Tag Archives: HMRC

A look at Portsmouth FC for Guidance on Football Clubs and Creditor Voluntary Agreements

17 Apr

Not surprisingly there has been very little analysis by the Scottish mainstream media of how other football clubs have dealt with administration where HMRC have been a major creditor. Portsmouth Football Club, on a factual basis has a significantly similar back story to Rangers and their current ‘predicament’. They both have an owner that bought the clubs for a £1. Both clubs had an owner that owned 80-90% of the shares in the business. They both had potential debts of £135-£140 million. The major difference is the percentage of the debt that was owed to HMRC. Another difference was that the Premier League paid funds to the clubs owed funds by Portsmouth. And there was court action by HMRC to prevent the CVA…

As the early stages of the 2009–10 season progressed, the finances dried up at Portsmouth and the club admitted on 1 October that some of their players and staff had not been paid. On 3 October, media outlets started to report that a deal was nearing completion for new owner Ali al-Faraj to take control of the club. On 5 October, a deal was agreed for a non exeecutive director named Al Faraj and his associates via BVI-registered company Falcondrone to hold a 90% majority holding, with Al-Fahim retaining 10% stake and the title of non-executive Chairman for two years.

In December 2009, it was announced that the club had failed to pay the players for the second consecutive month, on the 31st it was announced player’s wages would again be paid late on 5 January 2010. According to common football contracts, the players then had the right to terminate their contracts and leave the club without any compensation for the club, upon giving two weeks notice. Despite the financial difficulties, Grant’s time as manager was initially successful. He gained two wins (against Burnley and Liverpool) and a draw away at Sunderland from his first five games. The only losses inflicted on Pompey in this period were by eventual double winners Chelsea and the previous season’s champions, Manchester United. HM Revenue and Customs (HMRC) filed a winding-up petition against Portsmouth at the High Court in London on 23 December 2009. In March 2010, this winding-up petition was dropped, leaving Portsmouth with a nine-point penalty for entering administration.

On 17 June, the CVA was formally agreed with creditors with a 81.3% majority; Her Majesty’s Revenue and Customs (HMRC), Paul Hart and the agent of Pompey midfielder Tommy Smith were the only ones to reject it, but HMRC appealed against the CVA due to the reduction of their considerable debt. On 15 July 2010 HMRC appealed against the proposed CVA on the last day before it would be formally agreed, the case was originally going to take place in October 2010, but after an appeal from the administrators at the club it was set for 3 August at the High Court in London. The case was heard by Mr Justice Mann from 3 to 5 August where, having heard submissions from both sides, he turned down HMRC’s appeal on all five counts put forward by the revenue service. HMRC decided not to appeal against the verdict, leaving Portsmouth’s administrators to formally agree the CVA and bring the club out of administration.

HMRC applied to the court asking them to revoke/suspend the approval of a CVA.  HMRC also appealed against the decision on the amount of its debt to be allowed for voting purposes at the CVA meeting. HMRC sought to vote in the sum of £37,768,387, which included a sum of about £11 million of tax for “image rights” payable to players which the club claimed were not taxable but HMRC claimed were a sham. The chairman of the meeting (one of the administrators) permitted HMRC to vote only in the sum of £24,474,435, having rejected the whole of a claim of £2,947,468 and placed a value of £1 on the sum claimed in respect of the “sham” image rights.

Under the Football League’s insolvency policy a club was required to exit administration by an approved CVA, and that all football creditor debts had to be paid in full or fully secured. Football creditors were other clubs (to whom sums might be due for transfer fees), players (for remuneration) and various football authorities and organisations.

The issue here was that the Premier League had paid funds to other football clubs during a period of administration out of the moneys it would otherwise have paid to the club. There is no suggestion that the SPL/SFA have paid any of the money due to Dundee United, Dunfermline, or Hearts, all clubs that are owed funds by Rangers Football Club.

As mentioned earlier, HMRC sought to vote in the sum of £37,768,387, but was only permitted by the chairman to vote in the sum of £24,474,435. The CVA proposals were passed by more than 75 per cent of the creditors. The Revenue brought its application and appeal under the Insolvency Act 1986 s.6 and the Insolvency Rules 1986 r.1.17. The Revenue contended that the CVA unfairly prejudiced its interests because it would result in the loss of valuable claims under s.127 of the Act and had approved payments past and future payments to football creditors in full. It submitted that allowing football creditors to vote amounted to a material irregularity as they, unlike the other creditors, would be receiving payment in full. The Revenue argued that if the football creditor votes had been disallowed then it would have had more than 25 per cent of the vote and would have been able to block the CVA.

On 17 August, Balram Chainrai completed his takeover of the club and passed the owners and Directors F&PPT. During the 2009–10 season, it had become apparent to the new owner that Portsmouth were approximately £135m in debt.

This makes clear that HMRC has a precedent for seeking to block a CVA when unsatisfied with the percentage on the pound offered by the administrators. What is different in Rangers case, is that if the ‘big tax case’ goes against RFC, then HMRC will likely be the majority creditor. Payout is limited by however much money is on offer and is distributed by creditor class/negotiation, with threats of liquidation & security interests complicating matters. What the Portsmouth case shows us is that HMRC will be tough, tough customers. There should be no expectation that HMRC will do any favours to Rangers when there are 100M worth of assets sitting on their books…

If HMRC was willing to sue to seek to block a CVA on a debt of £25 million when the total debt of Portsmouth was £135 million, then what will they demand when the business is in debt to the tune of  up to £140 million and over 75% of the debt is owed to Her Majesties Revenue and Customs?

I wonder if the “two Bills, Miller and Ng” have done their due dilligence…