Gratuitous Alienation and RFC 2012 PLC – Some Clarification for Clarkeng

In response to my post re Gratuitous Alienation earlier this week, I noticed that Clarkeng made a few comments disagreeing with my thesis. I think that there may be crossed wires on our parts so I thought I would clarify my argument.

Some of Clarkeng’s comments are indented below, with my responses in bold beneath.

As far as BDO challenging D&P about the value achieved for the sale of the business and the assets I do not think you will hear anything further despite Paul’s suggestion.

To be exact BDO would NOT be challenging Duff & Phelps. Instead they would be “challenging” the purchaser, Sevco Scotland Ltd (now Rangers Football Club Ltd). An administrator acts as an agent for a company in administration, and the actions of the administrator are the actions, legally, of the company.

This is unlike liquidation where the actions are those of the liquidator, as the company is in no state to take any action itself.

As for time scales, if there is to be action by BDO regarding an apparent gratuitous alienation, then I would not expect it until near the end of this year, at the earliest. Liquidations take time, especially where there are as many complications as seem to exist in the case of RFC 2012 PLC.

 

Both are effectively officers of the court and it would require cast iron proof that corruption had occurred in the sale of the assets before any progress could be made on that route.

If BDO intended to pursue a case against Duff & Phelps then this would be problematic because of the immunity administrators have. But the gratuitous alienation action, should it be taken, is NOT against the administrators.

As I have tried to explain, but obviously not with sufficient clarity, there is no need for there to be any question of corruption or wrong-doing to allow a liquidator to make a challenge on the grounds of “gratuitous alienation”. All it requires is the liquidator to think it is worthwhile asking the purchaser of assets to explain why the purchase price paid was an “adequate consideration”.

And, as my previous posts on the topic have shown, it is NOT necessarily enough to say that the purchaser paid the best price offered. If so, that would open up the possibility of an administrator and a prospective purchaser agreeing to have a “low-ball” offer made and accepted, whilst at the same time rejecting on technical grounds any higher bid.

There is no suggestion that this happened at Rangers, nor should such an inference be taken, but that shows simply that there is a difference between the “best” purchase price paid and an “adequate consideration”.

 

Unfortunately in the business world situations like this occur every day and are perfectly legal.

Maybe, but surely the differential here, being so large, justifies this at least being looked at? And the argument is NOT that the asset sale was “illegal” but that the price was not “adequate”.

 

However I cannot find anywhere a successful application to invoke the powers of para 74 and maybe this suggests the courts do not wish to interfere with the conduct of an administration except in exceptional circumstances i.e. where criminal wrongdoing was clearly proved.

I am NOT suggesting that BDO would look to interfere with the course of the administration. After all, it is over. But it is not necessary to question the administration process to pursue the question of “gratuitous alienation”.

 

As I have tried to explain an administrator is an officer of the court and acts under protection of the law to the extent that the process is considered to be that of the court.

Correct. If BDO decided to sue Duff & Phelps alleging that the administrators had been negligent in its handling of the sale this could fall foul of the protection given to the administrators. However that is why administrators carry insurance.

If it was alleged that the administrators had been guilty of criminality or deliberate wrong-doing, then they would not have the court’s protection.

But there is no such suggestion here.

As I said this is one of the very few occasions where the law protects the “loser” of a deal from the effects of its “bad deal”. But this is only because the protection is given to the creditors who lose out, rather than to the company which erred.

 

The sale of the assets by the administrator or the liquidator may well be the subject of challenge by a member ( shareholder ) of the company or a creditor but provided they have acted within the scope of their appointed duties as case law shows this is a futile exercise.

Yes – if it was the action of the administrator that was being challenged. But the scenario I suggest is NOT such.

 

Administrators and liquidators cannot be charged with Gratuitous Alienation.

We are not talking about anyone being “charged”. As I said there is no need to establish any wrongdoing at all – it is simply a question of the purchaser of assets satisfying the liquidator that “adequate consideration “ was paid.

 

The crime committed would need to be something along the route of the administrator being involved in a conspiracy to defraud the creditors.

But I have made no suggestion of any criminality, so the above sentence is academic.

 

Just one final point worth noting – it is not the liquidators role to investigate the administration nor does he have the powers to object to it unless fraudulent activity has been proved.

The liquidator will investigate the role of the Directors to determine whether there is any malfeasance which needs to be dealt with and will collect in any remaining assets for distribution to the creditors.

The liquidator has a legal duty to look into all dealings pre-liquidation. That includes an administrator’s actions. All of the liquidator’s actions are intended (a) to see what return for creditors can be maximised and (b) whether there has been any activity, especially by directors, which has fallen foul of the law.

Pursuing an alleged gratuitous alienation is simply part of function (a).

Nor would the liquidator be “objecting” to the administration. It has happened. It is complete. BDO are not looking to “unravel” the administration.

I’m glad that at least on this point, Clarkeng and I agree!

 

The people who could have objected were the creditors e.g. HMRC but that time would seem to be past.

But this process would not be an “objection” to the sale. It is simply asking the purchaser to show that it paid “adequate consideration” for the assets. It is then up to the purchaser to do so, not for BDO to show it was inadequate.

There is no attempt to declare the sale void.

 

In this case the most beneficial situation is likely to be the monies which will be recovered from Collier Bristow and Craig Whyte.

And on this point too we will have to agree to disagree. There is a long post to write on the liquidator’s claims as mentioned above. Clarkeng is confident money will be recovered. I am far less so.

In any event, and in my view, BDO would be failing in their duty if they did not seriously consider the gratuitous alienation issue. They may decide, for perfectly legitimate reasons, not to do so, once they have considered all of the evidence and information which they have access to.

I should make clear, although some might call me naïve, that I do not believe that anything other than their legal duties and obligations will influence BDO’s decisions in this case. For all of the concerns by some that the Scottish “old boys’ network” will allow the issues to be swept under the carpet, I do not see HMRC accepting that.

BDO is a reputable firm of Insolvency Practitioners, amongst other things. It will not operate to prejudice creditors, especially HMRC, just on the basis of a handshake, or a shared interest in Rangers.

 

Yes I think Paul has made an error in his suggestion that an administrator can be pursued for Gratuitous Alienation. As regards the liquidators pursuing such a claim I am saying that yes they can pursue the Directors or Members of the Company in the event that this is alleged to have taken place but not the administrator.

They are both officers of the court and as I say unless the administrator is suspected of having committed a fraudulent transaction then case law seems to be fairly clear. The burden of proof by any claimant against an administrator is very high and under SIP16 or paras 74 or 88 the only practicable recourse available would have been to remove Duff and Phelps.

As I said there is no recorded case law of a successful action against an administrator under para 74 and the creditors have not contested the administration. There are instances of removal under para 88 but these are very few and far between.

As mentioned above, BDO would NOT be pursuing the administrators. Nor, in the case of a gratuitous alienation, would they pursue the Directors or Members of the company. (There are matters where it is competent to pursue the Directors, but those are for another day, and only a BDO investigation will determine if grounds for that exist here.)

 

I saw Paul’s reference to BDO pursuing this but cannot see where he gets it from unless he is assuming that SDM is guilty.

Sir David Murray has absolutely nothing to do with any issue of gratuitous alienation.

Put very simply the position, as I see it, is this.

RFC 2012 PLC owned assets. These assets were shown in the accounts in 2010 as worth in excess of £100 million.

The administrators sold the assets for £5.5 million.

The purchaser immediately revalued those assets to be worth near £60 million.

Was £5.5 million “adequate” for assets worth either over £100 million or around £60 million, and can the purchaser prove that it was.

 

Finally, to end this response, Iain chipped in. He said:-

They would get what someone thought it was worth. And if…like the last time that figure was the highest of several bids received then it would be safe to assume that that was the most it was worth.

As the authorities make clear, when deciding on the “adequacy” of the price paid, the facts of the sale process are relevant, but not conclusive. There can be questions about the open-ness of the process and, for example, in this case, a higher offer was made by Walter Smith’s consortium on the day of the sale. And there had been higher offers before which were ruled out for various reasons.

 

Conclusion

Will BDO pursue this? Maybe.

Will it be a quick process? Probably not. After all, to use an example, the liquidation of Craig Whyte’s Vital company took around 7 or 8 years to conclude, and the issues there were far less complex and the money far less than with RFC 2012 PLC.

Will BDO be swayed by outside factors, such as perceived love for any football team, or dislike of them? Of course not.

Will I keep banging on about this? Probably! 

🙂

 

Posted by Paul McConville

 

 

Advertisement