I make no apology for returning again to the joys of Insolvency law and Rangers FC. Lots of people, including most importantly Craig Whyte, are talking about restructuring, including administration.
As I commented here, there might be effects for Rangers depending on the exact nature of the Insolvency Event which they undergo (if indeed they do).
What is known, or reasonably assumed to be true, is as follows:-
1 Rangers FC Group Ltd (“Group”) owns 85% of Rangers FC PLC (“Club”);
2 Craig Whyte (“CW”) controls Group;
3 Group paid off the Lloyds TSB debt owed by Club, totalling £18 million, and in return for that received from Lloyds an assignation of the Floating Charge granted by Club in favour of Lloyds pre 2003; and
4 The debt owed by Club to Group consists of the sums paid by Group to settle the bank debt, together with any of the investment promised by Group into Club, and assorted charges, fees and interest incurred by Club in respect of the work of CW and his team, and the funds owed by Club to Group.
What is reasonably suspected as regards the future is as follows:-
1 There are concerns about Club’s cash flow and solvency, and either as a result of the First Tier Tribunal rejecting their appeal, or the money drying up earlier than that, it is assumed that administration will result;
2 If the Club undergoes an Insolvency Event, then Group’s Floating Charge will crystallise, and Group could appoint a Receiver, whose job it is to realise assets to settle the debt due to the secured creditor, which in this case is Group;
3 The Floating Charge will be security for “all sums due” by Club to Group, so it will not be restricted to the £18 million owed to the Bank when assigned to Group;
4 There will be an administrator appointed to carry out a “pre-pack” administration whereby the assets of the Club are sold off to another party (likely to be Group or another branch of CW’s business empire);
5 The funds generated by the “pre-pack” sale will provide a small dividend to the unsecured creditors, including HMRC;
6 This would leave “Group” or a new company (“newco”) to apply to the SPL for the “new” Rangers to remain in the SPL, even retaining its points this season, and also keeping the Club’s history, and to apply to UEFA for an “exception” to allow it to compete in European competition straight away; and
7 HMRC would object to any Company Voluntary Arrangement (“CVA”) proposed by Club.
The effect of all this is that, if that came to pass, CW would have acquired via his company, Rangers FC, in return for him probably off-setting Group’s claim against the value of assets transferred to Group or to a newco, and additionally for a payment of a few million pounds into the pot for unsecured creditors. The husk of Rangers would be left loaded with
A “Pre-pack” sale out of administration does not require the approval of creditors.
What are the Limits on an Administrator’s Powers in relation to a “pre-pack” sale?
An instructive case is DKLL Solicitors v Revenue and Customs  EWHC 2067 (Ch) (06 March 2007).
Although this is an English case, the law on corporate insolvency is very similar in Scotland and England.
In this case a “hopelessly insolvent” limited liability solicitors’ partnership was to be sold in a “pre-pack” to another firm. HMRC objected to this, and had applied for a winding up order (appointment of a liquidator).
The case came before the judge who had to decide if he should approve the administrators’ proposed “pre-pack”.
Whilst the precise terms of statue dealing with the administration of a limited liability partnership are not identical to those relating to a company, as a result of the slightly differing legal natures, these differences have no practical effect.
Mr Simmonds, QC, sitting as the judge, noted, quoting the relevant provisions:-
Paragraph 11 of Schedule B (1) to the Insolvency Act 1986, as modified by the provisions of Article 6 of and Schedule 2 to the Insolvent Partnerships Order 1994 states, “The court may make an administration order in relation to a partnership only if satisfied that (a), the partnership is unable to pay its debts and (b), that the administration order is reasonably likely to achieve the purpose of administration. “
Paragraph 3 of Schedule B (1) provides, “The administrator of a company must perform his functions with the objective of (a), rescuing the company as a going concern or (b), achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration or (c), realising property in order to make a distribution to one or more secure or preferential creditors.”
Paragraph 3(2) requires “Subject to sub-paragraph 4, the administrator of a company must perform its functions in the interests of the company’s creditors as a whole.”
An expert had placed a valuation on the firm’s assets, if a forced sale took place on liquidation, of £105,000. The proposed “pre-pack” was for a price of £400,000. Liquidation itself would create an additional £44,000 worth of preferential claims by employees for arrears of pay and holiday pay.
HMRC contended that “the estimated realisations in compulsory liquidation are substantially lower than they would expect. Furthermore, no explanation has been given to justify such a substantial variation from what is listed, at approximately £1.7m worth of assets, to a realisable sum of only marginally over £100,000. The Revenue does not accept the valuations or contentions put forward on the, for sale scenarios, and the whole financial position is very short on detail.”
So we have a position where, on paper, there are assets worth considerably more than it is suggested they would realise in a liquidation sale, and a pre-pack is proposed which will realise more than the expert assumes a forced sale will generate, but still far less than the book value of the assets.
After narrating the specific reasons what the expert reached the values he did, the judge commented, “In applications of this nature the court places great reliance on the expertise and experience of impartial insolvency practitioners, even though, of course, it is ultimately for the court to decide if the threshold conditions are satisfied. Moreover, there is no evidence to support Mr Sudds’ assertion that the firm’s assets could be realised for a sum more in line with the purchase price. It is also perhaps significant that there is no suggestion that those assets could be realised for more than the purchase price. I therefore see no reason not to proceed on the basis that the estimated statement of affairs produced by the applicants is reasonably likely to prove accurate.” (Emphases added)
He later addresses the main issue in the case, described as follows:-
“I come now to what appeared to me to be the principal ground of opposition advanced by the Revenue. Miss Williamson pointed out that the Revenue was, by some way, the majority creditor of the partnership by value, and accordingly, if a meeting of creditors were held … to consider the administrator’s proposal to sell to the proposed purchaser, the Revenue would be in a position to defeat those proposals. In the present case there will be no creditors’ meeting to consider the proposed sale, because it is what is described in the jargon as a pre-pack. In other words, the sale has been arranged to complete immediately after the appointment of the administrators, in circumstances where the administrators could not carry on the partnership’s business in administration without further funding, which is not available.”
Counsel for the Revenue conceded that an administrator could arrange and conclude a “pre-pack” without the consent of the creditors, but she argued that approval of such an arrangement where the main creditor was opposed was disenfranchising them.
The judge went on to say:-
“Even a majority creditor does not have a veto on the implementation of the administrator’s proposals. The court could, exercising its powers under paragraph 55.2 of Schedule B (1), authorise the implementation of those proposals, notwithstanding the opposition of the majority creditor. Accordingly, if the present case were not concerned with a pre-pack sale, and a creditors’ meeting prior to the implementation of proposals were envisaged, I would not accept that the Revenue’s opposition meant that it was not “reasonably likely” that the statutory objective would be achieved. In this regard it is to be noted that reasonably likely, means that the court considers there is a real prospect that the objective will be achieved. A real prospect does not equate to more than a 50 per cent probability”.
He determined that the statutory responsibility (b) referred to above was fulfilled as a cogent case had been made out for how it was likely that the proposed scheme would likely be better than the alternatives.
He concluded by saying:-
“Clearly, the Revenue’s opposition ought to be taken into account at this stage of the process also. I was told that the views of the other creditors are not currently known. However, I accept Mr Boardman’s submission that in exercising its discretion, the court can take into account the interests of what he described as other stakeholders, not merely those of the partnership’s creditors. I am particularly influenced by the fact that the proposed sale appears to be the only way of saving the jobs of the 50 odd employees of the partnership. The proposed sale is also likely to result in the affairs of the partnership’s clients being dealt with, with the minimum of disruption.”
How Does This Relate to Rangers?
Part (c) of the statutory responsibility of an administrator requires attention be given to settling secured creditors, prior to achieving the best outcome for the remaining creditors.
Accordingly, it might be seen that selling Ibrox Stadium to someone who wants to use it as a football ground is the best, and perhaps only, way to generate substantial sums for the creditors. As we have seen Group is first in line.
If the administrator has credible asset valuations, taking heed of the exigencies of a forced sale, and able to show that am orderly sale in a pre-pack is likely to be better for creditors than waiting for a liquidation, then the court could authorise such an arrangement.
As in the DKLL case, one would expect HMRC to challenge such a pre-pack. Whether this would succeed would depend on the various factors as mentioned by the judge in the above case.
If this scenario comes to pass, it all comes down to the valuations of the assets, and how credible they are. Effectively the book values in the accounts are irrelevant. It is the present day pre-pack v forced sale comparison which is most important.
Addendum regarding Breaking News, and also a point I forgot to mention
Tonight it is front page news in the Daily Record that medals owned by Rangers have been “attached”. This is what used to be known as poinding, and is a process whereby goods are allocated towards settling a debt due, or in respect of an ongoing case. As long as the Daily Record front page shown is genuine, it seems to relate to the action brought by the former Finance Director, Donald McIntyre, who was granted an order allowing arrestment of the full amount of his claim against Rangers.
As Sheriff Officers don’t execute diligence on a weekend, this must have happened, at the latest, on Friday. It strikes me that it is a sign (a) that so far Mr McIntyre’s lawyers have not been successful in catching the full sums under the order, so alternative methods are being used and (b) it is intended to embarrass Rangers further, and would appear to have succeeded in that aim.
In practical terms, unless the attachment is in place for over 60 days before an Insolvency, then the goods go back into the pot for all creditors. But having this on a front page cannot be in accord with CW’s plans, can it?
The point I forgot was about Farsley Celtic, which has been mentioned recently. When this English non-league team folded, HMRC prevented it using the name “Celtic” in its new title.
The rules about Phoenix companies are detailed and complex. However they are primarily directed towards liquidations not administration, and therefore it would appear unlikely that, in a sale of assets in a pre-pack, HMRC would have any locus to object to the new team being called Rangers.