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Liquidation
Liquidation is in the news this week following yesterday’s revelation that Hearts Football Club is facing possible closure following the presentation of a petition for winding up to the court by HMRC. So why is this different from the situation faced by Rangers FC in February of this year?Why was the statement which was issued by the Hearts’ board yesterday pitched in such dark terms?
The answer is really in the difference between the purposes of Administration –which was the process originally entered into by Rangers – and liquidation, which is the prospect facing Hearts. Administration is a rescue process. Its primary purpose is to save a company, or at least save the underlying business, which is what happened at Rangers. The old Rangers PLC is now in liquidation but the business of the football club continues.
Liquidation, on the other hand, is a process which is designed to bring about the closure of a business and to ensure that its affairs are brought to an orderly conclusion. There are 2 ways of doing this but the procedure in the news this week is Winding up by the Court.
Winding Up by the Court
This procedure involves the presentation of a petition to the sheriff court nearest to where the company has its main business interest. However, if the share capital of the company is greater than £120,000, the petition has to be presented in the Court of Session in Edinburgh. Petitions can be presented by any of the following:
1. The directors
2. The company (the shareholders)
3. A creditor
Procedure for winding up by the court
In the case of Hearts Football club, the petition has been presented by HMRC.For the petition to succeed, HMRC must demonstrate that the club is insolvent. Usually that’s done by proving to the satisfaction of the court that the company can’t pay its debts as they fall due.In this case, there is a substantial sum outstanding to the Inland Revenue in respect of PAYE and NIC payments due on staff wages.A company is required to pay these deductions over to HMRC on a monthly basis.Given that the bill here is over£450,000, it suggests that several months’ payments have been missed. Technically then Hearts FC is insolvent.
Presentation of a petition may or may not involve the appointment of a provisional liquidator.A provisional liquidator’s main function is to find out what assets and liabilities a company has and to establish what its true financial position is.He tries to maintain the status quo while the court considers whether or not it should grant a winding up order. Because the provisional liquidator is there to preserve the status quo, he normally allows trading to continue, at least in the short term. However, if the court action continues and a winding up order is granted, trading can only continue with the specific consent of the court.
Before consenting, the court will have to be satisfied that continued trading is in the best interests of the creditors.In other words, by keeping the business together, the liquidator will get a better return for creditors by obtaining a higher price for the assets. In Hearts’ case, the problem is a cash flow one.A liquidator would not want to incur losses while trading the business and he would want to be satisfied that there was enough cash in the short to medium term to meet the costs of continued trading.
The other problem the club will face if the order is granted is that a winding up order has the effect of terminating contracts, including employment contracts.It is likely that the footballing authorities would allow players to walk away under these circumstances and their value would be lost to the club. In addition, since the footballing authorities consigned Rangers to Division 3, they could not allow a newco Hearts to continue in the SPL either.
So what can be done?
Ubig Investments, Vladimir Romanov’s company, could make a decision to appoint an administrator.This appointment would‘trump’ the liquidation and would allow continued trading as happened with Rangers.However, any administrator would be wise to take a couple of weeks to plan his strategy before taking on an appointment of this size and there is no indication that Ubig has made any move in this direction at the moment.
Alternatively, Hearts could try to reach agreement with HMRC about payment of the outstanding debt.The petition for winding up could be sisted (put aside or put to sleep) while installments are paid.We believe that Hearts are due money from transfers within the next week or so, and, if the fans fall behind their team, gate receipts should be substantial.This may be enough to persuade HMRC to wait.
If they will not, there is an outside chance that the court could be persuaded to appoint a provisional liquidator in the short term, before granting a winding up order.The provisional liquidator could then make an assessment of the overall financial position of Hearts FC and decide whether to continue trading meantime.Appointment of a provisional liquidator would avoid the unwelcome effects of a winding up order on contracts (including employment contracts) and would avoid the need for the court to be addressed in detail on the merits of short term trading.A provisional liquidator can also sell the business and assets of a company, provided he has the consent of the court.So if there are any buyers in the wings, sale could be achieved before a winding up order was granted.Whatever happens, the next few days will be amongst the most important in the club’s history.
Maureen Leslie-Corporate Insolvency Director, MLM Solutions CPS