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Are the Rangers Administrators Duff&Phelps Being Up-Front and Forthright?

27 Apr

Today Ticketus announced that they withdrew support for the Blue Knights consortium to buy Rangers Football Club and the Blue Knights and Bill Miller lodged improved bids. According to a statement released by the Brian Kennedy and the Blue Knights, the pair made a renewed bid conditional on Craig Whyte’s shares being acquired and subject to a CVA being agreed among the Ibrox club’s many creditors.

Craig Whyte has admitted that, through his company Wavetower as a vehicle to do so, he used a £24m payment for future season ticket sales from Ticketus to complete the takeover of the club by paying off an £18million debt to Lloyds Banking Group. This is simply a leveraged buyout. It is legal. The Glazer Family bought Manchester United in exactly the same fashion.  Accordingly Craig Whyte had Lloyds Bank assign a security over the club which @rangerstaxcase has linked to on his/her own blog. It was lodged with Companies House, as required by law.

Craig Whyte’s company Wavetower, therefore, is a secured creditor. A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor. There are primarily two types of charges; fixed and floating.

A floating charge occurs when a security (i.e. mortgage, lien, etc.) is fixed to an underlying asset or group of assets which is subject to change in quantity and value. For example, a business that operates as a manufacturing company might apply for a loan to pay for new equipment. The lender will make the loan and take a floating charge using the businesses inventory as the asset to secure the loan. Although the equipment could be repossessed in the event that the business failed to make timely repayment on the loan, the floating charge does not prohibit the company from continuing to use the machinery as normal.

The special nature of a floating charge is that the company can continue to use the assets and can buy and sell them in the ordinary course of business. It can trade with its stock and sell and replace plant and machinery, etc. without needing fresh consent from the mortgagee. The charge is said to float over the assets charged, rather than fixing on any of them specifically. This continues until the charge ‘crystallizes’, which occurs when the debenture specifies. This will include any failure to meet the terms of the loan (non-payment, etc.), or if the company goes into liquidation, ceases to trade, etc.

This is different that a fixed charge, which is registered against a specific asset. A fixed charge is a charge or mortgage secured on particular property. A floating charge is a particular type of security, available only to companies. It is an equitable charge on (usually) all the company’s assets both present and future, on terms that the company may deal with the assets in the ordinary course of business. Very occasionally the charge is over just a class of the company’s assets, such as its stock.

When the charge crystalizes it fixes on the assets then owned by the company, catching any assets acquired up to that date, but missing any which have already been disposed of. If the charge was created before 15 September 2003 the debenture-holder is then entitled to appoint an administrative receiver, whose job is to collect the assets charged to pay off the loan. This is what is usually meant when a company goes into receivership or administration. If the charge was created after that date, the debenture-holder may appoint an administrator. The main purpose of any security is to enable the secured creditor to have priority of claim to the bankrupt party’s assets in the event of insolvency. However, because of the nature of floating charge, the priority of floating charge holder’s claims normally rank behind: holders of fixed security (such as a mortgage or fixed charge); and preferential creditors, who are given priority by statute.

As far as Craig Whyte is concerned, his company Wavetower, which is now known as Rangers Football Group (not to be confused with Rangers Football Club) owns 83.5% of the shares in and also has a standard fixed charge or security over Rangers Football Club.

In a normal insolvency event, there is not enough cash going around for everyone to be paid in case of liquidation. The liquidators come in and sell off all of the assets and divide them amongst all of the creditors, with the secured creditors paid first. In a normal event, there usually isn’t enough to go around, so the secured creditor is rewarded for his risk-taking by getting placed first in the queue – after the liquidators and before the administrators.

Both secured and unsecured creditors queue up in an orderly fashion (pun intended) and the liquidator slices up the pie accordingly.  This is why the CVA is so important and has been referred to as a “cat-and-mouse-game” as creditors bluff and counter-bluff with liquidators over what they will accept or not accept. Voting rights also become extremely important. As I pointed out in my earlier blog about Portsmouth Football Club, HMRC sued to prevent a CVA of .30p on the pound because it been given a lesser voting right than it thought it had been entitled to effectively ending its right to block a CVA agreed amongst the other unsecured creditors.

Let’s look at a couple of examples.

Example 1

If a creditor named ABC Ltd holds a security for £320,000 in a business called Widgets Ltd that has only £300,000 in assets, then ABC Ltd would get only £20,000 of voting rights in any CVA. That’s because the security is fixed against the assets of the company and the presumption is that the CVA works for the benefit of creditors. If the remaining unsecured creditors value their debt at £100,000, the secured creditor would be unable to block any CVA that the majority of creditors agreed to.

There are two major problems I can see here.  First, there is Ticketus.  In the Ticketus statement today, “there are a number of likely outcomes involving Ticketus re-obtaining its cash. If there is a CVA (company voluntary agreement) outcome, Ticketus is one of the biggest creditors and will get a share of what is left in the pot.”

Secondly, the “big tax case” judgement from the FTT is not in yet.  Until the judgement crystallizes, HMRC may only be a creditor to the tune of £13Million – £4million in VAT owed from the Ticketus deal and £9Million in unpaid PAYE.  However, figures released by Duff & Phelps earlier this month listed Ticketus as one of the club’s unsecured creditors to the tune of £26.7m. As we already know, any CVA must be agreed to by a 75% of the creditors’ value.

Let’s look at our example again of ABC Ltd and Widget Ltd. Previously I argued a secured creditor could not block a CVA if its value of the debt was less than 75% of the value of the entire debt. This was on the assumption that the assets did not EXCEED the VALUE of the SECURITY.

Look at it in a different way.

Example 2

Let’s say ABC Ltd owns a security over Widgets Ltd for £320,000 and the assets in Widgets were £350,000. Guess what happens? The liquidator must sell the assets to the benefit of the secured creditor with a security over the fixed assets. In this scenario, ABC Ltd gets £320,000 and £30,000 goes into the pot. A CVA could then be agreed by the unsecured creditors. In this example, the best unsecured creditors, that had claimed £100,000 in unsecured debt, can do is get .30p on the pound.

Let’s go back to Rangers and Craig Whyte.

Whyte claims he has given Ticketus, “personal and corporate guarantees underwriting their investment” and that he is “personally on the line for £27.5M in guarantees and cash.”  I don’t know about you, but if I had a security for £20-£30Million over a business with £100M in assets on the books, and I was potentially liable for £19M to another company because of “personal and corporate” guarantees”, would I sell to anyone for £11.2 Million?

Any offer that comes in for my business had better exceed the value of my security. Even David Murray knew this. He sold RFC for a security over £18M debt + £1.  As RFC already has paid Ticketus £8million I am sure a smart and savvy (I mean smarmy) businessman knows that the assets Rangers have on the books are grossly inflated and not worth in excess of £100Million. However, they will likely be in excess of the value of his security.

I have found no authority in the Insolvency Act, the Companies Act, the Enterprise Act or any other Act, quite frankly, that gives the administrators the right to sell Rangers. They may have been given permission to seek a buyer, but they cannot force CW to sell his shares. I have found no authority that allows Craig Whyte’s shares to be sold without his express permission, particularly when he owns 83.5% of the outstanding shares!  This is why Brian Kennedy and the Blue Knights can only offer a conditional offer to buy the club. The administrators have no power to force Craig Whyte to sell his shares. He is a secured creditor and is due £20-30Million. Like it or lump it. It is a fact.

Logic tells us then that the “pot” that Ticketus refers to has to fund itself from either from an offer to buy in excess of £20-30Million (Craig Whyte’s likely minimum buy-out price) or from the sale of the assets. I think Ticketus knows this.

Ticketus is actually in albeit a risky, pretty decent position. If CW gets paid, he is on the hook to them for £19M (27M – 8M already paid). The contract with Rangers Football Club is still in force, although they are not part of any consortium, so any new buyers will have to honour the contract they have with the club, which means they will get their funds back under the present season ticket arrangements, pending a successful legal challenge of course. If the club is liquidated, then the fire sale of the assets will likely mitigate their losses, if not pay off the entire amount owed. A sale of the assets MUST go to the benefit of the creditors not to the benefit of the football club, so none of the funds raised through the fire sale of the assets can be transferred to the NewCo. Even a bid for £33 million (three times the last Miller bid) would only satisfy the amount CW is owed and the debts to other football clubs. It would leave hardly anything else for Ticketus or HMRC who would then have to agree for pennies on the pound CVA allowing Rangers to come out of administration – when there is “£100Million” in assets sitting in Govan. Folks, this ain’t happening.

I am going to have to point out the obvious here, but with the HMRC “big tax case” judgement not in yet, how are even HMRC in a position to sit back and decide on a CVA when they don’t know what they are duly owed?!!? If I am right, it begs the question as to why and how D&P are taking offers for the club in the first place, especially since Craig Whyte can block any action to sell his shares.

Are the administrators fulfilling a PR exercise?

Of course. They must they be seen to be doing everything possible to save Rangers.  Are they under instructions from CW himself to try and find a buyer? To me, the whole thing reeks of incredulity and is an exercise in futility. Unless Craig Whyte’s security is less than publicly reported, it makes no logical sense as to why he would sell to either bidder and Duff & Phelps have raised a lot of Rangers supporters hopes for nothing. Again.