Our experts in restructuring series has focused on the need for expert input in order to secure a positive outcome be that through a pre-pack administration, CVA or to ensure that directors comply with their duties and avoid personal liability when exploring a business restructure. Expert input is not only critical in getting a restructuring process underway, it is also vital during the course of an administration or other insolvency process. The most recent instalment of the Rangers plc insolvency saga highlights the need for insolvency practitioners to obtain expert input when dealing with an administration.
Rangers plc’s insolvency story is well known: the company entered administration in February 2012 with Paul Clark and David Whitehouse of Duff & Phelps appointed as joint administrators. The major challenge for Rangers at that time was two potential tax liabilities (the “big tax case” concerning the using of employee benefit trusts and the “small tax case” about unpaid VAT). The administrators sought to sell the business as a going concern and proposals were received from various parties during Spring 2012 most of which were based on a CVA. In May 2012 a CVA proposal was put by the administrators to the creditors but that was voted down by HMRC (as largest creditor) in June 2012. The administrators then sold the business and assets of the company to Sevco Scotland Ltd for £5.5 million. Rangers plc entered liquidation in October 2012.
The liquidators brought an action against the administrators under paragraph 75 of Schedule B1 of the Insolvency Act 1986. The liquidators’ case was that the administrators had breached the duties they owed to the company causing the company loss and not serving the interests of the creditors. The liquidators sought an order from the court requiring the administrators to contribute sums to the company.
The liquidators claimed that the administrators had breached their duties in a number of ways. First, that they had failed to manage costs during the administration especially by failing to sell players or make more players and non-playing staff redundant. Secondly, they had failed to obtain the best possible price for the sale of the business and assets. The claim was quantified on a “loss of a chance” basis – a percentage of what could have been achieved by the administrators was recoverable.
The court’s decision highlighted that administrators have a duty to take specialist expert advice on matters outwith the administrators’ own expertise. If an administrator takes advice from an apparently competent advisor and the advice later turns out to be wrong, the administrator will not be in breach of duty and not liable to contribute to the company.
The court was critical of the administrators’ failure to take independent advice on several matters. They failed to get independent input on reducing the playing squad and instead relied only upon the opinion of Ally McCoist, the then manager of the team, about which players could be released while still allowing the club to fulfil its fixtures. The administrators had also assumed that player sales could not happen outside football transfer windows and failed to take advice on whether that was possible. They also failed to explore redundancies of non-playing staff, instead coming to an arrangement to reduce players’ wages in return for limiting non-player redundancies. The court found that the failure to take advice was a breach of the administrators’ duties and had resulted in losses to the company. The court calculated the losses on a lost chance basis amounted to £1,804,500 which the administrators were liable to repay to the company.
The court was also critical of the administrators’ failure to explore alternative means of realising the value of Ibrox and Murray Park, especially in failing to explore a sale and leaseback option. The sale to Sevco in June 2012 attributed £1.5 million to Ibrox and Murray Park – significantly less than value. The court found the administrators to be in breach of duty and required them to contribute £1,600,000 to the company. The administrators were required to contribute a total of £3,404,500 to the company together with interest.
It is hard not to feel some sympathy for the administrators – this was a high profile administration of an unusual business. It is understandable that assumptions were made, for example the inability to sell players outside the transfer window. However, the message from the court is clear: administrators need to be aware of the limitations of their own expertise and obtain independent expert input on areas failing outwith that. Otherwise, they may end up breaching their duties and liable for losses.
You may also be interested in the other parts of our experts in restructuring series.
Should you have any questions on any of the articles in this series please contact:
Eilidh MacEwan by email: firstname.lastname@example.org or by phone: 0131 285 1809 / 07376 192 463.
Steven Jansch by email: email@example.com or by phone: 0131 516 5361 / 07841 920 100.
Craig Darling by email: firstname.lastname@example.org or by phone: 0141 530 2044/07841 920 467
The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray