Dundee`s CVA Passes (For Now)

By on Feb 13, 2011 in Finance, Latest, Scottish Football | 12 comments

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.

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    12 Comments

  1. Gavin, hopefully this will all be in the past and Dundee can move forward with a supporter owned club. Hopefully the supporters will realise that their ambitions need to be curtailed and that promotion if and when it comes should be seen as a great achievement and not something that is expected.
    6p in the pound is a disgrace but its that or nothing and most of the creditors realised this it seems.You really do feel for the small local creditors who have been stung by this and certainly not those who quite rightly took a big hit like Brannan and Melville. If only there was some form of legal redress against those who created this mess.
    Regarding Harkins, I believe he is the only first team player who will still be contracted to the club come the end of the season and therefore any value will be realised then. this allows the club to raise money for the coming season allowing the supporters trust to get on an even keel and not start the season chasing their tail regarding signing players and running the club financialy. It also amazes me that folk think in hindsight that the 25 point deduction was not enough. If the club had lost a few games this would not be questioned as they would be sitting adrift at the bottom of the league. The players and team management should be praised to the roof for their performances and spirit. Remember that this is the smallest first team squad in the league and having to have the manager and a tv pundit on the bench to make up the numbers!
    How much more could be cut from the playing side without affecting the whole integrity of the league – playing 16 yr olds and possibly getting thrashed each week after taking points off of others pre administration? The players that remain have agreed to pay cuts.
    As for the debts, yes they are shocking. However, any decent administrator would take full legal advice on the structure of the Bennett/stadium rent debt. Gavin, you almost imply that he got the advice from a ‘lawyer’ in the pub on a saturday night!
    Billy Dodds has every right to vote against the cva but he is hypocritical in his attitude. He was the one who, when shown the door, said he wanted the club to survive first and foremost for the good people that worked there and then votes to close it down! He then says his concience is clear and has nothing to hide but complains that his vote was not kept annonymous. breathtaking!
    I think that it is great news that the supporters trust will be running the club and that relegation seems unlikely now, ensuring that the club should start next season in decent shape with a sensible board behind it at long long last. no more Ron Dixons, Angus Cooks, Di Steffanos etc. surely something to look forward to?

    dan

    February 13, 2011

  2. In the future don’t get your facts from P&B.

    DerryDode

    February 13, 2011

  3. dan – mostly fair points; the bit I disagree with most strongly is the Harkins / intergrity of the league stuff, what happens on the pitch should be entirely secondary to making every effort possible to pay off the debt. The integrity of the league is much more seriously affected by Dundee having a better-paid team than Stirling or Cowdenbeath even while they’re chalking off another three million worth of debt.

    DerryDode – I posted some of them on p&b myself, but I’ve been known to get stuff wrong before now and I’m happy to be corrected if I’ve done so again.

    Gavin

    February 13, 2011

  4. “all this might smack a little of sour grapes.”

    Yup.

    Baxter Parp

    February 13, 2011

  5. Gavin, regards the Harkins situation, which you say you feel most strongly about. If Dundee were to have sacked Harkins, then yes, in the short-term post-administration, Dundee FC would have saved a little bit more on wages, than had they not kept him and kept on a lower-paid player instead. My question is, how would this have made more money available to non-football creditors, given the football creditor rules, which state we would have had to meet Harkins’ contract in full anyway. Surely it’s better for the club, as a company, to have kept one of its most valuable assets, rather than leave it by the side of the road like you suggest, to the ultimate detriment of the company, since the asset would still have had to be paid for, in full, at a future point.

    No idea what qualifications you have, but I don’t know any companies who are quite happy to dump their more valuable assets on the rubbish dump, for someone to come along and pick it up for free the next day. Do you?

    Lastly, where is the relevance in all this of Stirling Albion, Cowdenbeat et all. An administrator does not seek to damage the company he is representing, just so the ‘intergrity’ of an outside body can be upheld. The football authorities imposed what were described in the national press as ‘draconian punishment’. Whether you think these are not now enough, is also irrelevant. The spirit shown at Dens, from players, management and regular fans, is a testimony to the human spirit, and the sheer bloody-mindedness of a group of people who would not let an 118-year old institution die. Let’s all just applaud that, shall we, instead of circling like vultures over a wounded beast of burden.

    Many thanks.

    Dave

    February 14, 2011

  6. Interesting point of view, but as with so many other versions, accuracy has been sacrificed for the benefit of effect, for example…

    Harkins was not sold because the club received no offers for him. He is the only other asset (after Griffiths) with a market value as he is the only player not out of contract in summer.

    The Melville donation/loan question is easily answered by looking atvthe club accounts to July 2009. His initial input was donated, but when his other business issues arose, after July 2009, subsequent input appears to have been loans. This is auditable.

    It would be interesting to see the accounts of all SFL clubs presented an a comparable format, clearly showing the level to which almost all of them are living beyond their operating income (aka “cheating” in media & fans language) and benefitting from donations, loans, and guarantees to support bank debt from directors or other benefactors.

    Why are football Limited Companies seen to be “cheating” by seeking investment or backing in order to attempt to grow their business, or to quite literally move up to a higher “league”, when this is common business practice in every other industry? Why is it so scandalous when a football company enters administration, yet it is not if it is an engineering company, a bus company, a computer games company?

    This is what bodies like the SFL/SFA ought to be reviewing, before they are forced to deal with multiple administration cases, and the resulting demise of the SFL structure, which appears bereft of any sponsorship of media input which can help the member clubs?

    Regarding the statement from Mr Dodds about the “leak” of confidentiality re his cva vote, there is a publicly available interview with Mr Jackson where he states that creditors leaving the meeting told the waiting reporters who had voted against the cva. is Mr Dodds complaining thatvthe creditors were told, or that the media were told? His Sunday Herald column is unclear on this.

    Woodstein

    February 14, 2011

  7. Woodstein – I’m pretty sure I’ve never used the “cheating” word, and while I can’t cover all the sins of Scottish football in one article, anyone who follows this site regularly will know (hopefully) that we want to encourage greater financial responsibility across the game. So I’m not suggesting anyone turns a blind eye to other clubs storing up trouble, but it’s more serious when a club has already defaulted on its debt. (And, in fact, that’s all the more reason why the league rules need to be fair to those clubs who aren’t doing so.)

    Dave – again, several fair points there:
    The Harkins situation was chosen only as an example (the most obvious one) of the more general point – that Dundee have still retained a pretty decent, and decently-paid team.

    >>how would this have made more money available to non-football creditors, given the football creditor rules, which state we would have had to meet Harkins’ contract in full anyway< <

    If that were a consideration, why were any cutbacks made at all? The company has to be put on an even keel first. (My understanding is that you trying to reach agreement to pay less than the full amounts to former players anyway.)

    >>I don’t know any companies who are quite happy to dump their more valuable assets on the rubbish dump, for someone to come along and pick it up for free the next day. Do you?< <

    Not if it's a saleable asset, no, the administrator would cash in on it instead - but you can't have it both ways there.

    >>An administrator does not seek to damage the company he is representing<<

    He doesn’t work for the company, he works for the creditors. In this case he took a calculated gamble that continuing with a decent team was the best way to serve their interests – and again I’m not suggesting he’s done anything untoward, Melville’s extra £200K gave him that option – but it’s also right and proper that the SFL take a dim view of it, particularly if it continues to give them sporting advantage over teams who aren’t defaulting on debts.

    The 25 point penalty I’ve covered in a previous article – I don’t believe, as some did, that automatic relegaton was feasible; I thought a 25 point penalty was about right and therefore I still do. That it’s turned out – imho – to be insufficient is unfortunate but obviously you can’t make decisions by hindsight.

    And yes, I do acknowledge what’s been achieved by the players in adversity, and again as mentioned in previous articles I applaud the fan’s fundraising efforts and I hope it goes well for them in the future. Courtesy of my best mate, who’s a Dee, I’ve been at dozens of Dundee games over the past few years quite apart from those against my own club, they’ve given me quite a few good memories and I hope there are many more to come. I do appreciate that most fans have been able to distinguish between my criticism over the current situation and any ill-feeling towards the club.

    Gavin

    February 14, 2011

  8. Dress this up with fiction and figures all you like but this was clearly written by a man who’s team were beaten on Saturday. If his teams benefactor walked away this week, could his club pay it’s creditors or it’s players? No. Without their benefactors money, are they living within their means? No. Dundee’s board made the mistake of accepting Calum Melville’s word and their mistake was to not get guarantees. Do Raith have the money in the bank as we speak to pay their players up to the remainder of their contracts, I doubt it.The whole of Scottish football is in a mess, Dundee were just the first to get caught living above their means, they will not be the last. I cannot think of any team in the First Division that does not operate at a loss, including Raith.

    BILL JAMIESON

    February 14, 2011

  9. Dry your eyes mate.

    derryrhumba

    February 14, 2011

  10. >>If that were a consideration, why were any cutbacks made at all?<<

    Cash flow. That's why. That was the immediate pressing problem when the club went into administration.

    The debts, cash flow, the administration regulations, the football creditors rule and "sporting integrity" were all exerting different pressures on the administrator.

    The SFL are responsible for some of these incentives and pressures. I don't think they've managed them well. They've given no indication that they have any grasp on how Scottish football finances should be governed, and in the circumstances I'm not inclined to treat any SFL criticism of the administrator with any great respect.

    It is quite possible that the balance that Bryan Jackson struck was the best available to the general creditors. Sacking Harkins and Griffiths would have improved the cash flow, but not the debt position. It would also have removed the chance to earn a transfer fee, and it would have seriously weakened the team, with a knock-on impact on fans' morale, attendances and fund-raising. The obvious, brutal option was to sack the higher earners with no sale value in order to try to ensure there would be enough cash to get the club through to a transfer window.

    Personally, I'm reluctant to state with any confidence whether decisions were correct without access to the detailed information.

    By the way, if you set aside Harkins and Griffiths, every single one of the players who remained was on a cheaper contract than every single one of the players who left. Clearly wages were a very important factor in deciding who should go. It is certainly possible that some players opted to take a cut to stay at Dens, and that was rumoured to be the case with Douglas, but I don't think you could justify the claim that Dundee kept on higher earners with no resale value.

    James Christie

    February 14, 2011

  11. Gavin, in general cases of administration, it’s certainly true to say that the administrator would work solely for the creditors, to maximise their returns, whilst trying to save the company on an ongoing basis. Would you not think that’s just a wee bit different when it comes to football clubs, that the focus changes slightly away from the creditors, towards the club and its community. Not officially, of course. Just an after-thought…

    Dave

    February 15, 2011

  12. James: “cashflow” – yes indeed, that is the point. Having something as an historic debt as opposed to an ongoing liability is a very different thing. An administrators first job is to tackle the latter, and get the business running on break-even.

    “Sacking Harkins and Griffiths would have improved the cash flow, but not the debt position. It would also have removed the chance to earn a transfer fee, and it would have seriously weakened the team, with a knock-on impact on fans’ morale, attendances and fund-raising.”

    Yup, that’s the crux of it. I’ve no problem with retaining players in order to sell them (though that argument goes out the window if you don’t do so); the more interesting question is the latter part of it. In Dundee’s case Jackson never did get the business back on break-even in respect of operating income – Melville’s final £200K gave him another option, and he chose to gamble that by sustaining further losses in the short-term in the hope that enough interest could thereby be generated to gain other income by the time that money ran out. It’s understandable, and once again I’m not accusing anyone of doing anything illegitimate with respect to business law.

    It’s also understandable, however, if the league feel (as I do) that it gives them a continuing advantage which is unfair on other, more prudently run, clubs in the league, and the rules and the sanctions should be strict enough (imho) to ensure that any such advantage is at least cancelled out.

    Dave: “Would you not think that’s just a wee bit different when it comes to football clubs, that the focus changes slightly away from the creditors, towards the club and its community. Not officially, of course. Just an after-thought…”

    I don’t have enough experience of administration in the wider world to draw such a general conclusion, but my impression is that you’re probably right there. The higher profile and the loyalty of fans (which has few parallels in terms of customer brand-loyalty in the rest of the commercial world) does make football a bit of a special case, and it may well be that they’re that bit more determined for the company to survive than they would be in other scenarios. PKF / Jackson are, comparatively, not being all that well paid for this job (£60K flat fee, I believe), but it’s good publicity for them – dependent on the club’s survival.

    Gavin

    February 16, 2011

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