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

Tuesday, 20 March 2012

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

Friday, 16 March 2012

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.

Thursday, 8 March 2012

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