Tax Case Result

The tax case result released yesterday afternoon was obviously a surprise.  After reading the findings, it is still difficult to understand how  two of the three judges arrived at such a decision. The third dissenting judge’s opinion was clearly more in line with expectations. However, in the First Tier Tribunal it is a case of majority rule.

If an appeal is launched, it will take several more months before we get the next level of decision. Appeals are not automatically granted, but in this case- with a dissenting judge and where a dispute over legal interpretation exists already- it seems certain. At the Upper Tribunal, new evidence is not introduced and the case is not re-argued. The judges at the Upper Tribunal will hear legal arguments over whether the First Tier Tribunal judges made an error in interpreting the law and will rule accordingly.

This blog brought light to a matter of public interest.  This blog has been accurate on all of the major points of the case except the one that matters most to date- the FTT outcome.

We thank everyone who has participated. Hopefully, we will see the result reversed on appeal.

The Devil Is In The Details

Complex legal contracts do not make for light reading.  However, within the boilerplate, information can often be found that will raise eyebrows.  The contract between Murray Holdings Limited (MHL- the MIH subsidiary used to hold Rangers’ shares) and Wavetower (the original name for The Rangers FC Group Ltd) is no different.  I am told that the Share Purchase Agreement that transferred ownership of Rangers to Craig Whyte’s Wavetower is a treasure trove of interesting details.

For example, the CONSEQUENCES OF BREACH clause states what will happen in the event of Whyte failing to make good on his many promises.

In the event of and upon the Purchaser failing at the required time to satisfy any of its obligations in accordance with Clause 6.3 above the Purchaser (or any person who has been assigned the Total Purchaser Debt pursuant to Clause 6.3) agrees that the Total Purchaser Debt is automatically released or waived or otherwise extinguished in terms to be agreed by the Company, the Purchaser and the Seller.

This means that Sir David Murray, in making good on his promise to only sell Rangers to a responsible custodian capable of taking the club forward, has included a provision that promises that Rangers £18m debt owed to Wavetower will be cleared if Whyte fails to make good on certain specific promises.  So what did Whyte promise?

The Shareholder Circular released by Whyte provided some details, but let us summarise what Clause 6.3 actually says:

  • It provides for the £18m debt to Wavetower to be extinguished 90 days after the conclusion of The (Big) Tax Case
  • It prevents Whyte from charging interest on the debt prior to the tax case being resolved (but interest can be back dated if there is an insolvency event)
  • The debt to Wavetower will be capitalised (i.e. converted to shares and the debt written down) 25 days after the completion of any reorganisation that brings the club out of insolvency’
  • Whyte will pay in all working capital promised (£5m is specified, but more detail is defined in related contract documents).

So the critical questions is:

Has Whyte paid in all of the working capital promised?

I have been told that he has not.  As part of the conclusion of the deal, Whyte’s lawyers, Collier Bristow, provided a letter confirming that they had received £5m in funds from Whyte and that it would be held for Rangers FC to draw upon.  However, it is believed that this money has not actually been transferred to Rangers.  Whyte can clear up any doubt or uncertainty with an accounting of his working capital cash flow.

Rangers fans seeking to avoid or delay the turmoil of insolvency should be asking for an unambiguous answer from Whyte that all of the working capital investment provisions of the sale agreement have been fulfilled.

If they have not been fulfilled, one man has the power to pressure Whyte: Sir David Murray.  Murray was press-ganged by Lloyds Banking Group into signing the deal, but he did insist upon the provisions outlined above.  Were they just cosmetic insertions designed to allow him to argue later that he tried to do right by Rangers?  Or did he mean them?

If Whyte has not made good on all of the provision of the contract already, Murray can threaten to invoke the CONSEQUENCES OF BREACH clause.  This would see Rangers’ debt to Wavetower eliminated and would be a strong incentive for Whyte to make good on any difference between what he has paid into Rangers and what he has promised.

Forcing the debt to be reduced to zero would remove the protection of the floating charge for Whyte.  If the debt to Wavetower is extinguished, Rangers could even have a CVA (a Company Voluntary Arrangement) where repayment to HMRC is negotiated and the legal entity which traces its founding to Flesher’s Haugh in Glasgow Green in 1872 would continue with its history intact.  The threat of a three-year ban on European competition from UEFA would also be eliminated.  If Whyte has not made good on all of his working capital promises, Murray would have a chance to provide Rangers fans with the best possible outcome from the supporters’ perspective.  The only “victim” would be someone who would have had to have reneged on promises for this plan to have legal standing.

Mr. Whyte: have you fully implemented all of the obligations of Clause 6.3 of the Share Purchase Agreement?  A simple listing of your net payments into The Rangers Football Club plc would answer the question.

Mr. Murray: if Mr. Whyte has not fulfilled all of his obligations, why have you not enforced the provisions you negotiated?  It would be the best gift you could give the fans whose club teeters on the brink today?

Rangers Insolvency: Is it inevitable?

Sleep has become a precious and rare commodity in recent weeks and I find myself trying to pry my eyes open to absorb the details of a data-packed Excel spreadsheet. For any normal, well-adjusted person, thoughts of forcing one’s eyes to move cell-to-cell, checking formula-after-formula, deep into the small hours of the morning would evoke a dystopian nightmare from A Clockwork Orange. However, this is not just any spreadsheet. This material has me transfixed. Commonsense says “leave it until the morning”, but I cannot sleep.

This is Rangers’ cashflow projection for season 2011/2012.

Naturally, I cannot disclose the origin of the data in the spreadsheet. However, I have confidence in its authenticity and its accuracy. I believe that it portrays genuine insight into Rangers’ cash flows for the current season. While I anonymise the data and figure out a way of presenting it on a blog, I will just give you the conclusions.

  • Rangers FC face a cash shortfall by the end of this season of about £19m
  • Without a fresh cash injection, Rangers will run out of money in October / November

And most significantly:

  • Without a fresh cash injection-

Rangers will be insolvent before the result of the EBT tax case is even known

Whyte’s new-found candour has him admitting that there is a crisis at Rangers, and that insolvency is a distinct possibility. However, it is tempered with the narrative that he inherited a mess. Any crisis, according to Whyte, is a result of the EBT dispute with HMRC which goes back to a time before owning Rangers was even a gleam in his eye. Whyte has started to spin insolvency as drawing a line underneath the club’s longterm problems. His hints that he might not appeal a decision against Rangers in the First Tier Tribunal (FTT) could be a clue to his real strategy.

To blame the previous regime at Ibrox requires that insolvency can be staved off until the judges sitting on the FTT return with their findings. However, Mr. Whyte will probably be mistaken if he thinks that the tribunal will return a result within a few days of it concluding. An insolvency event prior to that point would reveal the nature of the immediate problem: Rangers’ failure to qualify for the Champions’ League group stages. The arrestment of almost £3m by HMRC and Bain & McIntyre (ex-directors) intensifies matters.

Readers of the replies section of this blog will be aware of the complicated permutations that face Whyte. Delaying an insolvency filing to beyond 60 days after an arrestment weakens the claims of a secured creditor (himself) to reclaim that cash. Delay also requires Whyte to up the ante and provide additional working capital. In return, his reputation would survive the mauling that would accompany a filing without an adverse result in the FTT to hide behind. Whyte also faces uncertainty over the timing of a response from the judges. If Rangers maintain a staunch defence to the end, it is possible that the FTT findings might not be published until February or March 2012. That would require pouring in more cash to survive to this point. (Surely Whyte would not countenance “throwing the game” in the last days of the tribunal to arrive at a speedy conclusion?)

It is worth explaining cash flow for anyone who has not spent much time thinking about the monetary needs of a football club, it is extremely uneven. Cash accumulates over the summer months as season ticket holders renew in great numbers and drops over the autumn as players are paid their monthly salaries and bonuses. A good European run bolsters cash receipts in the short evenings and if post-Christmas European football is on the calendar, then a good season is had by all. Without significant European cash after September, Rangers (like Celtic) face a long period of outgoings being in excess of incoming cash. This funding gap can only be filled by a bank overdraft (short-term debt), a loan, or with the shareholders throwing in more equity. Traditionally, Rangers (and Celtic) have dipped into their overdraft facilities to pay wages and other bills during the months of negative cashflow. There is a problem this season however: Rangers do not have a credit facility with any bank.

Since buying Rangers’ debt to Lloyds Banking Group (who were desperate to escape from the headache of being Rangers’ primary creditor), Whyte has failed to open another line of credit. It would appear that no bank wants to lend to a club facing crippling tax bills or one that has a fan base who will organise a boycott if it has the nerve to ask for its money back. (While discussing Rangers’ debt, a much forgotten fact is that Lloyds were not Rangers’ only creditor. An additional £4m in creditors is still on Rangers’ books bringing to total debt to about £22m when we include the money owed to the club’s parent company).

Are Rangers facing imminent insolvency? If Whyte, or his backers, decide to pour in cash to delay the filing then obviously not. Without additional cash infusions insolvency seems inevitable within the next month.

In coming posts, we shall examine the cash flow projections for Rangers in more detail and ask some of the questions that naturally follow about this case:

Did Whyte really just gamble on Rangers qualifying for the Champions’ League group stages? Was insolvency part of Whyte’s plan from the beginning? How can Whyte hope to make a profit from his £18m + £1 investment in Rangers?

As this blog has maintained from the outset, the story being parlayed from the top of the marble staircase does not make sense. We now have a few more pieces of the jigsaw and will be able to make more sense of this case as time goes on.

In the meantime, I need some sleep.

Whyte gets ever more mysterious

Yesterday, Darrell King published his much “Heralded” interview with Rangers’ owner, Craig Whyte. Strangely devoid of quotes, King appears to be paraphrasing Whyte’s words. Quite what Whyte is afraid of is not clear, but that does not matter much. What did strike me as important is following paragraph:
Contrary to a report elsewhere this week, no form has been signed that would allow season-ticket money to be used as a guarantee against any future loans; indeed, the form lodged at Companies House by RFCG last month does the opposite: it prevents season-ticket money from being used for that purpose.

(Darrell: if you are reading this, you made a mistake.  The MG05s was actually filed by The Rangers Football Club plc, the football club, and not its parent company, The Rangers FC Group Ltd). Readers of this blog will recall the MG05s filed by Rangers at Companies House on the 26th of May.  This document created no small measure of debate and confusion.  Taken literally, this document said that all of Rangers assets had been released from the protection of the floating-charge except the “Released Assets”.  The “Released Assets” were defined as the proceeds from 100,339 season ticket sales over the next four years (averaging 25,000 per season).  The bizarre wording of the document struck readers of this blog at the time and we debated this subject at length: what did it mean?  Everything is released from the charge except the Released Assets?  It sounds illogical.

Of course, it is not illogical in law if you provide a definition of “Released Assets”.  Everything is released except (whatever we say is not released, even if we call the items not to be released “Released Assets”!)  It starts to make sense if you think about it.  However, this interpretation seemed a bit contorted.  Why would Whyte release all of Rangers’ assets except a very specific number of tickets from the protection of the floating charge?

A recap on floating charges and insolvency law:
When a bank (or other lender) provides a loan to a business, it will secure its own interests by attaching either a fixed-charge or a floating-charge on the assets of the business.  In a fixed-charge, specific assets are named and the bank could just take possession of these assets in the event of a failure to repay the loan or interest on schedule.  With a floating-charge, assets covered by the “charge” would be sold until it has been repaid in full.  In Scotland, holders of floating-charges that pre-date 15th September 2003, have some additional rights in insolvency of great relevance to Rangers and the tax case.  Holders of such floating-charges are able to call for the appointment of a Receiver, responsible only to themselves who can sell off the secured assets to a new company.  Rangers’ debt to Lloyds Banking Group  (Bank of Scotland) was secured by a floating charge dating back to 1999, and therefore covered by the old receivership laws. 

By purchasing this debt from Lloyds, all of the contractual privileges survive.  Whyte had the option of simply telling HMRC where to go if Rangers lost the tax case and buying all of Rangers’ assets worth keeping.  This would be a really clever use of law.  (I will leave others to pontificate over the ethics and morality of such actions, but I was impressed by the ‘checkmate’ nature of the manouvre).

The apparent release of all of the assets (except the proceeds from 100,339 season ticket sales) made no sense.  So, we speculated that what in fact was intended was the opposite: that the MG05s was just a mangled document that would be corrected.  That all of the assets remained protected by the floating-charge and that the tickets had been released from the floating charge for some other reason- presumably to finance a loan?  That the same Bristol-based firm that filed previous MG05s for Ticketus had prepared this document for Rangers does seem to add weight to this argument.  (The Daily Record seems to have read this blog and decided that this was in fact the case.  At least they did for a couple of hours until Whyte’s PR goons had the article pulled).

However, if Darrell King’s article accurately portrays Whyte’s words and understanding of the MG05s filing, he appears to have given up his greatest defence in the event of losing the tax case.  So the mysteries surrounding Mr. Whyte continue.

Scenarios that could explain this situation:

A) Screw-up:  Has a lawyer simply made a “balls-up”?  It does happen more than many would believe.  Are Rangers assets no longer protected from the tax man?

B) More deception:  The absence of quotes from King’s article on Saturday could be significant: to make the article deniable later?

C) Other:  I will be interested to hear other hypotheses for this strange set of facts.

Mr. Whyte’s thoughts on this blog:

In his interview with Scotland on Sunday published today, Whyte is asked about this blog:

“I’m aware of a website that has dedicated itself to talking about our tax
case,” said Whyte of a site that claims to be in the know about Rangers’
financial affairs and regularly predicts a new kind of Armageddon for the club.
“I’ve looked at it. What they’re saying is 99 per cent crap”

Care to comment on the 1% truth Mr. Whyte?  If 99% is so “crap”, it should be easy to pick examples?

Then there was this quote: “The tribunal only starts in November so it will likely be concluded around  March-time. Of course, there will probably be a series of appeals after that.  This could go on for years yet.”  
Dear oh dear, Mr. Whyte!  You have a mountain of correspondence on your desk that tells you that this is not true.  The First Tier Tribunal (Rangers’ appeal against tax assessments received months earlier) started in October 2010.  It adjourned after two weeks.  It restarted in April 2011 and after three more weeks, it still could not be concluded.  So, Rangers outstanding tax issues have been scheduled for November 2011.

Perhaps Mr. Whyte could do better by the supporters of his club by making full disclosures that actually make sense.  Nothing would remove the cloud of suspicion and innuendo from his period as Rangers’ owner faster than coherent statements that tell us how he will deal with an adverse outcome from the tax case.  I would think that anyone who can say so much but avoid making any sensible comment on the single biggest threat affecting his club is the one who is uttering “99 per cent crap”. 

Rangers’ Circular Released

Craig Whyte has released the long awaited shareholder circular providing an explanation of his company’s takeover of the club.  The original document can be found here:

http://www.rangers.co.uk/staticFiles/4d/76/0,,5~161357,00.pdf

Some initial points:

The club’s debt has NOT been cleared:
As was reported on this blog, the statements made previously about clearing the club’s debt were misleading. What has transpired is that The Rangers FC Group Ltd (TRFCG Ltd), Rangers’ owners, have promised to waive the debt purchased from Lloyds if Rangers have managed to avoid insolvency in a period of 90 days after the tax case has concluded. In plain English, if Rangers win the tax case, Whyte will write off the debt (converting it to shares). If Rangers lose their ‘appeal’, then TRFCG Ltd will be protected by its guarantees over Rangers’ fixed assets. Note Whyte’s word ‘appeal’- so much for the claims that it is just an investigation and that there are no tax bills!

Fixed assets not intended to be sold:
“nor is it the intention of The Rangers FC Group to redeploy any of the fixed assets of the Club;”  However, as we have been discussing, this does not include season ticket sales.  This seems to be a confirmation of our interpretation of the MG05s filing last week.  Rangers’ future  season tickets revenues can be sold for cash now.

No schedule for promises of investment:
While the document is very specific about the timeline for when the debt would have to be written off, it is conspicuously vague about the timeline for any investment in the team & in repairs to Ibrox. Such additional investments, should they be made prior to the conditions for writing off the debt (i.e. before the tax case is resolved), will be added to Rangers’ debt and would be protected by the floating charge on Rangers’ remaining assets. (i.e. everything except a large chunk of season ticket revenues over the next four years).

Unequivocal declaration of ownership and 3rd party interests:
The document says that TRFCG Ltd is wholly owned by Liberty Capital, which is in turn wholly owned by Craig Whyte. It amounts to a denial that there are any mysterious backers – either as shareholders or as holders of formal loan notes or guarantees. (However, speculation can be expected over whether any 3rd parties need such formalities to make an agreement).

This is a quick summary of what struck me immediately. Without doubt, we will parse this document and find more to discuss and debate.

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