Tag Archives: Duff and Phelps

A Fire Sale in Glasgow

27 Mar

Anyone in earshot of a sports radio program in Glasgow, or in eye-shot of a sports section in a Scottish paper could not escape the news that several conditional bids have been made for Rangers Football Club. Most likely the conditions that had to be satisfied involved the ongoing dispute with Ticketus which arose after current club owner Craig Whyte sold off 4 years worth of season ticket books in turn for £20M in which he used to clear off the debt owed to Lloyds TSB by Rangers Football Club. Another condition would likely involve the “big tax case” which may put Rangers further liabilities anywhere in excess of £24Million all the way up to £75M.

Craig Whyte’s Rangers Group is a secured creditor and owns a floating charge over the entire club. We are now in a situation where the administrators are legally trying to solicit open parties to purchase Rangers, without any legal authority to do so. The administrators are not legally empowered to sell the club under the Insolvency Act 1986, in fact, there is no legal precedent at all for a owner of shares to have a “forced sell” of those shares by an administrator in an Insolvency event.

Enter the Enterprise Act 2002. Why Rangers should have been put into a pre-pack administration.

pre pack administration sale is a powerful, legal way of selling the business on to a third party, a “newco” or to the existing directors if the business is facing serious problems and creditor threats.The main advantages of prepack administrations is continuity of the “business” and when the plan is ready and a contract of purchase is drawn up, the company is quickly protected by the Court while the administrator sells the “business and assets” (not the actual company) to the new owners. In Ranger’s case, it looks like Murray Park, Ibrox, and the Players along with any other assets could all be passed on to the “newco”. This gets rid of all of the old RFC debts, unwanted or onerous contracts, (possible Healy, Papac, McCulloch), and employees. There needs be no interruption to the business which in itself can destroy value. 

An advantage is that the cost of the process is lower as the administrators do not need to find funding to trade the business. The process, once the preliminary marketing, valuation work and discussions with creditors can be done in a couple of days if necessary.

If the business is to be sold to a connected party, ie the former directors (Paul Murray, et al), they will need to be able to fund the acquisition of the assets. However, the assets will need to be independently valued. Rangers’ own accounts value MP, Ibrox, and the Car Parks at over £100 million, extremely excessive if you ask my opinion!

The Enterprise Act 2002 allows an administrator to be appointed under Paragraph 68 of Schedule B1 of IA 1986. This allows the administrator to enter into an immediate sale of any of the company’s assets without any involvement of the creditors, like HMRC.

To see how this works in the real world, then we need to look at the case of DKLL Solcitiors v HMRC from 2007. DKLL’s liabilities totalled about £2.4M. About £1.7M of this was due to HMRC, a similar percentage of what is outstanding to HMRC and other creditors at RFC. HMRC was DKLL’s major creditor. HMRC had made a winding up order against DKLL and on the day before the hearing, an application for administration was made by two equity partners of DKLL for the purpose of enabling the proposed administrators to effect a pre-pack sale of DKLL’s business to a newly incorporated limited liability partnership for £400,000.

The court endorsed the use of a pre-pack on the following grounds:

  • In cases such as this it is appropriate that the court ‘places great reliance on the expertise and experience of impartial insolvency practitioners’ and the evidence presented to the court by such experts to determine whether the administration order was reasonably likely to achieve the purpose of the administration. No evidence had been produced by HMRC to suggest that the business could be sold for more than the price that would be achieved in the administration.
  • In relation to HMRC’s opposition to a pre-pack sale in administration, even a majority creditor did not have a veto on the implementation of the administrators’ proposals. The court can authorise the implementation of the administrators’ proposals, notwithstanding the opposition of the majority creditor or, indeed, any other creditors. Accordingly, HMRC’s opposition did not make it ‘reasonably likely’ that the objective of achieving a better result for creditors in an administration than in a winding up would not be achieved.
  • In exercising its discretion as to whether to make an administration order, the court ought to take HMRC’s opposition into account. But it should also consider the interests of the other stakeholders, and the proposed sale appeared to be the only way of saving the jobs of the 50 or so employees of the partnership. It was also likely to result in the affairs of the partnership’s clients being properly dealt and with the minimum of disruption to those clients.

The decision in DKLL also showed that the court accepted that in light of two other cases, Re T & D and Transbus, the administrators had power to complete the proposed sale without the sanction of a creditors’ meeting or a direction of the court. Therefore, pre-packs are not limited to administrators appointed out of court.

In Re T & D Industries [2000], the court held that administrators have the power to sell the whole of the assets and business of the company in advance of convening a creditors’ meeting, and without the need to go to the court for directions. The legislation on this point remains the same under the post-EA 2002 regime.

The courts have recognised that a pre-pack deal is a legitimate restructuring tool in appropriate circumstances and, in a series of cases, have confirmed that administrators have the power to sell a company’s business and/or assets without the prior approval of the court or creditors if the circumstances justify it.

However, it wouldn’t have been easy sailing for Rangers Football Club. The Insolvency Act (IA)1986, in particular s216 – restricts re-use of company names. If Rangers had gone down this route, they would have had to become something other than Rangers Football Club, Ltd. Section 216 is aimed at directors who take part in the promotion, formation or management of ‘phoenix’ companies (whether as a director or not) following an insolvency sale and breach of its provisions will, if convicted, lead to imprisonment or a fine. As well as this criminal sanction, s217 imposes personal liability for the company’s debts on those involved in the management of a ‘phoenix’ company in contravention of s216. Paul Murray better keep a retainer with legal counsel.

Secondly, this creates a whole slew of problems as far as UEFA, the SPL, the SFA, and as far as licensing goes.(Maybe the St Mirren story has something to do with this?) I had better leave that to someone else or try and tackle it at a later date. But Rangers would likely escape of its major creditor obligations. It would also not be Rangers any more. Its history would end. The “newco” would start in 2012. Maybe we will be seeing Govan Bears 2012, after all?  This begs the question as to why Sir David Murray didn’t go down this route instead of selling to Craig Whyte in the first place. 

So if pre-pack is no longer an option, then what options does that leave Duff and Phelps? A fire sale of the assets to new owner? Most likely.