Let’s examine HMRC’s conditions and in particular those conditions that may preclude HMRC from accepting any proposal delivered by Rangers FC.
A Company Voluntary Arrangement (CVA) can be an effective way of restructuring the debt of a company and, when successful, results in the company’s survival.
A few months ago, CVAs were a relatively unknown effective business tool, particularly in Scotland. They have now been brought into the spotlight due to the situation at The Rangers Football Club plc.
A CVA requires 75% of a company’s creditors to vote in favour to be successful. It is difficult to predict the attitude of creditors towards any CVA proposal. However, HMRC provide a guide to its conditions for accepting a proposal, which indicates how they are likely to vote on any proposal. HMRCs conditions are summarised on its factsheet - http://www.hmrc.gov.uk/helpsheets/vas-factsheet.pdf.
Conditions for HMRC accepting a proposal that cannot or may not be achievable –
• an optimised and achievable offer is made to creditors
This is a wide ranging condition, parts of which are covered by more specific conditions below. It does specifically cover HMRCs condition that they expect the Company to pay monthly contributions into the arrangement for a period of 5 years.
• the proposal treats all creditors within the same class equally
There has been no suggestion that the anticipated CVA funded by Charles Green’s consortium will attempt this. Previous bidders proposed treating certain unsecured creditors differently (such as bondholders and TicketUs) and this would have led HMRC to reject the CVA.
• that the open market value of assets is not materially different from the proposal
The offer put to creditors is likely to be rejected if there are independent professional valuations which suggest more money can be raised by ceasing to trade, then selling the assets off separately. If a CVA proposal does not disclose the break up valuations, HMRC will specifically request that information.
• that values being placed upon liabilities are not materially different from the proposal
There needs to be a full disclosure of liabilities. In relation to RFC, this is complicated by the EBT liability raised by HMRC, that has been defended by the club, and is presently subject to a decision by a first tier tribunal.
• full reasons for past non-payment of tax and clear explanation of changes made…
The most obvious reason appears to have been Craig Whyte’s apparent decision not to pay Tax & NI, during his period of control. HMRC will seek assurances that Mr Whyte will not be involved in the affairs of the club going forward, as a shareholder or director.
• evasion of statutory liabilities or past association with contrived insolvency
Proper use of EBTs is widely accepted as good tax planning. Mis-use of EBT resulting in an abuse of the tax system is considered by HMRC to be tax evasion.
• payment of other creditors whilst withholding sums due to the Crown
This relates to the payment of other creditors, whilst withholding sums due to HMRC. It has been widely reported that this happened during Mr Whyte’s period of control.
• failure to meet any obligations under a prior voluntary arrangement
This can apply where the company enters any form of payment arrangement with HMRC, then subsequently defaults.
• exclusion of creditors who are entitled to receive the same treatment as all others within their class
It is essential that all debts due to creditors, are treated equally. HMRC will expect it’s assessment of the unpaid tax liability relating to the EBTs to be dealt with by the proposal.
• a purchaser assuming responsibility for payment of some of the debts in consideration for the purchase of the debtor’s assets
There has been no suggestion that Mr Green’s proposal contains such conditions. Previous bidders did make this a condition of their bids, and such conditions would have led those bidders’ proposals to be rejected.
Those with a keen eye may have noticed that there is little guidance on the level of dividend which HMRC expect, other than the proposal to creditors is required to be optimised. Our two most recent CVAs proposed around 35p in the £, and HMRC successfully negotiated these up to around 70p in the £. Whilst this should not be taken as any guide whatsoever in relation to RFC, these examples evidence the influence HMRC has in CVAs, where it has 25% or more of the voting rights.
If a CVA is accepted by at least 75% of the creditors of RFC, then the club will avoid the sanctions that are anticipated to be levied against it, if it seeks to re-enter the SPL through the newco route. Therefore, achieving a CVA clearly has benefits for those involved with the Club.
However, taking into account the foregoing analysis, it is clear that the Company has never been able to meet HMRCs conditions for accepting a CVA in the recent frantic months and it would prudent for those involved to anticipate HMRC rejecting the proposal.
Allan McLeod is a Senior Manager at MLM Solutions, who are Scotland’s leading provider of CVAs and successfully negotiate with HMRC to meet their conditions for accepting CVA proposals.
Maureen Leslie, Director of MLM Solutions, is a regular commentator on BBC Newsnight Scotland and Reporting Scotland regarding CVAs and corporate insolvency matters.