller’s bid of £11.5m seems to offer more to creditors than the Knights’ bid.  As we’ve seen, the administrators have a statutory duty to take that into account.  Although he himself described the detail in a rather colourful way, it seems to involve the creation of some kind of subsidiary of Rangers FC plc, followed by a transfer of the business and assets to that subsidiary and a remerger with Rangers FC at some point in the future once a CVA has been agreed and completed.  However, failure to agree a CVA would not seem to be a significant impediment to his bid, although it would mean a move from purpose 1 to purpose 2 of the administration.

As we’ve seen, administrators have the power to create subsidiary companies and to transfer the whole or any part of the business and assets of the company in administration to that newly created subsidiary.  The stumbling block may be the ban on transfers imposed by the SFA last week, although today’s decision by the SPL to delay discussion of new Financial Fair Play rules must surely be helpful.  The SPL has confirmed that any application by a newco would be heard under existing provisions.

Perhaps it’s time for Rangers’ administrators to take some decisive action to break free of the present impasse and to provide some certainty for fans, players and employees of Rangers FC alike?  We’ll be online tomorrow lunchtime and will be happy to try to answer your questions about the operation of the insolvency process and how these might be used to facilitate either of the bids.

Join us here for our live Q&A session tomorrow from 12pm until 2pm

(1) Para 3 (2) Schedule B1 Insolvency Act 1986
(2) http://www.hmrc.gov.uk/helpsheets/vas-factsheet.pdf

Rangers FC - where next?

In a day of dramatic developments, Rangers FC seem to be left with a single bidder, the American Bill Miller.  At 5am this morning, the Press Association wires reported an ‘impasse’ at Ibrox.  Duff and Phelps said they needed an ‘unconditional offer’ before they could award preferred bidder status.  Apparently, Brian Kennedy’s offer had been rejected.  In the last few minutes, Bill Ng has withdrawn his bid saying that the bidding process has become ‘untenable’.  He has said he has ‘serious concerns’ about the deliverability of the shares on offer.

So where does that leave Rangers and the much discussed CVA?  

Remember, as recently as 4 April when the administrators published their proposals, they stated that they still believed that a sale “would result in an exit from the administration via a Company Voluntary Arrangement or Scheme of Arrangement”.  This would allow the company – the legal entity which is Rangers Football Club, to survive. 

However, to do this, a purchaser would have to acquire substantially the whole of the shareholding in the club, which brings us back to Craig Whyte.  Nothing has been said in public which suggests that he has agreed any deal to sell his shares.  So how could a bidder make an ‘unconditional offer’ to purchase the club when they don’t know if the shareholder will sell?

It seems that Mr Ng agrees.  Duff and Phelps cannot deliver Rangers Football Club plc to anyone without Craig Whyte’s agreement. 

However, the question of the shareholding is not the only barrier to an ‘unconditional offer’.  An unconditional offer for the company would involve some degree of certainty regarding how the company’s debt will be handled.  That is, some degree of certainty around the terms upon which a CVA might be agreed.  However, the level of debt is not yet quantified.  We don’t know how much HMRC is owed.  And we don’t know the value of Craig Whyte’s security.  In the same report from the administrators earlier this month, they advise that they are seeking to clarify how much, if anything is owed to RFC Group.  Again, this is a fairly fundamental point if you’re looking for ‘unconditional offers’.

And then there’s Ticketus.  Earlier this week, their involvement with the Blue Knights group apparently came to an end.  Last Friday, it looked like Paul Murray’s group would emerge as preferred bidders and enter a period of exclusivity.  Duff and Phelps reportedly demanded £500,000 in the form of a non-refundable deposit to proceed with the bid.  Ticketus, we are told, would not put up the money.

Asking for an up front, non-returnable deposit would be an entirely normal way to proceed.  Payment demonstrates good faith and gives the seller comfort in relation to the purchaser’s ability to fund the deal.  The sum Duff and Phelps asked for was not unreasonable or unusual in the context of a transaction of this size.  So why did Ticketus back off?  Hard to say.  But they face a loss of somewhere around £15m, depending on the precise terms of the deal with the Blue Knights.  Is it perhaps understandable that they did not want to throw another half a million into the pot?  Probably. 

Or did Ticketus simply defect to the Singaporean, Mr Ng because he put a better deal on the table?  It looks like it but Bill Ng has now expressed his frustration with Ticketus who appear to be applying increasing pressure to improve the outcome for themselves. 

If we think back to a couple of weeks ago, the administrators went to court to ask for guidance on the circumstances which might justify them breaching the Ticketus 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. 

If Ticketus are holding prospective purchasers over a barrel, Duff and Phelps might have to move closer to walking away from this contract.  Which means Ticketus would have to claim in a CVA, increasing the level of creditors by over £25m and diluting the return.  And perhaps open up the prospect of further litigation.

Which brings us to the final development this week which was the intimation of legal proceedings against Collyer Bristow, the solicitors who acted for Craig Whyte in the acquisition of Rangers, by the administrators. 

One of the questions which has to be asked when considering a CVA is whether the company is engaged in litigation or has litigation pending. 

Although administrators do not enter litigation unless they are confident of their position, the outcome can never be certain.  What IS certain is that it will take a long time and will cost a lot of money.  And that’s another barrier to an ‘unconditional offer’.  Who will pick up the costs of the case if Duff and Phelps lose?  Why should a purchaser, who is only interested in the future of the club, pick up liability for fighting old battles?

The odds against the administrators being able to deliver a CVA are stacking up.  Are Duff and Phelps moving to the second purpose of administration which is the sale of the business and assets?  Developments over the next few days may prove crucial.


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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. 


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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.