Rangers' financial blues

Ibrox stadium Image copyright Getty Images
Image caption Craig Whyte has tried to reassure sports reporters about Rangers' finances

It may be the beautiful game, but football's finances are looking ugly.

Accountants PKF underlined as much today, with their latest take on the game north and south of the border. Its survey found a lot of pessimism, delays in paying tax bills, too much debt, not enough TV income, falling gate takings and a struggle to secure sponsorship.

All this while first team squads are shrinking, yet player pay doesn't seem to be adjusting to the harsh realities of the downturn.

The survey is based on less than half the Scottish Premier League, so statistically, it has to be treated with a lot of care. But it's in line with much else we've been hearing about football finance.

We've been hearing a lot about one club in particular, as Craig Whyte discovers, as the new boss at Ibrox, that he's operating in a goldfish bowl - lots of people staring in, and some of the goldfish, it seems, given to eating their own kind.

Possible insolvency

A leaked version of the legal submission in an action against Rangers by its former chief executive Martin Bain is firmer evidence - if genuine - of much that has been rumoured.

And it includes reference to £49m of tax bill - that's £35m plus penalty - over which Rangers is still battling with HM Revenue and Customs.

The story continued yesterday with Craig Whyte gathering sports reporters to reassure them about Rangers' finances, and to tell them that Rangers will still be playing at Ibrox long after they're all dead.

It wasn't a claim he was willing to put on camera - a media strategy that makes you wonder what they've got to fear from a lens and a microphone.

This wasn't the most reassuring of messages, as reported today. Years of pain and cuts are ahead, and he couldn't make any guarantees about the club's future if it loses the larger of two tax disputes.

"I won't let club go bust," was one headline.

Don't be so sure, was the view of the Court of Session today. Martin Bain's lawyers successfully argued that the risk of insolvency at Ibrox is sufficiently high and imminent that money should be set aside pending the outcome of his legal action - not the £1.3m he is claiming, but £480,000.

That adds to the £2.3m which, it was claimed by Bain's counsel, is already frozen in pursuit of the smaller of HMRC's two tax claims.

But what about the £49m bill, if they lose the tax tribunal in November? There's still an expectation at Ibrox that Rangers can win that.

"If we don't, let's deal with that then," Whyte is quoted as saying yesterday. "There's no point in speculating about what may or may not happen".

Unfortunately for him, that speculation is exactly what many football fans are engaged in.

And I've been making some inquiries about the accounting and legal position Rangers is now in. So here are some of those hypotheticals:

Leaving aside the tax bills, could Rangers go under?

It depends on its main creditor being willing to continue that line of credit. And as its main creditor is Craig Whyte, who took over (or so it seemed) the £18m debt previously held by Lloyds Banking Group, that much looks secure for now. He's talking of "restructuring" the company's finances, but told his newspaper chums: "The club is not going to go under."

With that assurance, the club therefore needs revenue to come somewhere close to expenditure. That's become much more difficult without earnings from European competition this season.

The player wage bill has risen since Craig Whyte took over in May, we're told. And at least one of its revenue streams - for catering - has been signed away to another company.

Could Craig Whyte benefit from collapsing the club?

There's some speculation that Craig Whyte could choose to push the club into administration, and as lead creditor, he could expect to buy it back without its other debts.

That would break his promise not to let the club go bust, but it could probably be achieved without fans noticing any difference on the pitch.

It would require the agreement of creditors, among whom Craig Whyte would be dominant. Such a 'pre-pack deal' - the management collapsing the company, while it continues to trade, then buying it back from the administrator minus its debts - has been used repeatedly through this downturn.

But there's evidence in recent months that creditors are challenging such deals in court, so it's not clear that Craig Whyte would get the administrator to sell the club back to him.

He must be aware the football league rules could punish the club by non-financial means, deducting points.

Also, an administrator could take a look at the legal position on the tax tribunal, and decide that it's not worth pursuing - whatever Craig Whyte might think - in which case HMRC becomes the biggest creditor by far.

So collapsing the club's finances does not look like an attractive or even a rational option, unless a much bigger bill comes in, which leads to...

What happens if Rangers loses its larger tax case?

The outstanding sum in dispute from the smaller tax case looks affordable. It's hard to imagine that £1.4m would sink the club. But a bill for £49m is rather different.

The leaked legal submission in the Martin Bain case asserts that Craig Whyte has said privately that he would handle a bill up to £15m, but after that, the club would go under.

That's not being confirmed, but nor is it being denied in the reported comments from the man who controls 85% of Rangers shares. Questioned by the press, he refused to give a guarantee that the club would survive losing the tribunal.

It's worth noting that HMRC is playing tough as creditor, and particularly with football clubs.

That's because clubs have long had a habit - not allowable among mere mortal companies - that they can keep trading while technically insolvent.

That's not been the case for Rangers, but what it's discovering is the hard-nosed attitude of HMRC towards challenging CVAs, or creditors' voluntary arrangements to let a company go down and then picking up the pieces, minus the tax bill.

The tax authority could also have an interest in pursuing its case against Rangers for £49m post-administration, even if it had little chance of recovering that money - if only to set a legal precedent for others who have used offshore financial vehicles to pay employees.

Tax crackdown

So collapsing the company ahead of a ruling by the tax tribunal would not make the case go away. And if HMRC becomes the largest creditor, having won the tax dispute, then the tax authority is in the driving seat in determining who controls the club when it comes out of administration.

The administrator has a legal duty to try to rescue the business as a going concern and to sell it on, seeking compromise between creditors to get the best deal for all of them.

Those who fear Rangers would go the way of Gretna should be reassured by that. There is still a lot of value in the club, its ground, its brand and its following, but only if it continues to trade and to play football.

Other factors worth noting about HMRC's recent behaviour: it's begun to use a legal power that has been little used for years, which holds directors personally liable for tax, and particularly for national insurance, that's gone unpaid.

Could that extend to former directors? Apparently so. Watch out, Sir David Murray.

It's also keen to challenge the assertion by football's ruling bodies that football debts, such as player transfer fees, should take priority over all other bills. Unsurprisingly, HMRC begs to differ, seeing itself as first in the queue.

One final word of advice from m'learned friends: company administrations are best when they're planned, and the outcome determined in advance.

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