RANGERS TAX CASE

The idea of Rangers ever facing an insolvency event was once dismissed as being in realms of science-fiction fantasy. It was just unthinkable. Yet, in the past few months the idea has gained more currency.

“The Other Rangers Tax Case" has shot to prominence with the serving of court documents by Sheriff Officers last week.

These documents are part of the process that will lead to a winding up order being issued in a matter of weeks if the £2.8m underpayment and interest bill which the club has promised to pay, is not paid. The £1.4m in penalties, which were not part of the original agreement, can be delayed by initiating an appeal that will start yet another First Tier Tribunal.

This less heralded tax case, which centers around the offering of share options to employees below market prices, is a strange case to precipitate a crisis at Rangers. However, the impact of Rangers’ failure to qualify for the CL is starting to show.

The defeat by Malmo will result in a net reduction of Rangers’ turnover by approx £13m this season (allowing for an estimate of Europa League revenues). Rangers can now be expected to report a loss of about £4m based upon current expenses.

Timing of cash flows are critical for any football club teetering on the brink. Alastair Johnston’s warnings to Rangers fans to be vigilant stemmed from concerns that Craig Whyte had failed to appreciate the risks and amount of financial support that Rangers FC need in years without Champions’ League money. In any season, as tickets are renewed, cash reserves pile up for football clubs. In a season without Champions’ League money, that cash pile has to be stretched until renewals resume towards the end of the season.
Some additional cash will come in from commercial operations, TV, domestic cup games, and Europa League games. However, the Europa League is small beer compared to the money from the big European stage.
Despite promises of providing cash money for ’front loaded’ investment in the team, Whyte is using season ticket receipts to support capital investment in playing staff. However, whether enough cash will remain to cover wages and all other expenses before season ticket renewal money starts to come in is in doubt. Rangers have been in this situation before and have not faced a crisis. What is different this season?
The problem for Rangers appears to derive from their lack of a credit line with a bank. When Rangers had loans with Lloyds, the bank would extend credit to prevent insolvency. It was in the bank’s interests to support its clients through short-term funding gaps. Now that Rangers’ debt is owned by Craig Whyte’s company, no bank has a compelling reason to lend to Rangers. A troubled firm facing unpayable tax bills, and a supporter base that threatened a bank with boycotts for daring to exert its legal rights to get its money back: what bank manager would take on such risks after Lloyds Banking Group worked so hard to escape them?
Cash flows are uneven for every business. Sometimes your outgoings exceed cash coming in and vice-versa. This is not a problem
if you have a cash pile or a credit line to draw upon. Credit lines from banks are usually secured. For troubled businesses, unsecured credit lines are virtually unheard of. If Rangers had established a new line of credit with a bank, a new floating or fixed charge would have been published on Companies House (as is legally required). (Lloyds, in the form of Bank of Scotland, are still listed as the holder of the floating charge on Rangers assets. It seems inconceivable that they would reopen old wounds by lending to the club and beginning that cycle again).
I am told by someone familiar with the timing of cash flows at Ibrox, that with £2m having been spent on players and a £2.8m tax bill due to be paid within weeks, that the club would almost certainly have periods this season where it could not pay all of its bills.

What would happen if Rangers became insolvent before the big tax case is heard? It gets messy. Craig Whyte may be forced to use his ‘silver bullet’ and to file for receivership. Legal battles would then begin on whether the tax debts of the existing company, The Rangers Football Club plc, would carry forward to a new incarnation. HMRC has had its powers extended in recent years to deal with the alienation of assets for the explicit purpose of avoiding a legitimate tax debt. However, Rangers do have a floating charge of sufficient vintage to allow for a receivership process. I doubt that there are many lawyers in Scotland who would confidently predict the outcome of such a battle. It will be a knock-down, drag-out fight. The one aspect that is clear is that SPL rules require that a team that experiences an insolvency event in the middle of a season is subject to an immediate 10 point deduction.