Date 5 July 2010
Everyone knows that Julius Caesar “came a cropper” on the “Ides of March” (15th March).
So far, so what.
Well, supporters of Pompey’s CVA may yet come to dread the week containing the Ides of July (15th July 2010). Predictions and augers can (as Caesar found out) be tricky. With that in mind; Thursday 15th July looks likely to be last day when Her Majesty’s Revenue & Customs (HMRC) can issue a challenge against Portsmouth City Football Club’s Company Voluntary Arrangement (CVA).
Bear with me. Some of this stuff will be very interesting and non technical, other parts less so - but it’s all connected and (I think) worth a pause for thought.
Following the last meeting of Pompey’s creditors on 17th June 2010, there was a lot of positive publicity for the Joint Administrators of Portsmouth City Football Club.
It was reported that the proposal for a Company Voluntary Arrangement (CVA) was approved without modifications by creditors and members. It was further reported that “On the first vote 81.3% of the unsecured creditors voted in favour of the proposal and that on a second vote, which excluded connected creditors, 74.07% of the non-connected unsecured creditors voted in favour of the proposal.”
Following that meeting, as required by the UK’s insolvency regime, Andrew Andronikou, one of the Joint Supervisors of the newly approved CVA reported to the Court (and creditors) about the outcome. Mr. Andronikou was also Chairman of the creditors meeting on the 17th June 2010.
That report was dated, Friday 18th June 2010. Assuming this report to creditors was also filed at Court the same day then any creditor wishing to challenge the outcome of the meeting and or any of its Chairman’s decisions has 28 days within which to issue their application at the Royal Courts of Justice. Counting that day (18th June), the 28th day following that - and the deadline for an application is Thursday, 15th July. Not to ruin the dramatic impact of all this but as above, predictions can be tricky. If the report was filed at the Court later then 18th June 2010 then the 28 day period starts later too. If the report was filed on Monday, 21 June 2010 then last day HMRC can apply is Friday, 16th July.
Who would challenge and why?
Step forward any one of the unsecured creditors who opposes the terms of the “approved” CVA.
There might well be a raft of these out there but only one that matters….HMRC.
HMRC had increased their claim against the Club since the beginning of the Administration and along with their claim concerning tax due for “image rights” it stood at circa £37 million prior to the CVA meeting. At the beginning of the Administration the initial report to creditors (in April 2010) estimated HMRC’s claim at £17.1 million.
Prior to the meeting, Mr Andonikou, one of the joint Administrators of Pompey had already indicated that he might challenge part of that claim and as can be seen from the report that’s what he (as Chairman of the meeting) did. The Schedule of “Unsecured Trade and Expense creditors” shows that although HMRC had claimed £37,768,387.13 the Chairman only “admitted” (or allowed them to vote) a claim of £23,895,044.67.
The difference (circa £13.8million) would have made all the difference to the vote of the creditors. Rather then the 18% against which was reported, the result would have been closer to 29%. That’s more than enough to beat the 25% threshold required to defeat the CVA proposal at its first vote.
In order to succeed the CVA proposal must be approved twice by creditors. The first vote required 75% approval (hence 25% opposition is an effective veto).
The report to the Court provides no explanation for the reduction- they would emerge after an application. Instead I have speculated on what lies behind the Chairman’s decision to write down HMRC’s claim.
It appears that in reaching this decision the Chairman decided that he could disregard the increased claim of HMRC as it was “assessed” by HMRC after the beginning of the formal insolvency and before the June meeting. They may even be relying upon the recent tax/insolvency case of Mercury Tax Group Limited [2469 of 2009] Leeds District Registry/AKA HMRC v Maxwell and Klempka. If my guess is correct then I would be concerned that they were being very optimistic when they reached this view.
This case in question which I understand is currently being appealed anyway may not be as helpful as a superficial reading would suggest. Put another way, I would be surprised if another Court asked to consider whether HMRC can assert a “pre meeting” assessment -for the purposes of proving in a CVA vote, would deny HMRC the right to prove as a liquidated debt for the whole sum. Such a finding would unnecessarily restrict HMRC’s ability to prove in formal insolvencies and should also fall foul of a public policy argument.
For this and other reasons, HMRC would appear to be justified in asking the Court to look again at the decision of the Chairman to cut their vote from c. £37million to c. £23million.
What else?
If HMRC do decide to “have a go” then they are likely to chuck the kitchen sink at the application in the hope that one of the issues raised will be sufficient to force a reconsideration of the CVA approval.
So what else is there that HMRC could potentially challenge?
The Football Creditors Rule is the football league rule which ensures football related creditors (e.g. clubs) get 100% out of a formal insolvency. For ease of reference I’ll refer to the creditors who benefit from this as “Football Creditors”.
At the creditors meeting on 17th June, the Chairman of the meeting seems to have included the “Football Creditors” in the vote. Unsurprisingly they voted in favour.
HMRC may seek to claim that as (100%) beneficiaries of the Football Creditors Rule they are claiming a lien over the Club (especially the TV money). If that’s the case then the insolvency regime defines a “lien” as a form of security. i.e. secured borrowers.
Secured creditors should not be voting alongside unsecured creditors under a CVA. Oooops!
If called upon to defend this, as the Chairman of the meeting (as well as disputing the above) Mr. Andronikou could theoretically argue that the clubs impliedly waived their right to security when they voted in favour of the CVA. That could get very interesting if HMRC’s other action succeeds too and the Football Creditors Rule is struck out. Either way that could potentially leave both Mr. Andronikou and the Football Creditors in a very difficult position.
The Football Creditors Rule, the "Power to Deduct” is as follows: “47. If any Club or Relegated Club (“the debtor Club”) fails to make any payment due to any creditor of the description set out in Rule C.48, upon being reasonably satisfied to that effect, the Board shall be empowered to deduct the amount of any such payment from any distribution of UK Broadcasting Money, Overseas Broadcasting Money, Commercial Contract Money, Radio Contract Money or Title Sponsorship Money payable to the debtor Club, paying the same to the creditor to which it is due." As the rule operates to attach to money "due to the debtor club", that is property of the company. This may create legitimacy for the Football Creditors Rule but denies them the ability to vote in the CVA.
So far so obscure? We’ll if argued by HMRC (and confirmed by the Court) then it would remove the £20m-£30m of football creditors from the vote.
Finally, the secured creditors Portpin (Mr. Chanirai) and Ocadia (Mr Gaydamak) look to have voted in favour. According to the CVA they would have got paid in full. If they waived security or it was defective then that might indicate there has been a “material” change, which is another potential ground for appeal.
If any of these points succeed then a 75% majority cannot be achieved. No 75%, no CVA. No CVA? Well let’s just say the Championship will be a harsher place with a further point deduction for Pompey.
It never rains but it pours…
Why do this?
I will comment further on the mechanics of this kind of application if/when HMRC have applied, but the desire by some creditors to investigate the old regime has been best expressed by HMRC and it is clear that it was mainly their intervention prior to / at the last meeting that lead to the current CVA- sale of the business to “new” club & liquidation of “old” club route that was voted on at the meeting in June.
Unusually for HMRC they got involved early in Pompey’s Administration, initially filing a challenge to the validity of the current Administrators appointment (then backing away from that challenge at the second hearing).
They gave early signals of their desire for the kind of thorough investigation of former directors and connected parties that Liquidation is best suited for. A Liquidator has extensive powers of investigation /prosecution that are less readily available in other forms of insolvency such as a CVA or Administration.
It’s is very rare for a business involved in such a process to return much of a dividend for creditors except where a large recovery has come from a claim against old directors or parties connected to the Club.
During the course of Pompey’s insolvency HMRC have also initiated a thorough review of how clubs reward players for their “image rights” (in ways that are “tax lite”).
A challenge like this along with the challenge to the Premiership would indicate to me that they have formed a view and now want to come after these kinds of schemes (and the people who facilitate them).
Look too at the hardened attitude of HMRC to the arrears of football clubs for tax such as PAYE & National Insurance. Whereas in the past they may have allowed these arrears to build up for a few months at least, that is no longer the case. I am sure most will be aware of the recent winding up petitions against clubs such as Cardiff and Southend but that will just be the demands that have reached the public domain.
Many others will join them if they too fall into arrears with HMRC next season. Portsmouth may have been the first Premiership club to enter formal insolvency and the majority of future insolvencies look likely to come from the Championship and lower leagues but let’s not kid ourselves that Portsmouth will be the last big club to hit such serious trouble.
As above, HMRC has filed a petition against the Premiership over the “football creditors rule” whereby football creditors get a better return from clubs insolvency then ordinary creditors (like themselves). This rule is particularly galling to HMRC as they gave up a similar “special” status when the administration regime changed in 2003. Their challenge will take some time to come to Court and won’t directly affect the Portsmouth insolvency until either the parties negotiate a settlement or a Court makes a ruling. Any substantial hearing on this claim is probably many months away.
In any event who is to say that HMRC would want to “negotiate” with the Premiership (and others) over the Football Creditors Rule? Maybe they just want to end it.
Despite the failure of a previous challenge, the time is right for HMRC’s current challenge of the “football creditors rule”. The problem for the rule is that is goes against two guiding corner stones of the UK insolvency regime:
The first is that all creditors should be treated on an equal basis, being paid pro rata what they are owed. This is known as the”pari passu” principle. The second is the idea that no one should be deprived of their assets because of insolvency alone. This is known as the “the anti-deprivation” principle.
Finally; remember that HMRC is not just a money collecting machine. It has other functions too, such as helping the Treasury formulate tax policy and lead agency in the UK for anti money laundering investigations. Who is to say what is upper most in its mind is when they consider what action to take over football clubs and the issues surrounding them?
SUMMARY
I really do wonder if the football leagues, associated organisations and their members see just how big a wave is heading their way. I doubt if one in twenty have done an impact study on “what if?”.
My guess is that HMRC will take action before time runs out. If HMRC does decide to launch this second challenge (in addition to the first challenge over the Football Creditors Rule) then they will have parked their tanks squarely of the respective lawns of all the football leagues and the current owners of their member clubs. If both are successful then they will dramatically change the leagues, their cash flow and how clubs conduct themselves when buying and selling players. Imagine how the market for players would change if clubs actually had to pause to consider whether the people buying from them could really affords it. How many of the current incumbents of the Premiership would be considered a credit risk if both challenges were to be made (and succeed)?
Et tu Pompey?