Rangers and Administration – How Likely is a CVA to be Approved? Nae Chance!

Following the announcement today that Rangers Football Club PLC has filed a notice of intent to enter administration, there is a lot to digest.

According to the Q & A posted on the official website, the “escape route” is via a CVA or Company Voluntary Arrangement.

The official statement from Rangers indicated that a Company Voluntary Arrangement would be proposed to the creditors. This is an offer to pay the creditors an agreed proportion of the sums owed to them, in full settlement of the debt.

For example, a company with unsecured debts of £50 million, and funds of £5 million, might offer creditors 10p in the pound. If accepted, the remaining debt is cleared, and the company continues, debt free.

Rangers however appear to have one major problem with a CVA – HMRC.

The outcome of Rangers’ appeal against a determination that they should pay around £35 million in unpaid tax and interest is awaited. With penalties on top, this amount could well exceed £50 million, as acknowledged by the official statement from Ibrox today.

If 75% of unsecured creditors vote to approve a CVA then it is put in place, even if there is implacable opposition from the other 25%. This “vote” is based on the amount of the debt owed. Therefore, in our example above, a creditor owed £20 million would have 40% of the votes.

Rangers’ up to date financial position is not known. Its accounts up to year-end 30th June 2011 are long overdue, as is the AGM for shareholders to quiz Mr Whyte. However, taking Rangers’ statement that the HMRC debt may be in excess of £50 million, this suggests that the total amount of unsecured debt would need to exceed £200 million before a HMRC refusal to agree could be negated. Whilst, with the Ticketus deal etc, there might be a substantial sum due by Rangers to its creditors, it would be remarkable, and a scandal, if the debt was so high.

The history of HMRC agreeing to CVA’s in football clubs is not positive. Indeed HMRC fought tooth and nail to overturn the Portsmouth FC CVA. However, none of the grounds which allowed the administrator to move forward with a CVA there exist with Rangers.

The Rangers approach is detailed as follows:-

“f it is decided to go ahead with the application to appoint administrators, an administrator will be appointed who is likely to instigate a review and cost-cutting programme across all departments of the Club. The Club has engaged Duff and Phelps, a specialist restructuring practice, to assist in finding a solution to the present position. In the meantime, and in accordance with advice, it has been decided to seek the protection of a moratorium from HMRC action while a Company Voluntary Arrangement (CVA) proposal is made to creditors. This, if approved by creditors within a month, would minimise any points deduction and allow the Club to participate in European football.”

Mr Whyte’s own statement includes the masterplan as regards HMRC:-

“If HMRC were to agree, even at this late stage, a manageable agreement with the Club, then a formal insolvency procedure could yet be averted. It goes without saying that would be our preferred outcome.”

Is there any guidance about how HMRC might approach a CVA application, and whether or not it might agree to it?

Helpfully there is!

In November 2011 HMRC issued the fact sheet accessible on this link.

Here are some edited highlights. The reader can judge as we go along how likely HMRC is to go along with a Rangers CVA.

 

We consider voluntary arrangements on an individual basis, and will vote to support proposals where:

  • debtors are honest in their financial disclosure
  • an optimised and achievable offer is made to creditors
  • provision is made for payment of all future debts on time
  • they treat all creditors within the same class equally
  • there are no exceptional reasons for rejection.

 

However, we will not support debtors (individual or corporate) who do not allay our concerns about their proposals.”

Have there been any questions about Rangers or Mr Whyte being “honest in their financial disclosure”?

Is provision being made for all future tax debts to be paid on time, against a backcloth of rumoured arrears of VAT in connection with Ticketus, VAT generally and PAYE?

 

“We depend on you to deliver the most appropriate solution and confirm to creditors:

  • the debtor’s true position with regard to assets and liabilities
  • that the open market value of assets is not materially different from the proposal
  • that values being placed upon liabilities are not materially different from the proposal
  • that the proposal has a real prospect of working.”

 

How easy is it for Mr Whyte to deliver the true position of assets and liabilities? In the long lost to history case of Vital UK, for which Mr Whyte received his 7 year director’s ban, the company claimed to have over £650,000 of bills due to it, but this turned out to be far less, assets allegedly having been removed from the company to the detriment of creditors. The biggest creditor of Vital UK was HMRC. The taxman has a long memory.

What “open market” value will be placed on Ibrox or Murray Park? Can the stadium be sold and leased back? Who would be willing to buy it? Perhaps as an investment, with a football team guaranteed to be playing there, some body with millions of pounds could buy it and rent it back for a multi million rental?

As regards liabilities, HMRC will want to see their position recognised to the fullest, and not “written down” by Rangers to fix the figures.

So far, it is not looking good, I think. Lets see if things improve.

 

“We will not support a commercial offer unless there is full and honest financial disclosure. As a minimum we expect to see:

  • a detailed business cash flow forecast and a projection for at least the first 12 months of the proposed arrangement
  • reliable or professional valuations
  • a statement of business assets and liabilities (including all taxes)
  • that all previously overdue tax returns have been submitted
  •  full reasons for past nonpayment of tax and clear explanation of changes made to enable payment of post approval Crown liabilities as well as VA contributions.

 

If we do not have the above information it is likely that we will decide to vote against the proposal. If the information is later received we cannot guarantee to revisit the original decision.”

 

Will all overdue tax returns be submitted? The full PAYE returns are what will make it clear how much is still owing, if any. The same applies with VAT returns. The £5 million VAT which Mr Whyte denied was owed in connection with the Ticketus “sale” would also need to be accounted for and admitted as due.

The “full reasons for non-payment” would be a very interesting document to read.

HMRC are not happy to be told that the money was used for other things. As far as PAYE and VAT goes, it is HMRC’s view that that is not the company’s money. There is little or no excise therefore for a company not paying these liabilities, and using the funds for other purposes.

For example, HMRC might not look kindly on Rangers signing a new player to a £7,500 per week contract, when pleading poverty and seeking the protection of a CVA.

 

“We are also likely to reject a voluntary arrangement where there is evidence of:

  • evasion of statutory liabilities or past association with contrived insolvency
  • payment of other creditors whilst withholding sums due to the Crown.
  • any proposal that requires sale of HMRC debt or does not provide cash dividends
  • failure to meet any obligations under a prior voluntary arrangement
  • exclusion of creditors who are entitled to receive the same treatment as all others within their class
  • a purchaser assuming responsibility for payment of some of the debtor’s debts in consideration for the purchase of the debtor’s assets
  • any proposal by any member of any organisation that requires debts owed to its members, to be paid in full, whether inside or outside of the arrangement or before or after the completion of the arrangement when all other unsecured creditors will become bound to accept a compromise of their debt. Here ‘members’ includes any prescribed associate(s) or other creditor(s) specified by the organisation.”

 

The first line here might pose a problem. “Evasion of statutory liabilities or past association with contrived insolvency”. If Duff and Phelps can manage to persuade HMRC that Mr Whyte, with his history of disqualification, insolvency, unpaid taxes, and persistent failure to abide by statutory requirements regarding his companies, is not so bad as to justify refusal of the CVA, then they will be worth to him whatever fee they are charging (and which one assumes they have been paid up front).

 

If there has been the rumoured failures to pay the sums due for VAT and PAYE, then this will trigger the second paragraph too. What has Mr Whyte been spending Rangers’ money on, if not the tax bills?

 

The final paragraph mentioned is unlikely to be relevant here, but it is the HMRC embodiment of how it intends top deal with the “football creditors rule”. It does not apply in Scotland anyway, and as we know there is an ongoing court case where HMRC seek to have it rules ineffective.

 

Taking all the above into account, how likely is it that HMRC will approve a CVA for Rangers?

 

Put it this way, there is more chance of me winning the Olympic 100 metres than there is of HMRC going for this.

 

Some Rangers fans seem to be banking on the likelihood that a CVA might lead to HMRC getting more than in a liquidation. However, the “moral hazard” argument would prevent HMRC, even if it wanted to, from signing up to a “cosy deal” with Rangers. Otherwise any company in financial trouble would be able to bounce HMRC into accepting less tax than was due.

 

Therefore a CVA appears to be a forlorn hope for the Rangers board (consisting as it is of only Mr Whyte and Mr Ellis).

If the CVA fails, then Rangers would be headed at full speed towards liquidation, which I will address in a later post.

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29 Comments

Filed under Administration, Craig Whyte's Companies, Football, Insolvency, Rangers, The Company Directors Disqualification Act 1986.

29 responses to “Rangers and Administration – How Likely is a CVA to be Approved? Nae Chance!

  1. sorrynocando

    Duff & Phelps interesting indeed especially upon reflection of this mornings press.

    • One of the big complaints about the administration process is the apparently cosy relationship between banks, owners and insolvency practitioners. Mr Grier of Duff & Phelps has been an attendee at Ibrox with Mr Whyte.

      I cast no aspersions upon the man – I am sure he was simply carrying out early due diligence.

      • TheBlackKnight

        According to Onandon, on RTC, he was involved in the due diligence/takeover on behalf of Wavetower.

        Conflict of interest? If not, it must be viewed as severely suspect, by appointing an administrator that was involved in a perhaps ‘contrived’ takeover, being aware of various ‘strategies’ and ‘game plans’

  2. Private Land

    Paul,
    Asked ths question on RTC, but it’s a GloatBlitz over there at the minute.

    Is it possible that CW could still go straight to receivership – even with the intention to appoint an administrator posted?

    Not having a working knowledge of these processes, and reading between the lines of CW’s interview with Rangers TV (he said this was a step to secure RFC’s future), I infer that the intention to appoint is to co-erce HMRC into tacitly accepting a CVA. Otherwise why not just go straight to Admin? If he, as expected, fails to come to any such agreement with HMRC, he appoints a receiver as the holder of the floating charge and blames HMRC for the certain failure of administration.

    Furthermore, as he would lose control of things if an Admistrator was appointed, isn’t it all a phoney war that has begun today?

    Is it plausible then that administration will never come about?

  3. David

    Paul, very informative and my sunken heart sinks further still. Once the RTC folk read this their worst/best case scenario(depending on whose prespective you look at it) looks all the more likely, and more smiles on faces will appear. The future for my club looks very bleak indeed.

    • TheBlackKnight

      David,

      You obviously accept there will be ‘gloating’ by fans of other teams. Whilst yhis is understandable for a variety of reasons, this will not be confined to Celtic supporters. For some, Rangers Football Club and a ‘sizeable minority’ of it’s support has been seen as a permanent embarrassment to Scotland and Scottish football.

      Whilst I genuinely feel sorry for those friends and acquaintances who are decent Rangers supporters, I feel nothing for a club that may have actively encouraged financial doping.

      • David

        TBK, acknowledge the comment. Not proud about what my club has done, in fact the word “furious” might just drop in there. I fear for the future and think that might have been part of a thought out plan by Mr Whyte, or whatever initiials he is referred to. The future’s beige the future uncertain. There are a lot of people to answer to. Very Worried!

  4. TheBlackKnight

    I believe timing is key here Paul. I posted the proposition of HMRC going for a winding up order prior to the result of the FTT (big tax case). If rumours are to be believed, the VAT man may make a move to claim any monies due prior to the decision being disclosed. The sitting tight to see how this pans out will no doubt have an effect on the forthcoming legislation in regard to ‘Phoenix’ companies.

    HMRC may not have to ‘box clever’, but they will certainly want to make sure The Whyte Knight does not get away with what appears to be his clear intention of stuffing creditors and starting up a debt free NewCo

    Great blog (once again!)

    • TheBlackKnight

      Footnote:
      (specifically in relation to Private Lands erudite post)

      Concerns are being raised on RTC over the true reasons for the filing for administration. If this indeed does proceed, it is believed the full amount plus penalties and interest (of the big tax case) will ‘crystallise’. Hence the figures being claimed by The Whyte Knight of being over £50M. (erudite poster on RTC, Hugh McEwan, I believe first raised the issue)

      This appears to be a very deliberate attempt for The Whyte Knight to ‘force’ a CVA (creditor voluntary agreement)

      The reality however may be somewhat different. In the midst of rumours of agreements behind closed doors, NewCo being set up, funds diverted to off shore accounts etc, we must never forget that if guilty of using EBTs illegally, second contracts and side letters, Rangers Football Club would have been guilty of playing a ‘stacked deck’, cheating by any other name, and would have dragged the name of Scottish Football into the gutter.

      In my opinion, No quarter should be given!

  5. guinnessjohn

    Paul , I tip my bonnet to you , once again .

    There is clearly no way out of this that bears any relation to integrity . No surprise there , but it`s the wider implications that interest me . What are the chances of government agencies viewing these shenanigans and feeling compelled to intervene ?

  6. guinnessjohn

    TBK , as ever , articulate and to the point .

    Props , dude .

  7. Michael

    Paul, I don’t think it will be a simple case of HMRC doing what is right. There will be huge political pressure brought to bear here. Take for example these comments apparently from Shona Robison (http://www.scotsman.com/news/scottish-news/top-stories/rangers_fc_signals_intention_to_go_into_administration_1_2114762)

    “I understand that Rangers and HMRC are continuing dialogue and we obviously want to see an agreement which will protect jobs and enable the club to stay in business. Rangers is a crucial part of Scotland’s national game, and our interest is ensuring that a resolution can be arrived at between HMRC and the club to deliver these vital objectives.”

    So from this politician’s point of view (and others with a similar perspective will crawl out in the days to come) it is not only for the good of Scottish Football (“Rangers is a crucial part of Scotland’s national game”) but for those who will lose their livelihood (“want to see an agreement which will protect jobs”) that Rangers survive and we turn a blind eye to there thieving from the public purse.

  8. Brian McW

    Glad to hear you’re not a very fast runner………..

    End game approaches, and you sir, along with a few select others, have done a fantastic job!

    Brian McW

  9. Noname

    The thing that worries me is that there is a real political and media pressure for Them to survive. Also, the Taxpayer in this situation is the Club who may not have had a history of falling foul of the conditions that would preclude HMRC from accepting a CVA. The WUCW yes.

  10. Noname
    I think the liability for over £50 million of unpaid tax would be a major hurdle in Rangers having a CVA approved!
    They can’t claim consideration for “owning up” as soon as the bill was lodged, can they?

  11. Timabhouy

    WE MUST FIGHT TOOTH AND NAIL FOR JUSTICE TO BE SERVED THE SCOTS GOVERMENT MUST STAY OUT OF IT , IF IT WAS M&S THEY WOUDNT GIVE A TOSS !

    BUT IT WONT STOP ME VOTING INDEPENDANCE WHEN IT COMES
    YOU KNOW IT MAKES SENCE

  12. renfrewdave

    paul
    great work in presenting the facts in a way people can understand them. pity the MSM couldnt have done this rather than repeat the RFC & MBB statements as gospel.
    sitting here with a norwich and a birmingham fan reading this and the RTC blog. their opinion is that RFC have had their chips…

    keep up the good work

  13. nel

    Not being an expert on the possible outcomes for Rangers FC and Mr Whyte, I would only say that questions have to be asked about the “man”, the £1 sale of Rangers to him and what Sir Murray really knew about this takeover. Was Mr Murray really that niave about Whyte’s background (a previous £650,000 HMRC case, and a 7yr ban?), did Mr Murray sell the club for £1 just to get out of a draining club which I believe he loved and still does, and did Mr Whyte actually have enough money to cover the debts, the potential tax bill and general running of the club on a monthly basis.

    Questions may be asked about Mr Whyte, and whether he has money behind him. Perhaps its as simple as this, i’ve got money but i’m not risking it with a HMRC £49M+ overdraft over my head, who would? Has he maxed out his credit cards and now he has no other option?

    I don’t believe he has, though everything would suggest otherwise.
    Mr Whyte has made a businessman decision to limit his liability as Rangers Owner. The only problem with this is that HMRC will not accept this blatant move from him to limit his costs, it will not happen and HMRC will only force Mr Whyte to sell the assets, club, stadium, murray park and players.

    You can bet that your players will be sold, Davis yes, MacGregor ?, but who else would you sell, how much would you get in the climate, not a lot I think. It might be a good time to remove the dead wood, McCulloch, Edu, and Whittaker for nothing, £18,000 a week for 5 yrs, perhaps the manager should be jailed for that one and not Whyte.

    Comments welcome.

    Nel

  14. Paul, top class work once again.
    Things are now moving very quickly and I suspect that you’ll be writing many thousands of new words this week to address the continuing developments as they arise. More power to your pen!

    It’s not yet clear to me if Rangers are obliged to declare exactly how much they believe they owe to their various creditors in order to justify their petition to file for administration. Is detailed information required or is it enough for them to simply say that they believe they have a runaway problem?

  15. Roland Watson

    Thanks, I look forward to your liquidation post. My impression was that HMRC must get the best deal for the Treasury in these economically tight times whatever their attitude to Craig Whyte, be it thru administration or liquidation. If Whyte is the only secured creditor, that suggests to me they get less in liquidation and hence must go for a CVA?

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