HMRC v Hearts – A New Winding Up Petition – Might Sink Share Issue…and the Club

Recently I wrote about the Hearts share issue, the fact that the support seemed to be fully behind the efforts to raise funds to keep the club going to the end of the season, and the numerous risk warnings which basically amounted to the Hearts Board saying that there was literally no chance at all of any return whatever in return for buying the shares.

The share issue was a cri de couer by the Board. Having pointed out that the business was effectively insolvent, the Board said that is the share issue failed, then they would have to source the money from elsewhere. Who would lend to an admittedly insolvent business?

Today saw two announcements from Hearts, both of which emphasise the parlous position the club finds itself in. I will deal with the second in a later post.

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The Board Statement – Winding Up Petition

Heart of Midlothian plc (the “Club”) today wishes to make supporters and potential share offer investors aware of this most recent financial matter for their consideration in conjunction with the Share Offer 2012 brochure.

The Club has been served with an Order to wind up Heart of Midlothian plc by the Court of Session on behalf of the Commissioners for Her Majesty’s Revenue and Customs (the “Petition”).

The Club is, however, endeavouring to agree a suitable payment plan with HMRC for the outstanding amount of £449,692.04. It should be made clear that this has only recently been presented to Heart of Midlothian. The Petition is unrelated to the Club’s potential liabilities included in the Risk Factors section of the Share Offer 2012 brochure.

The Board is hopeful that a suitable agreement can be reached with HMRC to provide a suitable repayment plan.

A Club spokesperson said: “We have guaranteed future revenues from forthcoming games and related broadcast income as well as additional guaranteed transfer income which will more than cover the outstanding amount stated in this Petition. We would therefore be hopeful that HMRC will accept that winding up the Club would be totally unnecessary.”

The Club is revealing the Petition as it wants to continue being transparent in all its dealings with supporters and potential investors.

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Ouch!

As the Hearts Prospectus made clear, there is an ongoing appeal due to be heard against assessments of nearly £2 million sought by HMRC in connection with taxes claimed on earnings of players loaned to Hearts but paid in Lithuania.

However, as the statement makes clear, this new liability of £449,692.04 is unrelated to that one, which being under appeal is not yet due.

Whilst this latest bill has, as stated by the Board, only been presented to the club recently, I find it hard to believe that the bill was not with Hearts before preparation of the Share Prospectus. Especially as there have been a number of these petitions over the last couple of years, one would have imagined that Hearts would be aware of the risks of non-payment of tax. The timescales for preparation of a winding-up application suggest that the bill, if not the petition, must have been known about by Hearts when the Prospectus was issued.

As far as the money which Hearts refer to as being available to settle this debt, bearing in mind the fraught financial position of the club, one idly wonders how the spending gap will be filled.

It would be quite wrong to suggest that the Board issued the Share Prospectus relying on using some of the proceeds to meet this undisclosed liability. It is not necessarily wrong for Hearts not to have revealed the debt to HMRC in the Prospectus, especially where there is never the prospect for an investor of a dividend or even of selling the shares.

However the imminent prospect of a winding-up might dissuade investors – they might not wish to lose their investment in a couple of weeks.

HMRC have already, on a few occasions, used these petitions to force Hearts to pay. Clearly Hearts do not owe enough overall for HMRC to back off, as, to some extent, they did with Rangers.

Hearts have the problem, as addressed in my next post, of how to avoid extinction.

Posted by Paul McConville

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9 Comments

Filed under Football, Hearts, HMRC, Insolvency

9 responses to “HMRC v Hearts – A New Winding Up Petition – Might Sink Share Issue…and the Club

  1. Carl 31

    Could Hearts put themselves into administration and seek a CVA?

  2. easyJambo

    As you have pointed out it is difficult to believe that the board did not know about the possible bill when preparing the share offer (it explictly says that it is not a prospectus on page 2, but then calls it a prospectus on page 21).

    John Robertson agreed to act as an ambassador for the share scheme, but it looks like he was duped, as he says he didn’t know about the bill as recently as yesterday.

    Also they had to be aware that they weren’t paying PAYE and NIC for an extended period to run up a bill of 450K. Hearts director Sergejus Fedetovas is on record as saying the the wage bill this season will be down to £4.2M (£7M last season). A tax bill of that size must take at least 3 months to accumulate.

    The share offer also fails to provide up to date information on the debt. It states that the debt to UBIG in the last accounts (to June 2011) was just over £22M. What is the position today? They must know what the latest figures are, at least to June 2012. With a turnover of around £7M, wages also at £7M and other costs of approx £4M, the debt figure must be well in excess of the £22M quoted.

    I fear that the appeal for funds is a just quick way of generating free cash that will be consumed by UBIG’s floating charge when the club does end up with the inevitable insolvency event, which I suspect will be sooner rather than later.

    I will look forward to your thoughts on avoiding extinction, although it should be possible via a CVA with Vlad’s cooperation, as HMRC shouldn’t have enough debt to block it.

  3. Fraser

    The problem for Hearts seeking a CVA is that – as their vainglorious fans have often trumpeted – ‘they owe the debt to themselves’. Almost all their 21m debt is held by UBIG, the parent company, and as the share document confirmed, that is secured on Tynecastle. UBIG have already written off some 16m in debt over the last two years. If Hearts go into admin then Tynecastle – the only worthwhile asset they possess – would have to be sold for development if it was to realise anything like enough money to pay off that 21m. It’s doubtful it would have fetched as much as 20m back when the Pieman wanted to sell it. It wouldn’t fetch that now. So Vlad can kiss goodbye to much of that 21m if he lets Hearts go into admin. It might be cheaper to pay the taxman.

    They would also be deducted 17 points by the SPL if they went into admin and would have to empty their remaining top earners as soon as they could to cut costs. Relegation would be almost unavoidable. Even if they survived as a going concern they would find themselves in a worse position than they would have been in 2005 if Vlad had not come along, renting Murrayfield with a threadbare squad but in the 1st Division rather than the SPL. Even with the support of their loyal fan base they would find it hard to fight back quickly from there.

    Presumably transferring ownership of Tynecastle to UBIG in return for further debt forgiveness is still an option, providing the club is not immediately allowed to slip into administration. But since selling Tynecastle is the only way in which UBIG can get their money back even in the long term then it would only be a matter of time before Hearts were playing at Murrayfield in any case.

    I can’t see how Vlad stands to gain by letting Hearts run themselves into the ground now. It can’t therefore be his choice alone to stop funding them through the kindness of UBIG – are the other shareholders exerting some influence? Or is UBIG completely stuffed too?

  4. Budweiser

    @ Fraser

    Great analysis. I had wondered about Hearts ‘doing a sevco’ and being ‘debt free’ next season but it doesn’t really look like an option does it ? Surely the management must have been aware at the start of the season that the income v expenditure figures just didn’t add up? Were they hoping the problems would just go away or was there a plan which went disastrously wrong?

    • Fraser

      It’s hard to make out what exactly the plan ever was, from the beginning, unless it was to spunk away tens of millions of pounds on having a bit of fun with a football club. It’s kind of the equivalent of blowing a huge wad on food and vintage wine at a great restaurant – enormous pleasure, happy memories, but the next day it comes out your arse the same colour as a Big Mac and a can of Tennents.

  5. Apologies for not addressing the subject directly, but anyone who continue to make wild ‘accusations’ that Paul McConville is really a Celtic supporter should note that this blog was posted well into the Celtic v Barcelona game – and that, at the time, Celtic were 1-0 up. Nuff said, IMO…

    • ecojon

      @ Kenny McCaffrey

      I am surprised at you Mr McCaffrey as all posters on this blog know that not only can Paul walk on water but he can make time stand still 🙂

  6. Budweiser

    @Fraser

    What an ANALogy! But probably spot on.

    • Fraser

      On reflection, a better analogy is probably a night in a 5-star hotel with a couple of classy hookers* and a bagful of toot. There’s nothing much the matter with a gourmet feast, but the other scenario can go horribly wrong – too much snow and you have a heart attack, or a tabloid hack bursts in and snaps you in flagrante. Hearts have been metaphorically caught with their pants down and a rolled up 50 in their nostril.

      *Actually, this being the SPL we’re talking about perhaps it’s more like a couple of Wayne Rooney’s granny-whores…

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