Author: Guy Thomas Until the Court orders otherwise, Andrew Andronikou , of insolvency firm UHY Hacker Young remains as an Administrator of Portsmouth City Football Club. The paperwork appointing him was filed at the High Court on Friday, 26th February. Incidentally the appointment names three administrators. Mr Andronikou is the “lead” administrator as far as the media is concerned, but he has no special status above the other two in statutory terms - their responsibilities, powers and duties are the same. It has been well reported that HMRC are seeking to challenge that administration appointment. The first hearing was on 2 March 2010 and you may have been unlucky enough to catch my comments on Sky Sports News before the hearing. The application to challenge the Administration has been adjourned, until the week beginning 15th March and I will be writing more about that closer to the time. Whichever insolvency mechanism the Court decides upon (i.e. Administration or Liquidation), you may be wondering what will happen next for the former directors of the club (or anyone who may have acted as if they were a director). Is Administration the complete end of the directors’ involvement with the club? Maybe not. It seems likely that under Mr Andronikou, some of the former directors will continue in place (hopefully to help establish and maintain the clubs value as well as assist the Administrator’s work). However that assistance will not protect them from any statutory investigation by the Administrator concerning their conduct before the Administration took place. Insolvency Practitioner & Accountant Nick O’Reilly of Vantis, who recently examined the club’s books, said Pompey accounts were “completely dysfunctional” and its business methods had gone “against all good governance”.  Ouch! “I came away not knowing who controlled what,” O’Reilly told BBC Sport. The problem for the directors of the club and any company which enters Administration is this; when the company’s financial position was deteriorating there was a “tipping point” when the interests of shareholders become secondary to the interests of creditors. I don’t know when that point was or if there was in fact any wrongdoing by the directors of Portsmouth FC. The Judge in the (now suspended) winding up proceedings indicated in February, that this “tipping point” may have passed some time before the club entered Administration. After Portsmouth entered Administration then one of the roles of the Administrator put in charge of that process is to review the actions of directors in the period leading up to the Administration. If the Court subsequently orders the liquidation of the club then a liquidator will have to carry out the same investigation and report to the Secretary of State. As things stand, the Administrator will consider three stages: when the club became insolvent; when a club entered into Administration formally; and the period between those stages. The courts have long been able to impose orders disqualifying company directors. In 1986 the Company Directors Disqualification Act (CDDA) was brought in to deal with (amongst other things) “ Unfit conduct” by directors in insolvent companies. One of the definitions of an “insolvent company” is one that enters administration at a time when its liabilities exceed its assets. Whether or not there has been any “unfit conduct”, then the Administrator or Official Receiver has a duty to send the Secretary of State for Business Innovation and Skills (BIS) a report on the conduct of all directors who were in office in the last 3 years of the company’s trading. This is known as the “D” report. The most common examples of the type of conduct reported to the Secretary of State are; allowing the company to continue to trade when it was unable to pay its debts, failure to keep proper accounting records, failure to prepare and file accounts or make returns to Companies House and failure to submit returns or pay the Crown any tax due. The Administrators report is strictly confidential and no matter how much work the current directors carry out or assist the Clubs Administrator, it remains a highly confidential report which cannot be dis-closed to them. It is solely for use by the Secretary of State for BIS. The Secretary of State will then weigh the evidence; possibly carry out their own further investigation (depending on the report). If there is substantial evidence of unfit conduct they then have to decide whether it is in the public interest to prosecute the director or directors concerned. Any proceedings are brought by the Secretary of State for BIS through the Official Receiver.  The matter is heard, and decided by the Court, unless the Secretary of State accepts a disqualification undertaking from a director. The minimum period of disqualification is 2 years and the maximum 15 years.  If disqualified, unless he or she has court permission, the person is disqualified for the period stated in the order (or undertaking) from (amongst other things) being a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company. A wide definition to cover a lot of different kinds of work for a company. If someone breaches the order or undertaking then disqualified person and any person who assists them will be committing a criminal offence and is liable to be prosecuted. If such a prosecution takes place they may also be held personally liable for all the debts of the company concerned that were incurred after they were involved in any role from which the person was disqualified. Let’s be clear, we don’t yet know what really took place at Fratton Park in the months leading up to Administration and I don’t envy Mr Andronikou’s job in investigating the affairs of the club or explaining the basis of his appointment to the Court. I don’t know if there has been any breach of duties by the directors of the club. However, I do know this; Portsmouth’s journey through formal insolvency still has a long way to go and it certainly won’t be dull.

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They Think it’s All Over…What Next for the Directors of Portsmouth FC?

Author: Guy Thomas So what happens if a notice has been filed at the High Court giving warning of an Administration and that notice of intention to appoint is followed by a notice of appointment on Friday? Administration of the Club A fresh start, free of the unsecured creditors? Not quite. The Premier League still retain strong influence on the outcome. It’s well known by now that when the club goes into Administration then the Premier League will deduct at least nine points. What is less appreciated is how stance of the Premier League will effect how the Club will exit from Administration. The football authorities place a strong emphasis on the treatment of unsecured creditors. The main weapon in their arsenal is the so called “golden share” i.e. the club’s membership of the league.  The League prefers a Company Voluntary Arrangement or CVA. This is a procedure which allows a company to put a proposal to its creditors for an agreement, under which the creditors agree to accept a certain reduced sum of money in settlement of the debts due to them. The procedure is flexible and the form reflects what is acceptable to the creditors. The proposed arrangement needs the approval of at least 75% in value of the creditors, whether or not they voted in favour of it. The Court has a limited role and the arrangement is managed by a licensed insolvency practitioner or Supervisor. If the Club (in administration) wants to avoid further penalties from the League they will prefer to “exit” Administration via a CVA. This will give the power back to the unsecured creditors (like HMRC) as to whether they agree with the proposal. If the CVA proposal fails and the exit from Administration is carried out any other way (e.g. Leeds United /Luton Town FC) then further penalties of at least 20 points could be applied.  Clearly this will affect the value of the Club and influence the decisions of its future investors. The CVA procedure was introduced by the Insolvency Act 1986 and was designed primarily as a mechanism for business rescue. The procedure is also often used instead of liquidation as a means of distributing funds on the conclusion of (and, occasionally, during) an administration. Procedure for CVA a. Proposal: A proposal can be made by Directors of the Club or its Administrator. b. Nominee: Insolvency practitioner nominated under terms of proposal to supervise its implementation. Where the company is in administration, the Administrator may act as nominee. c. Where nominee is not administrator they have to notify the court whether, in his opinion, a meeting of creditors should be held in order to consider the proposal. Where nominee is administrator the Nominee proceeds directly to convene creditors’ meeting. d. Creditors’ meeting: Usually held within eight weeks of the notice of the proposal. The meeting may approve, modify or reject proposal and/or may choose another nominee. Requires a majority of 75 % in value of the creditors present and voting. The rights of secured or preferential creditors need to be taken into account too. e. Supervisor: If the proposal is approved, the nominee becomes the supervisor and implements the arrangement in accordance with the terms of the proposal. What about the hearing on Monday? Liquidation still looms, appointment of an Administrator by a “qualifying charge holder” is the only way to avoid the hearing on Monday. Even if that appointment happens on Friday however, an Administration, started by the filing of a Form 2.6B at the High Court (Notice of appointment of an Administrator by a by a Qualifying Charge Holder) only suspends the winding up petition. It will still loom in the background if the administration doesn’t pan out as intended. For more information on this story as it unfolds keep an eye on our blog. Also, I would recommend reading  ‘Portsmouth move closer to entering administration’  which was published on the BBC website and ‘Portsmouth administration may trigger 20-point deduction next season’ which appeared in the Guardian.

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Portsmouth FC: After the Administration… a Corporate Voluntary Arrangement?

Author: Guy Thomas There were six winding up petitions for football clubs in the High Court today. Two of them relate to Portsmouth! Hinckley United Football Club      Brighton Football Club Portsmouth City Football Club       Portsmouth City Football Club  (again!)     Southend United Football Club      Cardiff City Football Club       Cardiff & Southend have won a temporary reprise but Portsmouth’s problems have if anything intensified. Click here to view the article that appeared on the BBC website. I understand that Portsmouth have been asked to provide a ‘statement of affairs’ within the next week. Such a statement is drawn up by a specialist insolvency practitioner and will be very difficult to produce in such a short space of time, if that is the case the club looks set for administration. Given the minimum 10 point penalty that the Premier League may impose, it is highly likely that the club will , in the future, be preparing its finances on the basis it will be in the Championship next season. The statement of affairs will likely be made on the basis that Portsmouth is shortly going to be a Championship rather than Premier League club. Leeds, of all clubs, is actually a positive example for Portsmouth as they have managed to reduce long term overheads, such as player wages, and operate well as League One rather than Premier League club. Things may get worse before they get better, but the silver lining is that Portsmouth, like Leeds, has a large fan-base which virtually guarantees revenue over the next few years, and should enable them to bounce back. Depending on how things play out in the next couple of weeks in the Courts, next season looks likely to see a resurgent Leeds and a under pressure Portsmouth as competitors in the Championship seeking a return to top flight football. If HMRC is to maintain its new hard-line approach Portsmouth will not be the last Premiership club visiting the High Court in 2010. For too long, top flight clubs and their owners have been able to palm off their smaller and unsecured creditors but it looks like that is changing. The problem for clubs is that as soon as one creditor starts insolvency proceedings, as HMRC is, all the others, for example other clubs owed transfer fees, will follow suit. Many recent football insolvency (and near misses) in the lower leagues have been prompted by this change in stance by HMRC.

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Six of the Best

Author: Guy Thomas Earlier today, The Times Online reported on the Vantis Group’s interim results. Particular emphasis has been placed on the impact of the firm’s involvement in the Liquidation of Stamford International Bank Limited. Insolvency Practitioners (and their lawyers) face a difficult assessment when approaching a new appointment. Contrary to the widely held assumptions of many media and professional commentators; the acceptance of an appointment by an insolvency practitioner carries significant responsibility and potentially huge liability. As well as personal liability for many of their actions, the insolvency practitioner must also assess the cost /benefit of funding future litigation. As indicated in the above article, one of these factors is (when faced with significant opposition from a competing stakeholder with very deep pockets) how long will it be before there is likely to be sufficient realisation for the creditors and the insolvency estate. In this case, the ongoing tussle between the US Court appointed Receiver and Antiguan Court appointed Liquidators has spawned multiple and complex litigation across the globe. It should go with out saying that such complex international litigation can be costly. In this case, it appears the US Court appointed receiver has rigorously sought to oppose the Antiguan appointed liquidators attempts to realise assets at almost every turn. In addition to the obvious point concerning the management of cash flow inherent in any business, this also serves to illustrate a useful lesson for creditors and stakeholders in any formal insolvency process. Contrary to popular belief, all formal insolvency processes are subject to potential review by the Courts, stakeholders and creditors. Expert advice should always be sought, particularly where significant amounts are involved and again, as with any other business, litigation is often the backdrop to ongoing negotiation between the parties.

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The challenge of insolvency: Vantis and Stamford International Bank

Author: Guy Thomas Earlier this week, Brendan Guilfoyle, Chris White and John Russell of the P & A Partnership (an insolvency firm based in Sheffield) were appointed administrators of Crystal Palace FC. This has been well reported over the last couple of days by BBC online - click here to view . …and football fans should expect more of this type of response from the directors of struggling football clubs. Directors of struggling companies facing likely insolvency must also take into account the interests of creditors as well as their shareholders. Other stakeholders such as fans without a direct financial interest in the company often feel they are left behind by such choices. Football clubs and the directors that run them are no different to other companies in having to strike that balance. The expectation on people who have financially supported clubs through tough times to “dig deeper” can be overwhelming. As Brendan Guilfoyle, one of Crystal Palaces administrators said earlier this week, “This club has been in the spotlight for some months with creditors pressing for payments and players anxious about their wages.” He went on to explain that “Our role now is to find a buyer quickly to provide certainty for the employees, players and fans for the future. We are hoping our appointment will be short-lived as we understand there are many interested buyers.” Crystal Palace reportedly has debts of circa. £30 million. They had been listed to appear in court on January 27th to face a winding-up petition from HM Revenue and Customs over a seven figure (unpaid) tax bill. By happy coincidence, Brendan Guilfoyle a former National President of R3 (the insolvency industries professional body) had recently published a cautionary article on recent developments in “football administrations” . Whether you are a football fan or a company director of a business unconnected to football, it makes for an interesting read and I thoroughly recommend it as an insight into the running of a ongoing trading company (such as a football club) by an administrator. Please click here to view Brendan Guilfoyle’s article.

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Football Club Blues: Crystal Palace FC Enters Administration

Author: Guy Thomas Yesterday the BBC broke news of the latest claims against Portsmouth Football Club. This week it’s Sol Campbell, the short lived Notts County player who was also recently reported as having signed a new deal with Arsenal FC. Click here to view the article on the BBC. Football clubs are no different to any other businesses in the need to keep a tight rein on their finances during a recession.What is “different” about them is the intense and sometimes intrusive public scrutiny that they are under compared to other companies of similar turnover. This scrutiny applies double if the team is not perceived to be performing on the pitch or the choices of the management are not supported by the fans. “Increasingly, matters off the pitch are taking centre stage in the media’s mind as they seek to tell the full story of what is taking place on it” says Paul McGoohan, Sports Director of Square1 Consulting , who have advised a number of Premier League and Championship Clubs. “The media’s thirst for information and the emotive subject matter mean that is essential for executives to get the right message into the public domain. Good legal and communications advice can help club executives in successfully managing this process and ultimately assist in not losing the public battle.” I agree with Paul’s points above; It is a truism of a financial downturn that when a company is perceived to be “in trouble” that its troubles are doubled. It is for this reason that football clubs and their stakeholders routinely employ PR consultants to work alongside their legal team during difficult times. My top tips (below) can apply to Football Clubs, but are also transferable to any business: 1. Communicate with stakeholders and creditors concisely and accurately. 2. Don’t hide - its not going away and may get worse if you do nothing. 3. Keep on top of the “message”; if you lose control of it then you risk losing your company’s goodwill and hard fought business relationships. 4. Take advice to address the root problems. Good communications can only buy you time. Use the time wisely to address the problems behind the immediate crisis. 5.  Act quickly – try to get your message in before the rumours start.  Efficient communications with stakeholders and creditors engenders trust and can provide a useful foundation when the time comes to implement solutions and take your company forward.

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Football Finances: Why legal advice and PR go hand in hand

Author: Chris Cook In an article on the BBC this week, it has been found by a team of Manchester University researchers, as part of an Occupational Medicine survey, that only one in 20 doctors is following Government guidance on how long patients should be signed off work. The research focused on 113 GPs operating in one health trust in England and reviewed practices when dealing with hernia repairs, hysterectomies and heart attacks.  In spite of national guidance, it was found that there is a huge variation as to the length of time that employees are signed off for similar conditions.  Most doctors surveyed had not received training in respect of sickness certification and a third of the doctors were unaware of the Government guidance on recommended sick leave periods, which are set out on the Department of Work and Pensions website .  The study leader, Dr Richard Roope, commented that “We need to get across to GPs and patients alike that ‘being signed off’ may actually be bad for the health of the patient, their employer and the country as a whole”. In light of the recent swine flu epidemic, it is particularly important for employers to be able to rely upon the guidance provided by their employees’ doctors so as to ensure an adequate workforce over the festive period.  This recent survey suggests a clear lack of training on how long employees need to recuperate before returning to work, leading to a large number of inconsistencies in the recommendations given by doctors.  Employers are advised to consider using the services of occupational health or alternatively external consultants if they have any doubts as to the views of employees’ doctors on the issue of when any such employee will be able to return to work. New “fit note” scheme As some of you will be aware, the Government is proposing to replace sick notes with “fit notes”, which will involve doctors needing to set out what an employee is able to do.  It remains to be seen whether the introduction of the proposed new “fit note” scheme will focus doctors’ minds on giving employers more accurate guidance on return to work dates, and perhaps more importantly give recommendations on what can be done to facilitate an earlier rehabilitation to work.

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According to University Survey: Doctor’s are not following sick note guidance…

Author: Gary Dunger I’m sure you have all been eagerly anticipating the report on the Willow Foundation 10K run and our runners’ performances! In very testing conditions everybody put in a very good performance and despite survival being the main aim, some very creditable times were put in, especially considering that by the end of the race the surface was becoming somewhat slippery (being partly run on grass) and into driving rain, wind and hail. A special mention must go to Nat Young whom it seems must have been training very hard over the last few months as he went off like the proverbial hare, only to be reeled in by Terence two-thirds of the way in with Terence coming in first of the SA Law runners.  The finishing order on Sunday was: Terence Ritchie       46.36 Gary Dunger           47.03 Nat Young              47.06 Rob Ryall                52.12 Chris Alexander     57.54 Simon Walsh          58.23 Tracy Lacey-Smith 59.09 Nikki Petken           65.36  I am sure you will all join me in congratulating all those who participated, and many of whom are no doubt now saying “never again” after the experience.  For a full (humorous) account by another participant of the challenges yesterday see the RunningAmok blog . And it is not too late of course to sponsor the team, visit www.justgiving.com/SALaw , it would be great to reach £1000!

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The Willow Foundation - 10K Run

Author: Guy Thomas “Moaners” who “lived in unrealistic Disneyland”. In typical headline-grabbing style, Alan Sugar, Lord of the Fired, Business Guru and government Enterprise Champion, was recently reported in The Times laying into owners of small businesses who have been blaming banks for their difficulties. It is unsurprising that his comments, made when speaking to a delegation of 300 small and medium business owners in Manchester, have come under fire from the Federation of Small Businesses, Politicians and  business owners themselves. It’s too early to tell if this “kick up the backside” style of motivation has had an effect on how these firms will approach their banks in the future, or how owners of small businesses will feel about Alan Sugar’s comments, but I can tell you that it is not a balanced view of the situation. It can be argued that Sugar is simply out of touch with the SME market . Through our involvement with a variety of business clinics, we see many viable small businesses befuddled by lending practices and unclear on the right formats and accounting information that the banks require. In this climate it should be a priority of the banks and the government to educate small business borrowers in the mechanics and realities of business loans and what funding options are available. Business Link plays a very positive part in meeting this need for education, as do some banks, but more can and should be done to encourage small business borrowers to be both smarter and more effective advocates for their businesses. Of course, there will always be firms that are too high risk to be safely lent to, and it would of course be irresponsible of the banks to do so. But there is a large number of the small businesses and start ups that we encounter and advise that are run by passionate, driven and motivated individuals, who have, for the most part, sound business plans and a solid offering. Many of  the businesses we are seeing aren’t going to their banks in need of a ‘life-raft’ or because they are bust or have mis-managed their business. They are going to the banks for financial support to fulfil orders, for a quick injection of cash that will allow them to eventually grow their businesses and are on balance a good long term investment. Alan Sugar also comments “I hate the use of this word cashflow in the sense in that it is a business problem”. What he is perhaps failing to understand is that “cashflow” in this economy is a business problem originated by issues in the supply chain and customer network, opposed to financial miss management. We are advising our clients to deal with these issue in their supply chain and customer network head-on, by making sure they have contracts in place and that they are enforceable. We are also advocating that our client be “customer careful” and  really get to know their customer base. But not simply as a way of strengthening their relationship or for business development but as part of their risk management strategy. By gaining a clear understanding of which organisations your customers supply and are dealing with allows you to expose potential areas of danger in your wider network. So would many of these “moaners” be better off in insolvency as Sugar a ledges? Well, insolvency is, and always should be the last resort. We have a large SME client-base, and have seen more recently an increase in insolvent businesses and even more “tittering on the brink”. The key to avoiding insolvency is to take action immediately, as soon as you feel their might be a problem. By working together with your Accountant and your Lawyer there are usually reasonable alternatives to simply “going bust” . No doubt Lord Sugar intended his comments to motivate as well as admonish, it’s just a shame he has chosen, on this occasion, not to act as more of an advocate for small businesses, after all the SME account for 99.9% of all enterprise in the UK.

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Small Business in ‘Disneyland’…

Author: Chris Alexander First Quench Retailing Limited, owner of Threshers, Haddows, the Local and Wine Rack brands has gone into administration.  With around 1,300 outlets nationwide there will be many nervous landlords concerned about what administration means for them and their rental income. Tenant insolvency is an increasing phenomenon as the difficult economic conditions persist.  The recession is impacting upon businesses of all sectors occupying every type of commercial premises.  Alongside employment costs, rent is a large item of a businesses expenditure and can be one of the first expenses a struggling tenant will default on. Once a tenant enters into a formal insolvency procedure, whether it be administration an IVA/CVA, receivership, or liquidation a landlord is likely to loose out financially to some extent along with the other creditors (unless they can rely on a personal guarantees or other similar security).  Formal tenant insolvency can also complicate attempts to urgently recover possession of a property from a defaulting tenant, thereby frustrating attempts to re-let the property and preserve the rental income. It is prudent for landlords to maintain a close relationship with their tenants and not to allow significant arrears to accumulate.  This is because once an insolvency procedure has been initiated, in many cases, there will be a moratorium on enforcement action which will prevent a landlord from taking any form of enforcement action against the tenant (generally without permission of either the Court or an insolvency practitioner).  Such delays can prove even more expensive for landlords who are already facing significant rent arrears. We would always encourage landlord’s to take advice at an early stage before their options begin to narrow.

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With First Quench Retailing in administration what can Landlords do to protect themselves from insolvent tenants