In which I offer some thoughts on the likelihood of BDO, liquidators of Rangers Football Club PLC, seeking to “reduce” the sale of the assets and business of Rangers to Sevco and suggest that one of the Sevco Directors seems to have dug a large hole for his business by his statement this week.
Soon BDO will take over as liquidator of Rangers Football Club PLC (RFC PLC). This will bring to an end the involvement of the administrators, Duff and Phelps (D+P) and will open up for BDO the possibility of various steps to be taken in the interests of creditors.
One such power is conferred by s242 of the Insolvency Act 1986. The relevant parts of the section are detailed at the foot of this post.
The section gives the liquidator the power to challenge a “gratuitous alienation”. That means a transfer of assets for no price or for an inadequate price.
Where a liquidator brings such a challenge to a transaction, it is not for the liquidator to prove that the transaction was a gratuitous alienation, but instead for the defender to show that it was not.
The Act lays down that the court “shall grant decree of reduction or for such restoration of property to the company’s assets or other redress as may be appropriate” unless certain statutory exceptions are engaged.
What transaction are we looking at here?
There has been extensive discussion about the value achieved by D+P for creditors once the CVA was rejected. Rather than the £8.5 million due to paid under the CVA, there was a binding agreement to sell to Sevco 5088 Ltd the whole “assets and business” of Rangers for £5.5 million.
This definitely included Murray Park, Ibrox Stadium, the associated land, the players’ registrations and may have included the rights of RFC PLC to receive any prize money or TCV money due to it, together with the rights to transfer fees such as that due for Mr Jelavic, and the rights to pursuer Collyer Bristow and Rangers FC Group Ltd for damages running to millions of pounds.
Based on D+P’s own figures in the CVA proposal, the fixed assets would have been valued at around £.5 million or more. Accordingly Sevco (as I will refer to both Sevco incarnations) paid £1 million, or less, for everything else.
There has been general astonishment that such a low price could be accepted for fixed assets (although valued on a different basis) listed in accounts as worth in excess of £100 million.
The liquidator would be entitled to raise a court action stating that the sale by D+P, acting as agents of RFC PLC, to Sevco was a gratuitous alienation. Sevco would have to show either that the transfer was a legitimate gift or charitable donation (which is not the case), that RFC PLC was solvent when the sale took place (which it was not) or that adequate consideration was paid.
What evidence, as opposed to supposition, ids there that the sale of the assets was at an undervalue? Bear in mind that a sale of the assets means that the debts due by RFC PLC are irrelevant. The debts do not transfer with the assets.
We can thank Mr Imran Ahmad, one of the Directors of Sevco Scotland Ltd, for his contribution. He attended a meeting of the Rangers Fans Fighting Fund along with the rest of the Sevco Board. I have a detailed post coming regarding what was discussed, but I feel this issue deserves a slot of its own.
The relevant extract is as follows:-
A representative from Rangers Unite asked the board “What would you see as an exit price?” Imran replied that he believed on a bad day the club was worth £50 million.
“On a bad day the club is worth £50 million.”
I will repeat that… “On a bad day the club is worth £50 million.”
One more time – “On a bad day the club is worth £50 million.”
So one of the Directors of Sevco has confirmed in an open meeting that, on a bad day, his company has acquired, for the price of £5.5 million, assets worth £50 million! Three weeks after the acquisition of the “whole assets and business” of RFC PLC, the business is worth £50 million! Even allowing for a bit of exaggeration for effect, especially if the goal is to do a quick share flotation, the value is a long way up from the £5.5 million paid. Normally the courts will not protect a party who makes a bad deal, but here the court is being asked to protect the creditors, not the company RFC PLC, which made the deal.
What will a court look at in deciding the issues?
The issue was looked at in Short’s Trustee v Chung 1991 S.L.T. 472. This case related to a personal, rather than a corporate, insolvency but the legislation regarding gratuitous alienations is almost identical.
Lord Weir stated:-
“The pursuer instructed an experienced chartered surveyor, Mr John McKinney of Robert Galbraith & Lawson, to make a valuation of the flats as at October 1986. … Mr McKinney gave evidence. … From his knowledge of the sale of comparable property in the immediate neighbourhood and from a study of the records of other sales and using a valuer’s appraisal of this material, Mr McKinney concluded that the flats would fetch in the general area of £15,000 each on the open market as at October 1986. … These figures, as he made clear, also took into account a possible difficulty in selling these properties due to funding being difficult to obtain.
I accepted entirely the evidence of Mr McKinney and the conclusions which he reached. Although he was ably cross examined there was no evidence from a valuer led on behalf of the defender, notwithstanding that the onus under s. 34 (4) of the Act of establishing that the alienation was made for adequate consideration rested on her.
It is plain to me that Mr Meikle (who sold the properties to the now bankrupt Mr Short), for whatever reason, had no interest in obtaining anything beginning to approach a market price for the flats and he seemed satisfied that he was rid of them. The debtor did not seem to me to be seriously interested in the property market and no doubt an increase of £1,000 in the price of the flats over a period of a few months would have been enough for him. In my opinion these transactions in no sense represented a proper testing of the market. There was no advertisement, surveyors were not brought in to advise and the circumstances of the sales do not disclose a businesslike attitude to property dealing.
In approaching the question of whether an alienation was made for adequate consideration, it is necessary to bear in mind that the word “adequate” is not defined in the Act. Counsel for the defender submitted that it would be wrong to reach an opinion on this question, as the pursuer had sought to do, by making a valuation based on hindsight and on an objective analysis of valuation evidence. He contended that subjective considerations concerning the actual circumstances of the transactions at the time were material and relevant. Counsel for the pursuer on the other hand submitted that it was an objective test.
This is not a case in which it is necessary to embark on a comprehensive discussion of these questions and I can see that in some instances to reach an answer may not be a particularly easy task. As at present advised, I am not persuaded that it is necessary for the person who is seeking to uphold the transaction to demonstrate that an adequate consideration for the sale of heritable property necessarily means, with the benefit of hindsight or otherwise, the best price which could have been obtained in the open market in a properly conducted arms length transaction. There may well be cases where, for particular reasons, the consideration has turned out to be less than that but still be “adequate” for the purposes of s. 34, and it may be relevant to examine the circumstances in which a transaction took place. However, in this instance, such matters hardly arise. Even making every allowance for the imprecision of a valuer’s estimate, the difference between the valuations made by Mr McKinney and the sale prices actually obtained are so wide as to leave no room for doubt. The situation might have been different if valuation evidence for the defender had been led and had indicated a lower value for these properties. The defender has failed to satisfy me that the consideration for the alienations to her late husband begins to approach adequacy. A businesslike transaction in my opinion would have resulted in a price approaching the amounts spoken to by Mr McKinney.” (All emphases added)
What does this tell us?
It is for the party seeking to uphold the transaction to lead evidence of its adequacy, not for the liquidator to prove its inadequacy.
An objective valuation with hindsight might not be conclusive where there circumstances justifying a lower than commercial price, but in those circumstances the details surrounding the transaction would need to be examined.
There ought to be some testing of the market by the seller, or else some proper explanation as to why there has not been such a testing of the market. As Lord Weir said in this case “There was no advertisement, surveyors were not brought in to advise and the circumstances of the sales do not disclose a businesslike attitude to property dealing. “
How wide is the difference between the valuation suggested, perhaps by the liquidator, and that actually achieved?
Do the proceeds of sale seem consistent with a “business-like” transaction?
It should be noted that there is no need to suggest any improper motive on the part of the seller. The seller might believe they are getting a fair price, but the court will use hindsight in assessing this, unless specific circumstances suggest otherwise.
Bearing in mind that we have one of the Directors of the purchaser suggesting that the newly founded business, whose only assets are those purchased from the administrator, is worth £50 million on a bad day, how will Sevco seek to justify paying £5.5 million? Perhaps Mr Green and his colleagues have added so much value to the operation in three weeks that they can justify the increase? Or perhaps not?
In Lafferty Construction Ltd v McCombe 1994 S.L.T. 858 Lord Cullen considered the application of Section 242.
The pursuers were a company in liquidation and its liquidator. The winding up of the company commenced on 10 July 1989. The defender was the widow of a director and minority shareholder who died on 29 July 1985. On 25 March 1988 the company paid the defender £50,000 and delivered to her the registration documents of a Mercedes motor car registration number JMC 666. The pursuers sought declarator that the payment and transfer of ownership of the motor car were gratuitous alienations within the meaning of section 242; and sought decree for payment of £50,000; and, failing restoration of the motor car, payment of £20,000 as representing its value.
The defender claimed that solicitors acting for her and the executors of her late husband complained to Frank Lafferty, the majority shareholder in the company and in Rent A Skip Ltd, that the affairs of those companies were being conducted in a manner which was unfairly prejudicial to the interests of minority shareholders and proposed that their shares in those companies be purchased. Following discussions agreement was reached between solicitors acting for the company on the one hand and for the defender and the deceased’s executors on the other whereby (1) the sum of £50,000 was to be paid by the company to the defender; (2) the motor car referred to above was to be made over by the company to the defender free of all outstanding debts, and (3) an annuity of £20,000 per annum in favour of the defender was to be arranged by the company and to endure for a minimum of 10 years. The settlement was not paid by the company so Mrs McCombe raised court action and, in return for loosing certain arrestments she had lodged, she was paid the £50,000 and the car transferred to her. She claimed adequate consideration had been given.
Lord Cullen held:-
“… the crucial matter, as it appears to me, is whether the defender has made adequate averments to enable the court, if these averments are proved, to determine that the payment and delivery were for adequate consideration, whether they were in consideration of the settlement or in consideration of the withdrawal of the diligence or the other terms of the 1986 agreement.
In considering whether alienation was made for “adequate consideration”, I do not take the view that it is necessary for the defender to establish that the consideration for the alienation was the best which could have been obtained in the circumstances. On the other hand the expression “adequate” implies the application of an objective standpoint. The consideration should be not less than would reasonably be expected in the circumstances, assuming that persons in the position of the parties were acting in good faith and at arms length from each other. In the present case the defender, apart from the bare statement that adequate consideration was given for the payment and delivery has made no attempt to place any quantification, however broad, against any of the possible considerations. …
As I have already noted the defender’s argument was that it was enough for her to rely on the fact that the parties acted at arms length and that there was no suggestion of fraud, dishonesty or connivance. I observe in passing that the defender’s pleadings do not in terms rely on these matters. However, the more fundamental objection to this approach is that it seems to me to fail to address the need to establish that the consideration was, in an objective sense, adequate. The defender’s averments, if proved, would in my view not be sufficient to enable the court to determine that the payment and delivery were for adequate consideration.”
Once more therefore we see that an objective element is essential in the valuation, although the purchaser does not have to show that the price paid was the maximum achievable.
As Lord Cullen said “The consideration should be not less than would reasonably be expected in the circumstances, assuming that persons in the position of the parties were acting in good faith and at arms length from each other”.
Finally I would refer to a decision of Lord Milligan in McLuckie Brothers Ltd v Newhouse Contracts Ltd 1993 S.L.T. 641.
A company acquired certain lands for development for housing. They commenced building operations and in October 1989 entered into missives for the sale of the partly developed site to a second company for £330,000. The price actually paid was £353,515.31 to include certain works allegedly carried out after the date of the missives. The first company subsequently went into insolvent liquidation and a creditor of that company and the liquidator sought reduction of the disposition in favour of the second company. The second company contended that the sale was for adequate consideration. It led evidence that the price had been arrived at by taking into account the final price to be expected for the houses on the development and the cost of completing the development, allowing for contingencies. No details of such prices and costs were produced. Evidence was also led from an architect who valued the works carried out by 12 July 1989 at £257,650. The site was valued at £106,000. Certain works had been carried out to the buildings between 12 July 1989 and the date of the missives, some of which had been remedial works rendered necessary following the issue of a stop notice by the local authority in August 1989. The liquidator led no evidence and contended first that there was no evidence to show that the figure of £330,000 was adequate consideration, and secondly that what evidence there was pointed to a valuation in excess of £363,000.
Lord Milligan, being referred to Lord Weir’s decision in Short’s Trustee v Chung said “I agree with Lord Weir’s observation on this point, and in particular that a defence based on adequate consideration will not necessarily fail because after the event it appears that the price actually obtained might have been bettered.”
He noted that “Counsel for the pursuers submitted that the defenders had failed to establish that the alienation was for adequate consideration. He said that there was no proper evidence at all to suggest that the figure of £330,000 represented such adequate consideration”.
He went on to hold:-
“However, my firm view is that the defenders have failed to establish that the price of £330,000 represented an adequate consideration for the part developed site in terms of s 242 of the Insolvency Act 1986. … I have no clear detailed picture as to just what work was done between the July valuation and the October sale. What I do find is that the evidence showed that on a balance of probabilities sufficient work of a nature enhancing value was done during that period to have a material effect upon the value of the development between those two dates. While I am satisfied on that point on a balance of probabilities, the evidence does not enable me to quantify the extent of that increase.
I was left with the clear impression from Mr Alex Smith’s evidence that his offer of £330,000 related to the particular circumstances in which that offer was made. Those particular circumstances included the obvious financial problems of Newhouse Construction Ltd, the knowledge that Mr Francis Smith knew that he would be engaged as site agent by the defenders if the defenders’ offer was accepted, the absence of a competing bidder and of meaningful advertising of the sale and the perfectly understandable desire of Mr Alex Smith to achieve as low a price as he could in the rather special circumstances of this particular sale. With regard to advertisement I do not accept Mr Alex Smith’s evidence, supported though it was by that of Mr Francis Smith, that the site was advertised for sale, at least that it was so advertised in any meaningful way. If it had been, I cannot envisage that Mr McEwan would have been unaware of that, visiting the site every fortnight as he did. I accept Mr McEwan’s evidence that he had no knowledge that the site was being advertised for sale and also his evidence that he, initially at least, had no knowledge of the actual sale. In view of each of the foregoing circumstances, I do not find the offer made by Mr Alex Smith and agreed to by Mr Francis Smith to be of any substantial significance towards ascertaining what was adequate consideration for the alienation concerned.
I record that counsel for the defender founded upon the absence of any evidence from the pursuers. Upon my view of the evidence led for the defenders the absence of any evidence from the pursuers cannot avail the defenders. I would add that I find it difficult to see how the pursuers could have been expected to produce even an approximately accurate valuation of a partly developed site when the defenders cannot prove in reasonable detail the state of the site at the material time, a matter very much for the defenders to establish.”
Once again the emphasis is on the obligation of the purchaser to prove that adequate consideration has been given. The failure to have an open marketing process can affect that assessment. It will not be enough to say that the price paid was the best offered. Indeed higher offers were made, but D+P rejected them in connection with their attached conditions.
On the face of it, and taking account of Mr Ahmad’s comments, it looks as if it would be very difficult for Sevco to satisfy the court that “adequate consideration” had been given.
If the court finds that adequate consideration has not been given, then the transaction is reduced. The property acquired would go back to the seller, in this case the liquidator of RFC PLC. Sevco would be due back the money it had paid, but would then be a creditor of the liquidated company.
There is an exception to the rule where any right or interest is “acquired in good faith and for value from or through the transferee in the alienation.” Therefore, if Sevco found someone to pay the £50 million value, and this transaction was in good faith and for value, then the court could not reduce the transaction, However Sevco, in this example, would be pursued by the liquidators for the Windfall profit made. In addition, it might be asked how, against the background of what would likely be highly publicised court proceedings, anyone could truly buy the assets “in good faith”.
That would apply too to a share flotation, I submit. I am unsure s to how likely Sevco would be to manage to get a share issue on the way in time before the liquidators move in to RFC PLC. A hasty dash to do so would, per se, suggest lack of good faith.
Would I buy shares if it was known that the liquidators were taking action to reduce the transaction? Of course not.
I suspect that a challenge to the transaction under s242 was always on the cards.
Mr Ahmad has simply made that more likely, and ensured that he will be a witness, called by BDO in all likelihood, if the matter goes through the court.
The three cases I cited however all show that several years van pass before the matter is resolved, but it has the potential to restrict greatly the ability of Sevco to operate. If they are allowed to register new players, can they sign someone long-term where there might not be a team there, or at least one owed by Sevco. If the transaction is reduced or quashed, then what happens to employees?
It has the potential to become if possible, an even bigger mess, and one that could run for many years to come.
Posted by Paul McConville
Insolvency Act 1986 s242
Section 242 reads:-
“(1) Where this subsection applies and—
(a) the winding up of a company has commenced, an alienation by the company is challengeable by —
(i) any creditor who is a creditor by virtue of a debt incurred on or before the date of such commencement, or
(ii) the liquidator; …
(2) Subsection (1) applies where—
(a) by the alienation … any part of the company’s property is transferred or any claim or right of the company is discharged or renounced, and
(b) the alienation takes place on a relevant day.
(3) For the purposes of subsection (2)(b), the day on which an alienation takes place is the day on which it becomes completely effectual; and in that subsection “relevant day” means, if the alienation has the effect of favouring …
(b) any other person, a day not earlier than 2 years before that date.
(4) On a challenge being brought under subsection (1), the court shall grant decree of reduction or for such restoration of property to the company’s assets or other redress as may be appropriate; but the court shall not grant such a decree if the person seeking to uphold the alienation establishes—
(a) that immediately, or at any other time, after the alienation the company’s assets were greater than its liabilities, or
(b) that the alienation was made for adequate consideration …
Provided that this subsection is without prejudice to any right or interest acquired in good faith and for value from or through the transferee in the alienation.
(8) This section applies to Scotland only.”