Dundee`s CVA Passes (For Now)
The first reaction, when the news broke that Dundee’s CVA had been passed at a creditors’ meeting on Tuesday, was relief. I’d never really thought there would be much danger of it not doing, but it’s hard to be sure of such things, and with various different quotes of the total debt and of HMRC’s share of it, it did seem there was some possibility that HMRC might be able to block it, particlarly if anyone else voted with them. And despite all my criticism of the club, both in the reckless abandon that led to a second administration in seven years, and of the way they’ve handled it in the few months since, I really didn’t want the club to go under.
All this criticism, however, remains as strong as ever. The CVA offered creditors 6p in the pound (on debts which had mysteriously shot up to something over £3.5 million – of which, more shortly). I remain convinced that far more could have been done to cut costs and put more money into the debt, and it remains scandalous that they have continued to be able to focus so much (financial) effort on the team and continue to live beyond their immediate means while the club has been stiffing creditors to such a colossal extent. The list of debts was published this week, showing the full extent of it. £461,000 to HMRC, some £39,000 to the local council, £14,000 to Dundee University, £31,000 to Tayside Police, amongst all the usual litany of smaller debts to local businesses – £20 to Energie Fitness in Dundee, and £300 to Wallace Family Bakers. A couple of the major creditors – former directors Bob Brannan and Calum Melville, who got the club into this mess in the first place – are believed to be waiving their pay-off, so it will only cost them £150K to cover the CVA. Specifically, the money raised by DFCSS (the Supporters Society) will be used for that. They will own 53% of the shares, the remainder being owned by the business trust who have raised a smaller amount.
The business trust money along with the rest they’ve received recently – £150K from Wolves for Leigh Griffiths, and another £100K or so from Sky for televising their cup game against Motherwell last month – are being held back to settle priority debts (the football creditors) and to fund the club through the remainder of the season. It’s a lot of money to be held back from the CVA, and has raised some eyebrows.
Meanwhile Dundee are still doing very well on the pitch – yesterday’s win over league leaders Raith extended their unbeaten run to fourteen games, and would have seen them three points clear at the top without their points deduction. Their first goal yesterday was scored by Gary Harkins – for whom they paid a six figure sum for the summer before last, making him comfortably the division’s most expensive player. His wages aren’t buttons either, and – unlike Griffiths – he was not sold in January despite that being the initial excuse used by some for his being retained at the expense of lesser-paid players when the redundancy axe was wielded in October. The second goal was scored by veteran Neil McCann, the latest in a series of triallists the club has played to get round their transfer embargo.
Given that it was my team they beat with that injury-time winner yesterday, all this might smack a little of sour grapes. (And there might be a point there given that I’ve rather strengthened this part of the article since the draft that I wrote before the game.) But to be fair to me, I’ve been saying much the same throughout. In any case the actual losers – after the creditors – are not us but the teams at the bottom, at whose expense Dundee look set to survive relegation comfortably. The points deduction – though I admit I thought it was about right at the time – has proved woefully inadequate even to balance out the competitive advantage gained over these sides, quite apart from any issues of punishment or deterrence.
This is something the Scottish Football League will need to look at, and there’s sure to be considerable discussion about their rules on dealing with administrations come the next AGM.
A mixture of relief and anger then, but mostly the former.
The next reaction was one of surprise. Even though two other fairly significant creditors – the sacked management team of Gordom Chisholm and Billy Dodds – did indeed join with the authorities in voting against, the percentage voting in favour was rather more comfortable than had been anticipated, at 81.6%, with the total debt mysteriously having jumped by a million or so from even the highest quotes or estimates beforehand. This set off some alarm bells, and some memories of earlier CVAs which had been passed after friendly creditors suddenly remembered they were actually due lots more money than they’d previously thought it necessary to mention.
Administrator Bryan Jackson has already said that he’s anticipating a legal challenge, and there’s no doubt that HMRC will be looking at the detail rather closely. There are several possible issues that have been suggested.
A couple of these, I suspect, are not going to cause a problem. One angle that has been looked at is the status of Melville’s loans. Melville, the benefactor on whom Dundee had become too reliant in the year or so before administration, had during that time made a number of statements to the effect that all his cash was being given and not lent, and that the club would not owe him a penny. Yet when it came crashing down, it turned out he had outstanding soft loans to the tune of just over a million. (This was already known about and was not the extra debt that appeared just recently.) However, unless there’s some allegation that the books have actually been falsified after the fact – and I’ve heard no such suggestion – and even if he may have been intending to write the loans off at a later date, there’s no reason to doubt their veracity or legitimacy regardless of what might have been said in public. Rather perversely, the fact that so much else of what Melville and Brannan said in public turned out to be rubbish sort of works in his favour here. This is, I should think, a non-issue.
I’ve also heard it suggested that with so much money being withheld from the CVA, creditors might argue they’d have been better off if the business had been liquidated. Again though, I don’t think there is a problem here, as none of these sources of funding would have been available had the club been wound up. There are, it seems to me, two more likely options for a potential challenge:
1) The football debt.
This has of course been a thorny issue for a long time, and HMRC’s unhappiness with football prioritising its own debts ahead of tax debt is as strong as ever. Anyone who has been following twohundredpercent for long will have read many articles on the need for football to get its house in order in this regard, but in the meantime HMRC haven’t had much luck it in the courts. That football creditors are allowed to vote for the CVA when they aren’t going to be restricted by the terms of it seems a rum do to me, but was ruled legal during HMRC’s challenge of the Portsmouth CVA last year on the grounds that they do have a pecuniary interest in its outcome (ie they would get nothing if the company collapsed).
That hearing did not pass judgement on the more general legality of the football creditors rule, but it has been put to the test at least once, when the (then) Inland Revenue challenged the CVA of the (then) Wimbledon, in 2004. The decision was, in effect that those putting money into a company to rescue it were quite entitled to put in extra to settle a particular class of creditors – however, only under certain conditions:
17.In my judgment section 4(4)(a) of the Act lays down the rule that in an administration the assets of the company shall be applied in payment in full of the preferential creditors ahead of any payment to the non-preferential creditors. In so doing it mirrors the rule laid down by section 175 of the Act that in a liquidation the assets of the company shall be applied in payment in full of the preferential creditors ahead of any payment to non-preferential creditors. Neither section precludes payment of non-preferential creditors by third parties ahead of preferential creditors out of their own free money, and accordingly there can be no objection to payment by the Buyer of the Priority Debts in full. It does not matter that the non-preferential debts are paid (as they are paid in this case) to discharge the debts of the company and accordingly “on behalf of” or “at the instance of” or “for the benefit of” the company by a third party if they are paid out of his free money and at his own cost and not at the cost of the company. It would of course be different if the company put the third party in funds to do so.
That last line (the emphasis is mine) may turn out to be a critical one for somebody, sooner or later. In Dundee’s case, some of the money to rescue the club has come from external sources, but a substantial portion, at least that from Wolves and Sky especially, has come from funds generated from within the company. It may depend on the exact figures involved – and even this is unknown because agreement has not yet been reached with the former players – but if the money generated by the company is having to be used to settle football debt at the expense of those in the CVA then it’s possible that HMRC might have another go at a challenge on this score. (I should stress this is purely speculation on my part.)
2) That mysterious extra debt.
However, most of the discussion of the last few days has centred on how the debt was suddenly found to be so much higher than reported. It did not take long to track down the culprit – in amongst the list of debts was a previously unknown one of £925,000 owed to Sandeman Properties Ltd, the company which owns Dens Park, and which is in turn owned by John Bennett. Bennett has never been involved in the running of Dundee and shares no blame for the current situation. Indeed, despite his affilitions with the city’s other club, he’s been more than helpful to Dundee. As well as his soft loan of £200K which has now disappeared into the CVA, he bought the ground in the aftermath of their earlier administration, and has been renting it back to them for the princely sum of £1 a year. Apparently though, the lease for the ground makes provision for this rent to increase over the course of the coming years, and this is where the debt comes in. The £925K is the future schedule of rental payments – for the remaining 32 years of the lease agreement. The full sum for the whole 32 years has been included, with no element of mitigation.
This is extraordinary, but I stress once again that there is no accusation of misconduct on the part of the administrator – administrators are not lawyers, and he has covered himself professionally by taking legal advice which said it was possible. The argument, apparently, is that because the contract under which he bought the ground stipulates that it should only be used for football, no mitigation is possible. For thirty two years that seems highly improbable, either that no other football club, or no phoenix club, might ever exist, or that it wouldn’t be possible to change the land use of the ground – the clause in question is purely contractual and not an issue of designated land use, though even the latter can easily be changed if the land really would be sitting empty otherwise. The idea that, if the current company running Dundee FC were to go under, Sandeman Properties would have a worthless asset from which they could draw no revenue for three decades stretches credibility. Furthermore – like the football creditors – this is a debt which will now not actually be accrued. It would be entirely unenforceable to suggest that Sandeman were only able to collect 6p in the pound for the next thirty years, and in any case they are now free to renegotiate whatever agreements with Dundee suits both parties.
Most relevant case law (so I’m told) centres around administrators efforts to reduce the value of precisely such contractual breaches, and where the breach is a long way into the future and the actual level of loss unascertainable normal practice is to enter the debt at £1. Jackson may have found some lawyer who advised him he could count it in full, but on such a contentious point I’ve no doubt he could have found a lawyer to give him contrary advice, had the boot been on the other foot and he’d needed to keep Bennett’s share of the debt down to get the CVA through. His acceptance in full of such a debt from a creditor known to be friendly certainly contrasts sharply with his efforts to beat HMRC themselves down to a minimum – they had initially been claiming a much larger sum including fines. Administration, when it comes to it, is not an exact science – there are a number of judgement calls to be made, and there are times when those judgement calls can legitimately be made in whicever direction suits you best, and leave people to challenge it through the courts if they wish. It’ll be interesting to see if HMRC do so.
What’s not clear is whether or not this actually made any difference. Having had the vote, Jackson now has the advantage of knowing how the figures stack up – even if the Sandeman debt were reduced somewhat, there wouldn’t be a problem. If it were to be struck out altogether, or reduced to £1, the blocking creditors would then come very close to 25% – but I think still fractionally under it (I’ve done some number-crunching but the figures in the public domain aren’t exact enough for me to be sure on this point). Jackson’s own comment was that “It is difficult to say how crucial that was because there are four or five issues similar to that” – I don’t know to which debts he’s referring here, so there are further uncertainties.
So there may be a few weeks yet before Dundee can be sure they’re in the clear. Anyone wishing to challenge the CVA has 28 days to do so (from last Tuesday). Ultimately, I hope there isn’t a problem. That Jackson wanted to force the agreement through is clear – for the good publicity apart from anything else – but this interest did, genuienly, coincide with that of creditors, who would have been left empty-handed had he failed. At the same time, I don’t want to see football in disrepute, and it’s important that everything is seen to be above board – as far as such a thing is possible at this late stage when so much debt is being wiped.
At least one person has already accused Jackson of misconduct on a separate matter – former assistant manager Billy Dodds expressed his unhappiness that he had been publically outed as one of those who voted against. Never having been in the position of being asked to write of £70,000 or so of debt, I do not criticise him for his vote. Had the club gone under it would have been entirely the responsibility of those who racked up the debts, not those who declined to write them off. Furthermore, Dodds and Chisholm had some grounds to feel aggrieved at the way their situations were handled; although Chisholm had stated he would take a pay cut he was instead dumped and replaced with someone cheaper as soon as the club wre placed in administration. The suspicion is that it was actually quite a useful opportunity to get rid of a management team who were already making themselves unpopular with the fans. (Oh, and incidentally, the Employment Tribunal case of Jocky Scott – one manager previous to that – is still to be heard.)
Still, it left Dodds in the slightly uncomfortable position of defending his vote while criticising the decision to make it public, and similtaneously expressing his relief and happiness for those whose jobs had been saved by the failure of other creditors to vote as he did. All of which was a little unseemly, but just one of many little unseemlinesses in this whole rotten scenario. Hopefully the whole thing is behind us now, and hopefully the new ownership can show that some lessons have, finally, been learnt. Good luck to them.
Follow Twohundredpercent on Twitter here.