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.

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