Prior to going into the bulk of my post, can I suggest a visit here for another, but different, legal perspective on why a Rangers “fire sale” is the most likely outcome?
Back to the regularly scheduled programming –
From Lord Hodge’s judgment I have extracted the following section:-
[16] The administrators’ legal advisers have challenged the enforceability of the STA (Season Ticket Agreement). It envisaged that Rangers would use the payment for the first tranche STA tickets to effect the repayment of its debt of about £18 million to Bank of Scotland plc. It was also proposed that Rangers would lend £16 million to Wavetower Limited (now called The Rangers FC Group Limited) to enable that debt to be repaid and that the bank’s debt and its securities would be assigned to Wavetower Limited (Schedule 19). The administrators’ legal advisers have asserted that the STA is illegal on the ground that it was an agreement for the giving indirectly by Rangers of financial assistance for the acquisition of its shares contrary to section 678 of the Companies Act 2006. The existence of this challenge is not however relevant to the directions which I have to give as I must assume at this stage that the Ticketus agreements are valid.
As I mentioned in my last post, this discloses (a) that Rangers lent, or it was proposed that it should lend, Group £16 million and (b) Duff & Phelps are trying to strike the Ticketus deal down on “financial assistance” grounds.
What Chance Do the Administrators Have of Striking Down the Ticketus Deal as Illegal “Financial Assistance”?
Slim.
OK – I’ll explain. My “workings” are shown below but, put simply, it looks as if, even if the loan from Rangers to Group was “financial assistance” the sale to Ticketus is a normal and legitimate business transaction. Whilst it might be argues that the sale is “tainted” by illegality in the loan deal, the two transactions can be separated.
However, even if the Ticketus “sale” is struck down, Ticketus would have a claim against Rangers for return of the money on the grounds of “unjustified enrichment”. Ticketus will either have a valid contract or will be creditors. They will not, to coin a phrase, be walking away!
The Technical Stuff!
Section 678 of the Companies Act reads as follows:-
Assistance for acquisition of shares in public company
(1) Where a person is acquiring or proposing to acquire shares in a public company, it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place.
(2) Subsection (1) does not prohibit a company from giving financial assistance for the acquisition of shares in it or its holding company if—
(a) the company’s principal purpose in giving the assistance is not to give it for the purpose of any such acquisition, or
(b) the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company.
(3) Where—
(a) a person has acquired shares in a company, and
(b) a liability has been incurred (by that or another person) for the purpose of the acquisition,
it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability if, at the time the assistance is given, the company in which the shares were acquired is a public company.
(4) Subsection (3) does not prohibit a company from giving financial assistance if—
(a) the company’s principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or
(b) the reduction or discharge of any such liability is only an incidental part of some larger purpose of the company, and the assistance is given in good faith in the interests of the company.
(5) This section has effect subject to sections 681 and 682 (unconditional and conditional exceptions to prohibition).
How Does This Affect Ticketus, Group and Rangers?
Let’s see how this applies to the acquisition of 85% of Rangers Football Club PLC (Rangers) by Wavetower Ltd, now Rangers FC Group Ltd (Group).
In terms of sub section one Group seems to be in the clear. “Where a person is acquiring … shares in a public company, it is not lawful for that company … to give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place.”
The shares were acquired on 6th May 2011 for the price of £1. The Ticketus deal, which is argued as being illegal “financial assistance” was signed on 9th May. This postdates the transfer of shares and unless Rangers lent Group £1 for the purchase, it seems as if “financial assistance” ought not to be an issue.
Sub section 3 states “(3) Where — (a) a person has acquired shares in a company, and (b) a liability has been incurred … for the purpose of the acquisition, it is not lawful for that company … to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability if, at the time the assistance is given, the company in which the shares were acquired is a public company.“
This raises a few more questions.
Group acquired 85% of the shares in Rangers. In addition, at settlement of the transaction, Group paid the Bank of Scotland £18 million to eliminate the Rangers debt to the bank and to acquire for Group the Floating Charge over Rangers’ assets.
How did Mr Whyte and his Group finance the payment to the Bank? From all that has been said, Group does not appear to have any assets of its own, being a vehicle only for the acquisition of Rangers. Therefore, if it is the case that Group had to settle the liability to the Bank prior to the Ticketus deal being agreed, this suggests that Group “incurred a liability” for the purpose of the acquisition. This is for the generality of the acquisition, and not for the purchase of the shares for only £1. The settlement of the bank debt was one of the conditions of the sale. Therefore it can be argued, and I suspect this is the tack taken by D&P, that Rangers paying or “lending” the £16 million referred to to Group was settlement of the “bridging loan” taken out by Group to pay the Bank.
As Rangers was and is a public company, then financial assistance provided by Rangers for the purpose of reducing or discharging Group’s liability, such as using the Ticketus money to settle the “bridging loan” would then seem, possibly, to fall foul of the Act.
The argument would be whether or not, strictly, the section covered only the share acquisition, and this ignores the original debt to the Bank paid off as part of the deal, or whether the full package, including settlement of the bank debt forms a part of the transaction which cannot receive “financial assistance”.
Some Law!
As was said in “In re Uniq plc” [2011] EWHC 749 (Ch):-
“Each payment must be examined having regard to the circumstances of each paying company, while of course having regard to the overall scheme both of clause 6 and more generally. As often observed, the two main questions as regards any transaction in the context of section 678 are: is it “financial assistance” and is it given for the purpose of the acquisition of shares in the company giving the assistance or in its holding company. For these purposes, it is necessary to look at the transaction as it affects the company which may be said to be giving the financial assistance: Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 , 10.
“As to what constitutes “financial assistance”, Hoffmann J said in that case, in a passage subsequently approved by the Court of Appeal in British and Commonwealth Holdings plc v Barclays Bank plc [1996] 1 WLR 1 , 14 and in Chaston v SWP Group plc [2003] 1 BCLC 675 , para 17:
“There are two elements in the commission of offence under section 54 [of the Companies Act 1948]. The first is the giving of financial assistance and the second is that it should have been given ‘for the purpose of or in connection with’ in this case, a purchase of shares … There is no definition of giving financial assistance in the section, although some examples are given. The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.”
As Lord Hoffman said, there need to be two elements to establish financial assistance. The first is, of course “financial assistance” and the second is “that it should have been given ‘for the purpose of or in connection with’ in this case, a purchase of shares”.
As His Lordship went on to say, and as I reiterate:-“ One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.”
The Helpful Case of Brady v Brady
The issue was previously clarified (and I mean that ironically) by Brady v Brady, a House of Lords decision in 1988, reported at [1989] AC 755.
Amongst the main issues dealt with in the Brady case was the “larger purpose” test. This, in the Rangers context, is contained now in ss4 of s678.
Even if there is “financial assistance” it can be given if incidental to a “larger purpose” of the company and the assistance is given bona fide in the interests of the company.
The “purpose” which the directors have in mind must involve something other than the acquisition of the company’s shares. If the object of the transaction is to acquire the shares, then the larger purpose exemption cannot apply even if the motivation or reasons for the acquisition may be to the benefit of the company or may even be crucial to the survival of the business (e.g. because, following the acquisition, the purchaser expects to revive the company’s fortunes).
In Brady, two brothers had fallen out and, as a result, the family company was deadlocked. The ultimate consequence would have been the failure of the business. To avoid that, the brothers agreed on a reconstruction which would divide the business into two halves, each one of which would be continued independently by each brother.
In brief, part of the reorganisation involved the acquisition of shares in T. Brady & Sons Ltd by one brother and, because of that transaction, a debt was incurred to the other brother; assets were to be transferred out of T. Brady & Sons Ltd in satisfaction of that debt. The proposed transfer of assets by the company was a plain contravention of s.151(2) (as the rule then was), and so it became necessary to decide whether the exemption could apply under these circumstances.
The House of Lords held that it could not, because the purpose of the asset transfer by the company was to reduce the liability incurred by the purchaser of shares in the company. The reasons which motivated the arrangement could not affect its underlying purpose. For the purposes of s.151(2), it thus could not be said that the company’s “principal purpose” was not to reduce or discharge the purchaser’s liability, nor could it be said that this was merely incidental to some “larger purpose” of the company. So, while it is necessary to inquire into the actual intentions of the directors, the distinction between a “purpose” and a “reason” in many respects remains an objective test. The directors must have in mind some independent purpose of which the assistance can properly be considered an incident.
In the Rangers context, can it be said that the sale of season tickets to Ticketus by Rangers is financial assistance?
If the target of the attack by D&P was simply the loan from Rangers to Group, then the position seems more straightforward. But D&P are looking to strike down the sale of tickets as a “financial assistance” transaction, or part thereof.
What Happens if there has been Illegal Financial Assistance?
The section states that any prohibited financial assistance is “unlawful”, and provides for criminal penalties. But what about the relevant contracts themselves? It is established that any transaction effected in contravention of the financial assistance rules is void and unenforceable. That was confirmed by the House of Lords in Brady.
Even if the parties do not raise the issue, the court must do so where a relevant transaction appears, for it cannot allow its own process to be used as a means of enforcing an illegal arrangement.
Primary transactions which directly contravene the financial assistance rules are unlawful. The rights purported to be created pursuant to such transactions will accordingly be unenforceable.
It is clear I submit, taking account of the law as it stands, and the Brady v Brady principles, that ex facie the Ticketus deal is valid. Rangers sold rights to present and future season tickets to Ticketus. That is a perfectly normal and therefore valid transaction.
However, if we take it, for the purpose of this analysis that the loan by Rangers to Group was illegal (and that is not directly what D&P are attacking, but we will take that pro veritate for now) where does this place the Ticketus deal?
In other, and wider words, what happens to “secondary” transactions? Are they tainted by an illegal “primary transaction”?
In Central and Eastern Trust Company v Irving Oil Ltd 110 D.L.R. (3d) 257 the Canadian Supreme Court considered the following problem.
In that case, Targetco raised money on the security of its assets, and these funds were remitted to the vendor of its shares as part of the purchase price. When Targetco made the payment to the vendor, this plainly amounted to financial assistance in connection with the purchase. The execution of the security should not have been regarded as financial assistance, because it only “assisted” Targetco itself to raise the funding. Nevertheless, the security would have been unenforceable because it formed part of a series of arrangements designed to secure an unlawful objective, and the lender was aware of the factual background giving rise to the breach. The bank’s loan and security were thus “tainted” by the illegality of the primary transaction.
But, for example, a loan made by a bank to assist the company in funding an acquisition of its own shares does not directly contravene s.678. That being so, it is hard to see logically why the security given for that facility should contravene the prohibition.
Under these circumstances, the secondary transactions can only be held to be unenforceable on the basis that they are “tainted” by the primary transactions.
It is necessary to distinguish between (on the one hand) primary transactions which assist a party in the acquisition of the company’s shares and (on the other hand) secondary or preparatory arrangements which a company makes in order to fund its obligations in respect of the primary transaction. If the primary transaction does not itself contravene the financial assistance rule, then it should follow that the secondary arrangements likewise cannot be challenged under that same rule.
However, the position seems to be that, even if the secondary transaction is tainted, then it depends on the state of knowledge of the other party.
Therefore, did Ticketus know that the purpose of the sale was to give Rangers money to lend to Group to clear, directly or indirectly, the bank loan. If they did not, then I do not see how that sale is “tainted”. On the other hand, even if they did, and the sale was for a fair value and did not diminish the net worth of Rangers, it might seem unusual to strike it down anyway!
Does this explain why the loan from Rangers to Group was only £16 million? Group can state that the full sale proceeds from Ticketus were not used by Group to clear off the bank debt. Some of the money was raised elsewhere.
What If the Ticketus Deal Is Ruled Illegal?
The net effect of success in having the Ticketus deal struck down would be what?
Ticketus has given, in return for tickets, many millions of pounds to Rangers. The effect of that was that the bank debt was cleared.
There is a legal doctrine of recompense called “unjustified enrichment”. In this case, if the Ticketus deal is ruled unlawful, it would appear that Rangers would have been “unjustifiably enriched” by the bank debt being cleared. This would especially be so if D&P sought to invalidate any debt owed to Group.
As described in the Stair Memorial Encyclopaedia:-
“Many examples of the remedy of recompense have arisen out of contract related situations: as when a contract has proved to be void, or has been annulled; or where a contractual remedy has not been available. A contract may be void, for example, because one of the parties lacks the necessary capacity. If a shopkeeper sells goods to a child under the age of sixteen in the mistaken belief that the child is already of age, or that the transaction in question, the terms being not unreasonable, is one commonly entered into by persons of the child’s age and circumstances, there will be no contract. However, the shopkeeper may still have a claim in recompense quantum lucratus.
A rather different point was raised by the case of Cuthbertson v Lowes. A contract of sale was entered into in respect of two fields of potatoes. These were sold by the ‘Scotch’ acre, in contravention of various Weights and Measures Acts which enacted that contracts of sale expressed in the old Scots measures were to be null and void. The potatoes changed hands, but then Lowes, the purchaser, refused to pay the agreed price, claiming that the contract was illegal, and that he was entitled to retain the potatoes without payment on the basis of the maxim in turpi causa melior est conditio possidentis. In a short and typically robust judgment Lord President Inglis agreed that the contract was indeed null and void, and thus the purchaser was not bound to pay the contract price. Lord President Inglis did not accept, however, that the defender was therefore entitled to retain the potatoes without giving value for them:
‘I cannot readily yield assent to a proposition which would be productive of a result so inequitable, and I am of opinion that we are not constrained to do so. No doubt the Court cannot enforce performance of an illegal contract, and in turpi causa melior est conditio possidentis, but there is no turpitude in a man selling his potatoes by the Scotch and not by the imperial acre’.
The principles of recompense applied, the measure of recovery — that is, the extent of the enrichment — in this case being the market value of the potatoes at the time of delivery.
The decision, although sometimes criticised, has generally been accepted as good law. It is difficult not to applaud it as an example of Lord President Inglis’ sound common sense. It seems entirely in line with the basic principles of unjustified enrichment to translate the purchaser’s moral obligation to give value for the potatoes into law. Any other solution would appear to condone sharp practice. Clearly, there was no intention of donation on the part of the seller.
————–
In this case, if Rangers (a) do not have to supply any tickets to Ticketus, as the agreement is void as “financial assistance” but (b) have eliminated their bank debt and (c) Ticketus has received nothing for that money, I think that Ticketus would have a very strong argument for return of what it had paid to Rangers (not Group, Liberty Capital or whoever).
As with many of the issues in this saga, a court action will be needed to resolve matters, unless there is a surprising outbreak of accord.
Acknowledgement – As well as the always wise input and encouragement of Love and Garbage (and his posts today, whilst not football related are brilliant) I am also very much obliged to Charles Proctor for his excellent and very detailed article in Company Lawyer magazine in 2007 titled “Financial Assistance: new proposals and new perspectives”. If the reader has access to Westlaw, the piece can be found there. My very simplistic analysis of financial assistance relies on much of what Mr Proctor wrote, although any errors in interpretation are mine, not his.
Posted by Paul McConville
Random Thoughts Re Scots Law by Paul McConville 
Another interesting piece Paul, looks like this fiasco could be tied up in court for years to come…….I see you mention the debt owed to BOS, has it not always been referred to as the Lloyds debt before or is this yet another amount owed?
I believe it was his lordship that referred to BoS in his guidance (BoS being the original debt/floating charge holder)
You’ve oversimplified this so the tabloids will cut and paste it. 🙂
Lol 🙂
Brilliant as always Paul. Fine research.
Also calls into question the circular statement in which Wavetower (RFCGLtd) promised not to take monies or borrowings from RFC Plc (now in Administration). Unless, of course, it was for the benefit of the club.
They would have been ‘insolvent’ (not to diminish the prospect that they were already technically trading whilst insolvent from June 2011) long before 14 Feb 2012 had that not been the case. 😉
Think this is mibbes the same point, phrased differently…
Let’s assume that AJ’s interview to Mark Daly was correct, and Lloyds were going to call in their loan, sending RFC into liquidation.
Is it possible to give any guidance as to whether keeping RFC afloat until the FTT(T) decision falls into the category of “larger purpose” than the mere acqisition of shares?
🙂
My goodness Paul, you’ll be writing these learned articles for years to come it appears.
Thx for your great efforts. Very much appreciated…
Oh Paul
Both you and RTC and Celtic Quick News think you have done a full analysis of all the money Sir Minty went through.
You missed the Biggy
Micheal Carrol self proclaimed King of Chavs
Carroll proudly sports a tattoo of the Northern Irish paramilitary organisation Ulster Defence Association and, as a fan of Rangers FC, invested up to a million pounds of his winnings via Rangers Financial Management, from whom the football club receive a share of profits on the financial services they sell
Another great analysis of this dire situation Paul.
Seems to me, and I know very little about Scottish law, that this will drag on through the courts for years and will be a huge expense that Rangers do not seem to be in a position to afford.
Can D&P justify spending this amount of money in the “best interests” of the club?
Hi Paul, can you confirm when the debt to Lloyds/BofS was paid off? Was it definitely prior to the Ticketus deal being done? Sorry if this has already been stated elsewhere here or on RTC.
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