This article was first published in Estates Gazette on 23 January 2012.
The acquisition of Plymouth Argyle Football Club from the club’s administrators was complicated not only by the labyrinthine regulatory structure of the football world, but also because valuable property and trading assets were held in the same entity. Similarly complicated non-property regulation and law pose particular problems for insolvent businesses in other fields, such as care homes, airports, hotels, nightclubs and restaurants, where property and trading issues are mixed.
This article discusses how some of the difficulties were addressed in the Plymouth Argyle deal and makes suggestions as to how these issues could be mitigated in other cases.
Understanding the regulatory framework
To play in the Football League a club must hold a share in The Football League Limited (League). The commencement of administration of the club triggers a notice by which the board of the League can direct that the club’s share is sold to a third party for a nominal price. However, the board of the League will, in most cases, suspend and eventually waive this notice if satisfied that the club has implemented an acceptable restructuring.
The League will almost certainly require the implementation of a company voluntary arrangement or scheme of arrangement in which debts to “football creditors” are discharged to the satisfaction of the League. Football creditors include debts to players, the Professional Footballers’ Association, other members of the League and associated leagues. This rule has been heavily criticised and generated a series of legal challenges by HMRC, aggrieved by the priority given to football creditors over tax and other general creditors.
Any deal to buy the assets from the administrator will then require substantial payments to football creditors (which may vastly exceed the value of assets on a break-up basis). It will also involve extensive discussion with the League to gain its approval to the restructuring and to settle the extensive agreement for readmission of the successor entity to the League.
While compliance with the regulatory regime in a football deal is particularly onerous, many trading businesses holding property need to comply with similarly complex regulatory systems to maintain property values.
Choosing an insolvency procedure
In football insolvencies, the choice of insolvency procedure is, in effect, dictated by the rules of the League. To gain readmission to the League, the League generally expects an administration followed by a CVA which discharges football creditors to its satisfaction and meets its other requirements.
This, in effect, forces a financially distressed football club to work through an expensive trading administration and to negotiate a complex CVA. This denies the club access to the more streamlined procedures which have become more common for distressed businesses in other sectors.
The pure property solution
Many property insolvencies are deal with by fixed-charge receiverships. A bank or other holder of a charge over property will usually have a right, when the underlying loan or liability falls due, to demand payment and, if not paid, to appoint a receiver by notice to the borrower the following day. The requirements of the charge documents must be followed and there are traps for the unwary, but the procedure is generally quick and simple to implement. The receiver need not be an insolvency practitioner (he will often be a specialist surveyor), which can save costs, and he will owe clear legal duties to his appointing charge holder, with whom he will liaise closely on progress of any asset sale.
However, for security created after 15 September 2003, it is, generally, prohibited to appoint a receiver under a qualifying floating charge (over the whole or substantially the whole of a company’s property). Stock, debts and many other classes of assets in trading businesses which are being replaced regularly can only be secured to a lender by way of floating charge. That means that receivership is not an effective remedy for most trading businesses, which instead prefer to look to administration.
The intangible business solution: pre-packs
While changes to the procedure for administration introduced in 2002 made it easier, an extended period in administration is still very expensive for trading businesses. Only an insolvency practitioner may act as a company administrator. Administrators owe statutory duties to all creditors and face an increasing range of potential liabilities in relation to employment, pensions, tax and other areas. This has encouraged the use of pre-pack administrations.
A “pre-pack” is defined in Statement of Insolvency Practice 16 (E&W) (SIP 16) as “an arrangement under which the sale of all business and assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment”.
The use of pre-packs has been heavily criticised in the media. Many see them as an opportunity for unscrupulous management to snatch assets for minimal payment. Certainly, the procedure is open to abuse. However, properly used, pre-packs can be a useful restructuring tool.
The procedure reduces the administrator’s costs and reduces his exposure to trading risks and potential liabilities. By minimising the exposure of the business’s employees, customers and suppliers to the administration process, it also reduces the risk of these people walking out and thereby damaging the business to the detriment of creditors.
However, pre-packs are usually not appropriate for insolvent businesses holding substantial property assets. The property will have a clear value which can be assessed by specialist surveyors. The administrators’ legal duties require them to try to optimise values and SIP 16 (a code for the conduct of pre-packs by administrators) requires disclosure to creditors of, amongst other things, any valuations obtained of the business or the underlying assets.
Trading businesses with property
As a result of these difficulties, many trading businesses with valuable property are left in a no-man’s land, stranded between the developing pre-pack and fixed-charge receivership models, and unable to benefit from the costs savings, speed and flexibility of those solutions.
Again, the issue is replicated in the insolvencies of many trading businesses holding substantial property assets where the combination of assets prevents use of the more flexible and cheaper options.
The funding market
A similar dichotomy exists in the funding market. While ratios are tighter and funding more expensive than in the past, lending is available from UK banks for secured property deals. Similarly, a small but growing band of distressed-business investors is prepared to provide private equity-style investment for trading businesses. However, trading businesses with substantial property assets are, again, stranded between these two routes – too expensive for the distressed business investors and too complicated for the property lenders.
In the Plymouth Argyle case, the solution was found in separating the property from trading assets on completion. Plymouth City Council agreed to buy Home Park Stadium for £1.6m from the purchasing vehicle, Green Pilgrim, and lease it back to Green Pilgrim for annual repayments of approximately £130,000.
Employees and unsecured creditors
When assets of the trading business and property ownership are within the same company, additional attention will need to be given to the Transfer of Undertakings (Protection of Employment) Regulations 2006 in implementing a restructuring solution.
In simple terms, where there is a transfer of a business, undertaking or part of a business or undertaking, TUPE transfers automatically the contract of employment of any person employed in that undertaking to the transferee. That can be extremely expensive for the buyer, who will then inherit all relevant contracts of employment including arrears of pay and certain pending employment claims.
There are limited relaxations of the regime in an insolvency context, but the liabilities under TUPE are very hard to sidestep. Detailed procedural requirements must be addressed if an employee is to waive effectively their claims and the seller in an insolvency situation will generally be reluctant or unable to give an indemnity for liabilities.
In the Plymouth Argyle deal, agreements with players and other employees were required to implement the restructuring, which complicated the deal process.
Other unsecured creditors do not transfer across to the buyer as a matter of law. However the threat of action against an insolvency practitioner selling assets, a third party involved with the deal, or the commercial necessity of preserving goodwill of a key supplier or customer, often means that such claims cannot be ignored on a business purchase.
Separating the assets, optimising flexibility and value
For many businesses, the position would be improved by dividing assets between a separate operating company and property-owning company. This can allow the two categories of assets to benefit from the separate funding markets and, on insolvency, to utilise more efficient and flexible procedures to benefit creditors.
Care will be needed on tax planning for the separation of assets. Often the reorganisation will involve a transfer of assets within the same corporate group. If transferred well before one or both of the opco and propco leave the group, the risk of de-grouping tax charge can be minimised.
De-grouping tax charges are a complex area, but it should be noted that, while the transfer of assets between group companies gains certain reliefs from tax and SDLT, if a company which acquired assets within the group subsequently leaves the group within six years (or three in the case of SDLT), a de-grouping charge could arise, meaning that early implementation of the reorganisation can be beneficial.
However, a simple separation of assets will not always address all issues. Where the property is of limited value without the trading business, security or other arrangements should be put in place to ensure that the property owner has a sufficient degree of control over the trading business to preserve the property value.
The holding of property and other business assets in a single company can create difficulties businesses. With sufficient time, separation of these assets into separate ownership structures may reduce certain problems. However, care needs to be taken to mitigate taxation risks and for the property owner to maintain sufficient influence to protect its interests. Where a separation of assets is not possible, the implementation of financing and insolvency solutions will require careful analysis and attention.
Jeremy Whiteson, partner, Fladgate LLP (email@example.com)