17 August 2012

Irony & Insolvency

by Andy McKellar | Contributor

The finances of Scottish football clubs have never faced such intense scrutiny following The Rangers Football Club plc’s entry into administration on 14th February 2012 as a result of the failure to pay sums due to HM Revenue & Customs under the instruction of then owner Craig Whyte. 

Rangers FC were subsequently denied entry to the Scottish Premier League and were eventually admitted into the SFL Third Division after inefficient and protracted discussions with the authorities throughout the summer. 

It seems however that the clubs are not the only ones who should be worried by Rangers’ absence from the top-tier as it would appear that money problems may be on the horizon for the SPL itself, if they have not arrived already. 

Earlier this week RangersMedia revealed that the Scottish Premier League was indeed technically ‘insolvent’, a phrase with which we are relatively familiar with by now. Insolvency can be defined as ‘the inability of a debtor to pay a debt’ and can be further broken down into cash-flow or balance-sheet insolvency. On the face of it, both could perhaps be true of the SPL.

Various outlets revealed earlier this week that the top-flight clubs in our country were still awaiting their first payments from the League which accounts for 4% of the cash pot per club. This would most certainly fit in with the definition of cash flow insolvency, whereby there is a lack of required liquidity that would allow debts to be paid as they fall due. This possibility is emphasised by STV’s claim that the SPL no longer has a sufficient cash reserve to make emergency payments to its member clubs should they be required. 

SPL directors: Are you concerned yet? 

If you need further evidence of potential financial troubles ahead then perhaps we should examine the Balance Sheet of the Scottish Premier League Ltd for the year ended 31 May 2011, which are the most up to date accounts available. While there is almost £4M sitting in the bank account of the SPL on the date in question, the creditors falling due within one year result in a net liability of £196k being shown. This would be termed as balance sheet insolvency. 

During the year under consideration the Scottish Premier League was contracted under a broadcasting deal worth £65M over 5 years with BSkyB and ESPN which presumably contributed a proportionate £13M towards the overall turnover of £22.7M during that year. Things were looking slightly more positive for the League with costs remaining relatively static and a proposed new TV deal worth an extra £3M per year waiting to be signed off. As we all know however, there was a problem. 

The SPL chairman who denied Rangers Football Club entry to the League on the grounds of ‘sporting integrity’ consequently threw away any chance of the proposed broadcasting deal ever being finalised. Fortunately for the club representatives both Sky and ESPN decided to stick by Scottish football and apparently agreed a new five-year deal, albeit at a far reduced value to the one that was being boasted about previously. Of course this means that a technically insolvent company now faces the risk of a reduced turnover when one might logically assume that money received was required to be increased significantly. Once again, for the SPL, the signs are not good. 

In the interest of fairness it is probably correct to acknowledge that the directors’ responsibilities include preparing financial statements on a ‘going concern’ basis, unless of course it is inappropriate to presume that the company will continue in business. This duty, as you would expect, was agreed by and signed on behalf of the SPL board by Ralph Topping and Neil Doncaster, and approved and signed off by KPMG LLP, the auditors. For the record, the accounts also showed an operating loss of £29k.

The SPL however, with the assistance of the Scottish Football Association, spotted an opportunity to save itself some much needed cash when Sevco Scotland Ltd, as it was formerly known, applied for the necessary SFA licence. 

While there has been a considerable lack of transparency and clarity on this matter, it would appear that the prize money for season 2011/12 due to Rangers FC, and in particular the ‘oldco’, has not been paid. 

The SPL rules state that “a Club’s entitlement to receive payment of fees from the Company (SPL) in accordance with the Rules shall not be in any way dependent upon the Club holding any share or shares in the Company and the Club remain entitled to receive payment for any fees properly due...”

So it would appear, regardless of the previous company which operated RFC no longer being a member of the League, the earned prize money should still have been paid if the SPL intended to abide by its own rules. 

The media this week however have suggested that as part of Rangers’ membership application, it was agreed by the necessary parties involved that any right to the SPL prize money was waived. Duff & Phelps, who are currently operating the oldco, were required to approve such a condition and to my basic understanding could resultantly be in breach of their statutory duty to the company’s creditors. Given their previous incompetence, I would hardly be surprised. 

It remains to be seen whether any creditor will raise an objection or take legal action over such matters but there is certainly a distinct possibility if the claims are proved to be factual. Furthermore BDO may be make enquiries, if and when they sweep into action, over just why such money was allowed to be removed from the reach of already deprived creditors. If proved to be accurate then I suspect there could be trouble ahead. 

Back to the SPL: The fact that the League seems to have withheld prize money to the tune of £2.55M and yet is still continuing to encounter cash-flow problems should perhaps set alarm bells ringing for all concerned. With an insufficient cash reserve, a loss-making business model, and a negative balance sheet already, the signs are certainly not good for the Scottish Premier League. The lack of an improved TV deal and subsequent reduction in sponsorship receipts will do little to help matters financially. Strangely, however, the Scottish media seem reluctant to discuss the issue.

The Scottish Premier League Ltd and its members clubs are perhaps not the only ones who should be nervous about the current financial state of the League. In the United Kingdom, if a company continues to trade while insolvent then the directors may become personally liable to help meet the deficit to unsecured creditors if the company’s financial position is deemed to have been made worse by the directors continuing to trade instead of putting the company into liquidation immediately. 

Such serious consequences do require the process of liquidation, either voluntarily or otherwise, to be entered into, and perhaps considering such a thing is somewhat getting ahead of ourselves. Regardless, it is still worthwhile highlighting the severe penalties that may result from the SPL's mismanagement. We may even be treated to witnessing such consequences when BDO investigate the actions of a certain Mr Whyte. I certainly couldn’t rule it out.

As a Rangers fan I’m sure I will be forgiven for perhaps not holding the warmest feelings for the SPL and its members. Certainly there is an element of me that would take great delight in watching the whole thing fall apart as a result of my Club’s absence. Wouldn’t it be completely ironic if the same league that punished Rangers for suffering an insolvency event then subsequently went bust as a direct result? I suspect many Bears will currently be affording themselves a sly snigger at that very thought. 

Other fans however may view this as desiring vengeance, although it could be certainly be argued that Rangers are where they are due to the same vindictiveness shown by the various SPL clubs.

Further irony can be viewed in the seemingly new found prosperity of Rangers Football Club as ticket sales continue to increase by the day. It certainly would no longer be surprising to see our fans surpass last year’s total of just over 37,000 season ticket holders, and to single-handedly hold a higher aggregate attendance than the whole of the SPL this weekend when we welcome East Stirlingshire to our grand old stadium. 

It is good to see the Rangers' support clearly confirming Super Ally’s claim that ‘we don’t do walking away’ while fans of other clubs seem never to have turned up in the first place.  Indeed the much promoted Sell-Out Saturday resulted in average attendances of less than 50% of the stadiums’ capacity, making a mockery of the campaign’s title. 

As alluded to above, only time will tell if such financial concerns for the Scottish Premier League ever become a potentially destructive reality. Scottish football as a whole has been embarrassed enough by the meltdown at Ibrox and subsequent handling of the situation by the footballing authorities. I’m not convinced its lowly reputation could afford the collapse of its self-titled ‘Premier League’. 

If such an occurrence does come to pass then David Longmuir and the SFL would suddenly find themselves in an unusual position of power, perhaps becoming the driving force behind the much needed restructuring of our national game. Certainly I’d be willing to wager that they’d make a far better job of it than either the SFA or SPL, both of whom have shown themselves to be thoroughly unfit for purpose in recent months. 

I take great comfort in the loyalty that is being shown by the Rangers’ faithful and in the knowledge that we can sit back, get on with our football and watch events elsewhere from the outside. As for what happens to the SPL? Que Sera, Sera.