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Rangers in Crisis: Some Legal Explanations and Questions for the Mainstream Media

17 May

Having listened to several mainstream media outlets struggle to explain to its listeners how the law operates in situations like the one Rangers find themselves in, I decided to spell it out for our less legally inclined.   One of the most common claim listeners make is, “How can Rangers be punished for the acts of an individual like Craig Whyte?”

Another one is,  “Why are the SFA making the rules as they go along?”

Thirdly Graham Spiers claimed last night on Clyde Sports Scoreboard that “he had seen no evidence to suggest John Mclelland or John Greig has done anything wrong”.

The balance of this blog post will debunk these 3 claims and whether you love Rangers or loathe Rangers, the laws have operated clearly and predictably.  These are the laws of the land and in part, govern how businesses and corporations operate.

The second part of this blog asks some real questions that the media are not asking.

Thirdly, I wrap up by laying out where Rangers are now and where Rangers will likely be at the start of next season.

For the avoidance of doubt, Rangers Football Club is a company, subject to the Companies Act 2006 and several other legal instruments that govern how the laws treat companies and businesses. In a legal sense, there is no such things as a ‘club’…

Some lawyers may cringe at the simplicity that follows, but this is for the layman, not you…

Point 1:

In the late 1800’s the House of Lords ruled in the case of Salomon v Salomon that a company is a separate legal entity from a person. This is one of the founding principles of our economic and company policy over the 20th Century. If I am worth a £1billion and I setup a business, specifically a limited company, and I fund it to the amount of £10,000, then I am only liable for £10,000 if it goes bust. Yours truly, me myself, and I do not own the assets of the company, the company does. Accordingly, this also means the company owns its own debts and liabilities. This is commonly referred to as separate legal personality and encourages entrepreneurship and risk taking. By creating a separate legal entity, one of the legal effects is commonly referred to as limited liability. This means, except in rare circumstances, if my business goes bust, my company’s creditors cannot hold yours truly, me myself and I accountable for the company debt – even if I am personally worth £1 trillion by the time my business goes bankrupt.  This is almost absolute – with a few exceptions, but importantly even when my business is in debt up to £120M.  I get to keep my £1 trillion and the creditors are doomed to accept their cruel fates.

What this also means in practice is that a person who makes decisions on behalf of a company is not liable, barring a few exceptions, for the dealings of the company. If a person makes a decision to the gain of the business, it is the business that is meant to gain the benefit. Likewise, if a person in charge makes a poor decision it is the business that suffers the consequences.

In football terms, let’s look at this way. Say a Rangers Chairman buys 2 talented schoolboys for £10K. One turns out to be a dud 5 years later. The other turns out to be the next Messi seven years later. When Chairman A leaves the company in year 6, knowing that he cost the business 5K for the dud player. Rangers own the loss. The chairman doesn’t have to take it with him. The same rule applies when the 2nd boy goes on to be sold for £50M. The club gets to keep the money. The ex-owner can’t come back demanding money for his hit purchase. This works great in practice and ensures a level of certainty. However, like any legal principle when things go bad, the same rule applies and this is where most Rangers supporters and the media are going wrong.

When someone suffers a loss as a result of the actions of a company, either a creditor or a party litigant or a shareholder, they often sue the business. They don’t sue the CEO or the senior manager or the call centre operative. They sue the corporation.

In reality, most CEOs or Chairmen have very little contact with customers about the day-to-day operations of the business. There is no point in suing Bill Gates if Windows 7 crashes. Bill Gates is separate from Microsoft.  You’re unhappy with your contract with Microsoft, you sue them.  When a manager doesn’t clean up aisle 6 at Tesco’s, and little Sally slips in the puddle, Sally sues Tesco’s, not the manager of the Silverburn Store.

The courts have developed a test to determine when a company and its representatives are acting out-with their official role, and when they are acting as a representative of the company. There is a very important distinction.

The SFA disciplinary panel made reference to this in the case of Tesco’s v Nattrass [1972] AC 153 – 9 times. This is the law. This is relevant law today and this case is the basis for the decision and the appeal.  The disciplinary panel make reference to this case throughout their reasoning.

Here are the facts of the case:

Tesco was offering a discount on washing powder which was advertised on posters displayed in stores. Once they ran out of the lower priced product the stores began to replace it with the regularly priced stock. The manager failed to take the signs down and a customer was charged at the higher price. Tesco was charged under the Trade Descriptions Act 1968 for falsely advertising the price of washing powder. In its defence Tesco argued that the company had taken all reasonable precautions and all due diligence, and that the conduct of the manager could not attach liability to the corporation.

The House of Lords accepted the defence and found that the manager was not a part of the “directing mind” of the corporation and therefore his conduct was not attributable to the corporation. The corporation had done all it could to enforce the rules regarding advertising.

In the House of Lords Tesco were successful with their defence showing that,

  • a store manager was classed as ‘another person’, and,
  • a system of delegating responsibility to that person was performance of due diligence, not avoidance of it
  • The store manager was not the directing mind and will of the company – the company had done all it could to avoid committing an offence and the offence were the fault of another person (an employee). The company was acquitted.

Lord Reid held that, in order for liability to attach to the actions of a person, it must be the case that “The person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company.”

Let’s look at that again. A person who is acting as the company and his mind which directs his acts is the mind of the company. In other words, according to the law of the land, if Craig Whyte is guilty then Rangers MUST be guilty. Every time a Rangers supporter screams, “its CW that guilty not us”, they are effectively reinforcing Rangers own guilt under the Tesco’s v Nattrass doctrine!

Point 3

This brings us to the Board of Directors and John McLelland and John Greig.  This section might sit uncomfortable with some of the Rangers support, especially Graham Spiers…

If a football club fans are going to insist that a person the fans can relate to is sitting on board level, they need to be aware that the law doesn’t recognize symbolism.  It recognizes statutes, regulations and case precedent.  When Mr McLelland and Mr Greig take the position on the Board as Non-Executive Directors (NEDs), they are under legal obligations to act in a certain way.

Both men sat on the Board during Mr Whyte’s tenure as NEDs.  If one is to sit at board level as a NED, then several legal obligations fall upon them.  NEDs are differentiated from inside directors, who are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers). Sometimes NEDs are often confused with Independent directors who are people who do not own shares in the company. NEDs can also hold shares in the company.

After several high profile business collapses in the late 1990’s the British government commissioned the Higgs Report which was published in 2003. The recommended obligations placed on people who serve as a NON-EXECUTIVE DIRECTOR is as follows:

  • Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.
  • Performance: Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitoring, and where necessary removing, senior management and in succession planning.
  • Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
  • People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning.

It is not enough to give Mr Greig the title of “greatest ever Ranger” and call his appointment symbolic. At the moment he takes the legal title of non-executive director he loses the defence that he doesn’t know anything about corporate governance. When Mr Greig and Mr McLelland take the title of Non-Executive Director, they are considered the legal custodians of the governance process.  Anyone known as an NED at Rangers was under a legal obligation to provide an independent view on Rangers resources, appointments, and standards of conduct.

The failure to oblige to these legal obligations also put Mr Dave King, Mr Alastair Johnson, Mr Paul Murray, and Mr Martin Bain, who all have served as non-executive directors in one capacity or another during the Murray/Whyte reign, on notice.

As you can see, the Disciplinary Panel and the Judicial Appeal Board all were correct to hold Rangers and Craig Whyte together. Therefore, it is a fallacy to argue that Craig Whyte operated as a “rogue” when so many other people in the company failed to live up to their legal obligations to proper corporate governance.

Point 2:

The rules are quite clear. The SFA is not making them up as they go along.

The tribunal’s published determination makes reference to articles 94.1 and 95 of the Scottish FA’s Articles of Association, which relate to the permitted penalties for any infringement of the rules:

Rule 94.1 refers to the powers of the judicial panel, stating it “shall be the sole judge” when a club “in any way brings the game into disrepute or any other grounds it considers sufficient”.

And then they add:

Rule 95 then provides a mechanism for an independent tribunal to impose any sanction it wishes out-with the guidelines set down by the Judicial Panel Protocol, leading to the decision to hit Rangers with a registration embargo.

The Judicial Panel shall have the jurisdiction, subject to the terms of the Judicial Panel Protocol, to deal with any alleged infringement of any provision of these articles.

A… club… if found to have infringed the articles shall be liable to censure or to a fine or to a suspension or to an expulsion from the Challenge Cup [Scottish Cup] Competition, to any combination of these penalties or such other penalty, condition or sanction as the Judicial Panel considers appropriate, including such other sanctions as are contained within the Judicial Panel Protocol, in order to deal justly with the case in question.”

This should answer the first two questions.

 

Hopefully this will clarify some of the finer legal points that the mainstream media are struggling to get their heads around. In turn, I hope they help me answer the following questions that need answering…

  • Was the Ticketus deal a double whammy poison pill? I’ll address this in a future blog post, but Ill pose the following question – what if Ticketus deal was done to ensure the club doesn’t have a buyer and does go into liquidation? This is why it is important to make public the people buying into the Green consortium.
  • Did Craig Whyte give up his floating charge over the fixed assets of the club? Giving up his shares doesn’t really mean anything if he still owns a floating charge. I have it on good authority that an examination of the Rangers books will shows how Whyte was operating his floating charge to the tune of a charge of 2%-3% a month in interest. That is likely a premium RFC are paying to Rangers FC Group for the £18M loan facility allowing Whyte as a secured creditor to get cash out of RFC with impunity. Is he still doing this?
  • Thirdly, Dunfermline Athletic, Dundee, Hearts and Rapid Vienna are all due funds. They must be paid in their entirety in order for Rangers to satisfy the football authorities. However in a CVA, one cannot discriminate between creditors. If DAFC, Dundee, Hearts, and Rapid Vienna are to be paid in full, then so are Craig Whyte, Ticketus, and HMRC. How does Rangers (IA) satisfy their football debts without compromising the rules around non-discrimination of unsecured creditors?

Please let us know, MSM…

Where does this leave RFC (IA)? Here is what I see as the potential outcomes in no particular order…

Option 1 – Sell assets, namely players raising cash for a CVA pot. Ticketus and HMRC will have to agree.. Right now, either of them could block a CVA on the 75% Creditors rule. Ticketus has about a £26M claim as an unsecured creditor. HMRC has a claim of approximately £42M claim. (25M +9M PAYE +4M VAT on Ticketus deal, and 4M “wee tax case”). As the judgement from the ‘big tax case’ is not in yet, I’ll leave that out.  I still see HMRC and Ticketus having to agree to any CVA and the only way they will agree is for a fire sale of all Rangers assets to raise the value of the CVA pot.

Rangers stay in the SPL, and with the transfer embargo in place, have to field a team of youngsters for a season.

Option 2: Rangers sell Ibrox and all the other fixed assets to keep the players. I know this is an unlikely outcome. While Ally’s rallying cry “we don’t do walking away” made for good fodder for rallying the troops, when a players livelihood is on the line, he will be hard pressed not to walk away to the bank to collect a pay check from a club on much stronger foundations. Without any working capital and no legal right to buy players, the only way RFC can stay competitive is to sell their fixed assets – Ibrox, Murray Park, and the two car parks.  Take the proceeds from the asset sale and stick it in the CVA pot and hope all the unsecured creditors agree.

Rent Ibrox back from its new owners. Or play in Hampden and rent it from the SFA. Ouch. That would be a sore one. All the big name players go, with the exception of people like Lee McCulloch and one or two of the rising stars like Andy Little.  This gives the club some working capital. They can’t rely on Ticket sales to raise funds anymore because of the Ticketus deal and the season ticket deals.

Option 3: The big tax case comes back against Rangers and holds up the levy already placed on Rangers. HMRC moves for liquidation. All hell breaks loose and all the assets are sold off – players and fixed and creditors repaid pennies on the pound.  Rangers are killed off by two decades of financial mismanagement. The blame lies at Sir David Murray’s door as much as it is Craig Whyte’s.

Option 4: This is the ‘NewCo’ option and would involve literally start all over again by applying to get back into the SFA. Sell all players and sell all fixed assets. A possibility would be to rent Ibrox and Murray Park back from its new owners. The transfer embargo has ensured those 40 players on RFC rosters have a place to play. It just means that they can’t buy anyone for 12 months over the age of 18.

The competence of the panel and the reasoning behind the decision has now been explained. Let’s say we see, either an oldco RFC in the SPL next season, or a “NewCo” RFC next year.

Under the ‘oldco’ outcome, we will see a club with no stadium, no players, under an effective transfer embargo, and either playing at Ibrox rented from its new owners or Hampden, if Ibrox is sold off to developers. It will likely have been punished a further points reduction for still being in administration. It will likely be a shell club, well shy of its former glory.  It will be Rangers though, and that will be what a lot of the fans will want to see.

Under the ‘newco’ option, it will not be Rangers and that will be a sore pill to take for a lot of supporters.

All of this gets settled and then the double contract announcement comes home to roost. The former RFC as a “newco” can’t be punished anymore, because it is, well new. The “oldco” can be.  I think it will be appropriate  that the football community start to think of the totality of Craig Whyte’s actions as misdemeanours. There will be a wholesalfe shift in how the football community starts to view Sir David Murray. If the double contract judgement comes back against Rangers, it will likely be referred to as a series of felonies – systematic long-term cheating and we will have to have a serious of conversations about how to deal with this.  Do we invalidate all of the results over a year when EBTs and double contracts were in use? If that’s the case, I think we need to look at how much money clubs lost out on after amending  all of the tainted results. Should compensatory damages be paid to all of those clubs that lost out on a second, 3rd or 4th place finish because of a financially doped team? How much did clubs lose out on from not being able to play in Europe? What would be the difference in the amount each club would have received from the commercial fund?  What would attendance have been if the playing field had been levelled?

There will be a lot of questions to be answered. Hopefully, you and I will get there together.

Laters.

Web3dLaw

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