Some Thoughts Regarding Lord Hodge’s Bain v Rangers Decision – Not One Way Traffic!

Martin Bain v Rangers – Lord Hodge’s Decision Analysed

Today the written judgement of Lord Hodge was published following the hearing on 13th September.

The judgement can be found here

As it puts some meat on the bones of the verbal decision and the reporting of that hearing, I thought it was worth a detailed analysis.

It tells us far more than has been clear so far as regards the specific issues in dispute, and also publicly identifies time scales for further procedures.

Lord Hodge started by summarising what the case is about, stating that it arises from termination of Martin Bain’s contract with Rangers.

Mr Bain alleges that Rangers repudiated his contract of employment as its chief executive (i) by acts which amounted to a breach of a duty not to undermine the trust and confidence between employer and employee and (ii) by anticipatory breach of contract when Rangers’ new chairman, Mr Craig Whyte, stated to the press that “there was no way back” after Rangers had suspended him and that he would not be allowed to return to his duties. Mr Bain avers that he accepted those breaches of contract as a repudiation and rescinded the contract on 20 June 2011.

What Did Lord Hodge Need to Decide?

Lord Hodge detailed that “There are three tests which the court has to consider… when deciding whether to grant a warrant for diligence on the dependence. The burden of showing that those tests are met rests on the applicant for the warrant.” The tests are laid down in s15F of the Debtors (Scotland) Act.

These are (1) that the claimant has a prima facie case; (2) that there is a real and substantial risk that enforcement of any decree in this action would be defeated or prejudiced by reason of the defender being insolvent or verging on insolvency; and (3) whether it is reasonable in all the circumstances to grant a warrant, including the effect which that grant may have on any person having an interest.

Lord Hodge dealt with these points in turn.

The Merits of the Case

As regards the merits of the case, he noted an apparent difficulty for Mr Bain. In his case, Mr Bain states that his contract of employment, with effect from 29 September 2009, was for thirty nine months.  However “a long-term service contract of this length is prohibited under sections 188 and 189 of the Companies Act 2006 unless it is approved by a resolution of the members of the company. Mr Ellis QC, who appeared for Mr Bain, asserted that Mr Bain did not know whether the members of Rangers had approved the contract. I found that surprising as I would have expected the chief executive of a public company to be aware whether or not his employment contract had the needed shareholder approval.

One – nil to Rangers, perhaps? It is interesting that there was no comment about this, at least that I saw, in the press coverage on 13th September, although this might be one of the factors the judge did not mention in open court. It dents Mr Bain’s position if he was not aware if his contract had been legally approved.

However Mr Ellis, Mr Bain’s excellent QC, had a fall back position. “Mr Ellis pointed out that if the contract was in breach of sections 188 and 189, the statute replaced the offending provision of the contract setting out the term of the contract with a deemed provision that the company could terminate the contract at any time on giving reasonable notice. Mr Bain avers that reasonable notice in the circumstances of his position and employment history is twelve months. Accordingly, Mr Ellis submitted that Mr Bain had a prima facie case that he was entitled to damages on the basis that he had been deprived of the benefits which would have accrued to him in a twelve-month notice period.

The argument put forward in the “fall back” position was accepted as being a valid one by Rangers QC. This is an interesting example of the law denying an apparent agreement legal effect, but allowing something else to be substituted for it, rather than simply tearing it up.

One positive for Rangers though is that the fall back position would reduce the sum claimed to approximately £964,000, from the £1.3 million craved.

Mr Napier for Rangers said that they had a substantial counterclaim against Mr Bain for alleged breaches of fiduciary duty, but that this had not yet been developed, so he could not ask the judge to refuse the arrestment on that ground.

Lord Hodge decided that, as matters stand, there is a prima facie case.

How prepared are Rangers in this case? It is three months since Mr Bain left, and four since he was suspended. One would have hoped that, by this stage, at least a reasonable skeleton argument could have been put forward as regards the claim against him. But no.

The Possibility of Insolvency

As regards the second test, he noted that the law was clear.”First, in addressing this test the court has to look into the future to the time when a pursuer is likely to obtain a judicial determination of his case… Secondly …the notion of risk is crucial; it looks to the possibility of insolvency, not actual insolvency.

Mr Ellis laid out a number of grounds for there to be concern regarding Rangers’ solvency.

These were as follows:-

1                    that the “healthy balance sheet depended on the valuation of the company’s stadium and training facilities;

2                    that the accounts did not provide for the potential tax liability of £49 million in respect of the “big” tax case;

3                    that Mr Ellis relied on the terms upon which Wavetower Limited, controlled by Mr Whyte, had purchased the holding of 85 per cent of Rangers’ shares (further referred to below);

4                    that there was the “small” tax case, where HMRC had arrested £2.3 million in a bank account of Rangers and where Rangers had accepted its liability to pay £2.8 million and that it disputed only amount of the interest and penalties;

5                    that Rangers had paid a debt of about £35,000 to its former solicitors, Levy & McRae, only after they had sued when faced with delaying tactics; and

6                    that Mr Whyte had given an interview reported in an article in the Daily Record on the day of the hearing (13 September 2011) in which the reporter recorded Mr Whyte as stating that Rangers faced cuts in expenditure because it faced a £10 million black hole in its annual running costs.

On the basis of these details Mr Ellis asked the court to conclude that Rangers was already in a state of practical insolvency. In any event, if the “big” tax case was lost, Rangers would be practically insolvent unless it received sufficient outside support.

In reply, Mr Napier argued that Mr Bain had not shown that there was a real and substantial risk of insolvency as (a) there was no basis for challenging Rangers’ statutory accounts, which Mr Bain himself had signed, which showed a solvent company, (b) the outcome of the tax case was unknown and it was far from clear that Rangers would lose the case in the spectacular fashion which Mr Ellis suggested, and (c) the determination of the tax case was in any event a long way off.

He argued that the risk of insolvency must be reasonably proximate and it could not be said that it was so in this case. The court should not assume an adverse outcome to the tax case.

Lord Hodge stated that he was not persuaded that Rangers were presently insolvent. There are two types of insolvency – practical insolvency where a company cannot pay its debts as they fall due and absolute insolvency where a company’s total dent exceeds its total assets.

Lord Hodge then referred to Mr Whyte’s sworn statement lodged at court which, one assumes, asserted Rangers’ solvency.

He said, “In relation to the HMRC claim for £2.8 million and penalties, Mr Whyte’s affidavit suggests that HMRC have been able to arrest £2.3 million in Rangers’ bank account. Discussions are continuing between HMRC and Rangers in relation to the level of penalties imposed. In any event, the purchaser of Rangers has undertaken to pay the debt to HMRC. Thus, while the debt affects Rangers’ balance sheet, it does not of itself contribute towards any practical insolvency. The delayed response by Rangers in settling the claim for fees by Levy & McRae may have been coloured by a sense of grievance toward the solicitors that they should not be acting for Mr Bain when they had acted for the club. Accordingly I attach little weight to either claim as demonstrative of actual or impending insolvency.” (Emphases added)

It’s not made clear what form the undertaking to pay the HMRC bill takes. Have formal declarations been made to this effect? As most the money to do so has already been arrested, this is perhaps not as generous an offer as at first sight.

Another win for Rangers then?

No – as Lord Hodge goes on to discuss the arrangements by which Mr Whyte carried out the takeover.

What is more significant to my mind as an indicator of a potential difficulty in the medium term is the structure of the takeover deal which is recorded in the circular sent to shareholders of Rangers on 3 June 2011. That document disclosed that The Rangers FC Group Limited (formerly Wavetower Limited) (“Group”) had purchased 85.3 per cent of the shares of Rangers for the cash sum of £1 and had given certain undertakings. As part of the deal, Group took over Rangers’ indebtedness to the Lloyds Banking Group, which Mr Ellis informed me stood at about £18 million, and obtained an assignation of the Bank’s securities over Rangers’ assets. The summary of material terms of the acquisition disclosed that Group would waive this debt “if the Club has not suffered an insolvency event within 90 days of the Club’s appeal in relation to the tax claim brought against the Club by HM Revenue & Customs….”Group has undertaken to provide or secure the investment of substantial sums in Rangers but, until it waives the acquired bank debt, such further investment is to be treated as increasing Rangers’ debt to Group. Thus those funds will not improve Rangers’ balance sheet until the expiry of ninety days after the determination of the tax appeal.” (Emphases added)

Here we come to one of the keys of the whole deal. Mr Whyte’s “Group” will only invest, unconditionally, in Rangers once 90 days passes after the “big” tax case is decided. Till then, all investment is actually to be treated as a loan, thus, if Rangers did have an Insolvency Event, Mr Whyte’s “Group” would have an increased share of the debt, thus giving it greater power to resolve an administration type situation in its interests.

Lord Hodge goes on to say “In my view, this carefully structured deal, by which Group has (a) secured its existing investment, by which the bank was repaid, and its commitment to make or procure further investment in Rangers against the assets of Rangers by the assignation of the bank’s securities and (b) made the waiver of its loan to Rangers conditional upon the non-occurrence of an insolvency event in the ninety days after the determination of the appeal in relation to HMRC’s £49 million claim, shows an appreciation by Group of a risk of insolvency resulting from that claim.

In addition, when Lord Hodge asked Mr Napier to clarify Rangers’ position in relation to the HMRC claim for £49 million, “He was not able to assist as he had no instructions in relation to that matter. I must therefore treat Mr Bain’s assertions as to the extent of HMRC’s claim as uncontradicted, although I acknowledge that the claim itself is the subject of an appeal by Rangers.

We come again to the question of preparedness. Reasonably assiduous internet users can talk at great length regarding the tax issue. So why was Rangers’ QC not able to comment at all? Was this neglect on someone’s part, or a deliberate effort to keep as much as possible of the dirty linen out of court?

Lord Hodge noted that the HMRC appeal might still take some time to resolve and that Mr Bain’s case itself would probably not get to a full hearing before next summer, but he viewed the potential tax debt as more definite that a future trading event and as such,”I am not persuaded that the outcome of the HMRC claim is too remote in time for the court to form a view as to the existence of a risk. I am satisfied that there is a real and substantial risk of insolvency if the tax appeal were to be decided against Rangers in the sums which have been discussed. In reaching this view I emphasise that I am concerned with the statutory test which addresses the degree of possibility. I am not speaking of the actuality or even probability of insolvency.

Was It Reasonable to Grant the Order?

Turning to the third test, His Lordship noted Mr Ellis as arguing that Mr Bain had lost substantial benefits from his contract and an arrestment, if effected more than sixty days before insolvency, might confer a preference. Rangers’ tangible assets were subject to securities which had been assigned by its bank to Group, and Mr Bain could expect no benefit from those assets.

Mr Napier responded by alleging that the processes leading to the large HMRC claim had been in place when Mr Bain was an executive director of Rangers and the alleged liabilities incurred on his watch. He accused Mr Bain, by seeking to use the HMRC claim for tax and penalties to secure a warrant to arrest on the dependence, of taking benefit from his own irregularities and that was not reasonable.

However the particular scheme which gave rise to the “big” case was put in place and contributions into it started in season 200-2001 (according to the relevant Rangers Annual Report) but Mr Bain only became a Director in September 2001.

Lord Hodge commented “In reaching a view on this third test of reasonableness I take account of the assertion that the tax claim which has given rise to the possibility of insolvency is something which had occurred at least in part under Mr Bain’s stewardship. But that of itself does not make it unreasonable to give him some security for his claim. I am satisfied that Mr Bain has discharged the burden of showing that it is reasonable to grant warrant for arrestment on the dependence.

The Amount of the Arrestment and Court Costs

However he restricted the sum to be arrested to reflect “the fact that Rangers’ claim against Mr Bain exists and is likely to be developed over time. It would not be appropriate in my view to ignore Rangers’ allegation that Mr Bain has been in part responsible for its predicament.

He found Mr Bain successful as regards costs, but only for one half, to reflect his partial success.

Conclusion

Interestingly, following the verbal judgement there were commentators and commenters quick to say that Mr Bain had proved nothing, as the merits of the case are some way from being heard. I have already heard it said today that Lord Hodge’s last comments above in some way vindicate Rangers and establish that Mr Bain has a case to answer.

That is not the case. All that was offered to the court were imprecise assertions of Mr Bain’s potential liability, together with the very serious allegation of breach of fiduciary duty. Detailed allegations will need to be made, and Mr Bain will have the chance to answer.

The case still has a good distance to run, although both parties will be doing their best to put their cases together as quickly as possible. Mr Bain clearly has a substantial head start, and Rangers have a lot of catching up to do.

If the plan is for Rangers to suffer an Insolvency Event before next summer however, the arrestment will at least get Mr Bain some of his money!

We await the next exciting instalment!

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9 Comments

Filed under Bain v Rangers, Civil Law, Courts, Football

9 responses to “Some Thoughts Regarding Lord Hodge’s Bain v Rangers Decision – Not One Way Traffic!

  1. Very interesting, Paul. I am particularly surprised that Rangers’ QC could glibly assert that he has received no instruction on the matter of the biggest tax bill in the history of the club as if such a matter was of no importance in an argument about a potential state of insolvency.
    What might the judge privately think about that? Might he read between the lines to deduce that it suited Napier NOT to be instructed about any details of the big bill so that he could avoid being trapped into answering questions about it? Or does His Lordship just take it at face value?
    As an ordinary Joe, I’d have thought that a QC wouldn’t dare to go into a court to argue about Rangers’ financial health unless he had a pretty good picture of its overall condition. I’m sure that Napier’s competence is not in question so is there any conclusion to be reached other than that he didn’t want to be briefed about the big bill? I’m surprised that the judge didn’t ask him if he was taking the p…

    Some of the legal rationalising of the arguments strikes me, as a layman, as being counter-intuitive. The judge says, “I am satisfied that there is a real and substantial risk of insolvency if the tax appeal were to be decided against Rangers.” You also report that “Lord Hodge noted that the HMRC appeal might still take some time to resolve and that Mr Bain’s case itself would probably not get to a full hearing before next summer”. But His Lordship also says [14] “I accept that the appeal against the HMRC determination is at an early stage and that there is scope for appeals by either party from the First tier Tribunal to the Upper Tribunal and thereafter the courts.”
    What I don’t follow is precisely what he means by “if the tax appeal were to be decided against Rangers.” I’d have understood that as referring to the FTT since it’s expected to give a decision before Bain’s case gets to a full hearing. As things stand, HMRC have already presented Rangers with a tax bill for £49m+ which remains unpaid while the appeals process is ongoing. Why then does Lord Hodge mention the scope for further appeals (which, I presume, would drag on beyond the hearing of Bain’s case)? If there are further appeals following an FTT decision against Rangers, does the tribunal’s decision stand in the meantime in the sense that Rangers would have to cough up the £49 million before launching further appeals?

    One more thing; is there some special significance in the “90 days” condition which is mentioned in Whyte’s circular? Why 90 rather than 120 or 60? If HMRC wins the appeal, does it have to take some action (which would trigger the insolvency event) within 90 days? Is ninety days a random length of time?

    Finally, I’d like to thank you for the time you’re putting into this blog. It’s great to be able to ask an expert about this arcane stuff!

  2. rumpole

    Is bain’s contract legal ? has he in fact abused his position and his fiduciary duty ?

    • As Rangers QC accepted, the failure to have the contrcat approved by the members does not rip it up, but instead allows the court to determine what would have been “reasonable”. Here this is of most importance as regards the notice period, and Mr Ellis for Mr Bain is arguing that a 12 month period should be used if the full contrcat is held to be invalid.

      As far as the breach of fiduciary duty is concerned, if an executive decided to award himself improved terms, with no one other than him approving it, one can see a problem. It is hard to imagine that taking place at Rangers though. Surely someone, eg the Chairman, would have known what the Chief Executive was doing.

  3. rumpole

    I would hazard, as they say in all the top stables, that Bain is onto very small plums.
    Have you heard the latest about the tribunal, seems our Learned friend Thornhill has traduced the HMRC presentation, as nothing more or less than kite flying. The Tribunal panel are said to be much impressed by Andrew’s leadings.

  4. Michael

    Paul, I have some questions.

    What is the significance of the 60 days mentioned? If Bain wins his case will he get that money ahead of the preferred creditor (GROUP)?

    Are HMRC in the same position regarding their arrestment? Will they get their money ahead of GROUP if they win?

    If the answers to questions 2 and 4are NO and NO then what is the point of the arrestments?

    Apologies if these questions are outwith you area of expertise.

    • Michael,

      Thanks for the questions!

      The rules regarding insolvency state that “diligence”, that is action taken to freeze funds or secure payment, is ineffective if carried out within 60 days prior to the Insolvency event eg administrtaion. This is to stop a last minute rush of clamiants who, hearing that a business is in trouble, run to the courts to try to freeze chunks of the business funds against debts due to them. Diligence within the 60 day period is deemed to be “equalised”. If funds are arrested, the “owner” in this case Rangers, cannot make use of them until the dispute is determined or a court lifts or reduces the arrestment.

      If more than 60 days passes, then the creditor is in an advantaged position as regards the sums arrested, so that, subject to various technicalities, those funds are not available to the administrator unless and until there is an agreement with the creditor. Here, where Mr Bain has secured certain funds to protect his position, should he be successful in court, the action he has raised would need to continue (unless the adminstrator gave in) to determine who was due the arrested money. If Mr Bain gets awarded more than the arrested sum, then he would get it all, and for the rest simply be an ordinary creditor. If awarded less, the balance would go back into the administrator’s pot, for distribution to creditors generally. Mr Bain’s lawyers are therefore hopeful that there is no such insolvency event before mid November!

      The position with HMRC is broadly the same, except they, effectively, have a court order for the £2.8 million now. If Rangers refuse to hand it over, HMRC can sue Rangers and the bank where the funds are frozen for an order that the bank hand over the cash (an action of furthcoming). The bank would take no part in the case but as they hold the funds they have to be a party to it.

      As long as the relevant period has passed, HMRC would be preferred as a creditor for the sum arrested. They would be an ordinary creditor for everything else.

      I understand that GROUP has a “Floating Charge” over the remaining assets of Rangers, but as this is a security which crystallises when it is called up, the arrested funds would not be caught by that. To answer questions 2 and 4 therefore, subject to any other peculiarities there might be, Mr Bain and HMRC have secured these sums ahead of GROUP.

  5. rumpole

    The Bain case rather more simple than Lord Hodge would have the masses believe.
    Bains contract is either legal or not, despite Napier’s strange conceeding of a totally irrelevant point.

  6. Pingback: Could Sir David Murray Ride to Rangers’ Rescue? – A Speculation | Random Thoughts Re Scots (and Other) Law

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