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 30^th 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.