The overwhelmingly common theme to the reports of Lord Hodge’s ruling yesterday was that he refused to give any directions: the BBC’s “'No ruling' on Rangers administrators' Ticketus challenge”
seems pretty typical. Having read the judgment, we’re not so sure that that is a helpful summary of what is a very
interesting opinion. The court seems to us to have provided a careful and
useful analysis of the law and, for the administrators in the particular case,
a pretty clear steer as to what they can do and guidance which they can follow (follow – no more puns, honestly).
As anyone in Scotland who has seen a news report or read a
newspaper in the last month will know, Rangers Football Club plc is in
administration. It is due at least £9m to HMRC and figures of £50m and more are
talked about as being due if the company loses an upcoming appeal. That’s a lot
of debt. The Insolvency Act 1986, as amended by the Enterpise Act 2002, charges administrators with performing their functions so as to rescue the company
as a going concern or, in short, achieve the best return for the creditors as a
whole subject to any secured and preferential rights. That’s of course all
pretty broad and, where the circumstances merit it, administrators can apply to
the Court, under paragraph 63 of Schedule B1 to the Insolvency Act 1986, for
directions as to how they should carry our their functions.
The subject of the application to Lord Hodge at the Court of Session was, in reality, the
deal the company had struck some time ago with "Ticketus". Ticketus buys tickets in bulk from the organisation putting on or hosting an event, in
advance and at less than face value, and then collects the proceeds when those tickets are sold to the public, at face value, making a profit for itself and allowing the organiser to bring revenue in ahead of when that revenue would normally be
received. The deal here related to certain season tickets for seats at Ibrox
Stadium for games to be played during 2011 through
to 2015. In short, the parties agreed that Rangers would sell the tickets as
agents for Ticketus and put the proceeds into a designated bank account. For that, Ticketus paid about
£25m. The court was told that the income flow from the sale of the season
tickets would represent about 60% of the company’s entire turnover during those
years. If the administrators could lawfully break the agreement with Ticketus
then that money would become available for all creditors and it was this issue
of lawfulness on which they sought the court’s direction:
“The central issue which divides the parties is whether the expected future income from the sale of season tickets to supporters for the 2012-2013 season and the two following seasons is subject to a trust so that Ticketus has a beneficial interest in that income when it arises.”
On the way, consideration of this required analysis of a
number of interesting and important questions and highlighted fundamental
differences between Scottish and English insolvency law. As a preliminary, the
agreement with Ticketus was subject to English law but Lord Hodge decided that,
as a matter of private international law, it had to be Scots law (as the lex
situs) that determined what proprietary rights, if any, were created in the
seats or tickets and which governed recognition of the trust in the proceeds of
the future sale of the tickets which the agreement tried to set up. This ended
up being critical.
Construed under English law, the agreement gave Ticketus a
bundle of transferable and irrevocable licences to occupy a defined number of
seats of different types at specified future matches. The licences “conferred
an intermediate right which was not a property right in the conventional sense
but was more than a mere personal right, and they could be enforced by the
grant of equitable relief which could include an order for specific performance
of the rights attaching to the tickets.” Again in terms of English law, the deal
vested in Ticketus the “full beneficial title” to the proceeds of the future
sales of the tickets and left Rangers with “a bare legal title”, protecting the
proceeds against other creditors in the event of the company’s insolvency.
The position in terms of Scots law on almost all of this is
starkly and crucially different. The first question the judge asked himself was
how to characterise Ticketus’ rights under Scots law. As regards the seats:
“[The deal with Ticketus] did not create any real right in the seats which may in subsequent seasons come to be the subject of season tickets if supporters choose to purchase them. Presently there are no season tickets in relation to future seasons. On purchase of a season ticket the supporter would not have any real right in relation to his allocated seat. His right of access to and occupancy of the seat would exist only when a match was being played. The right could not be categorised as a lease because it conferred only an intermittent right of occupation for a limited purpose and for limited periods of time. … In any event, a lease could not confer a real right under the Leases Act 1449 without possession…. [A season ticket is] a licence giving access to and egress from the allocated seat and a right to occupy that seat when matches are played at Ibrox. But such a licence is a contractual right and does not confer a real right in relation to a seat.”
So, no real right. What about some other kind of
intermediate right, short of a real right but more than a simple personal right
under a contract?
“In Scots law there is a clear divide between a real right and a personal right and it has long been established that there is no intermediate right. The payment by the purchaser of the price of the asset to be acquired does not convert a personal contractual right into a real right…. In Scots insolvency law, a contracting party who has paid in advance for an asset does not thereby acquire an equitable right in the thing and is treated as an unsecured creditor.... This may shock English lawyers who are used to equity stepping in to protect contractual expectations in some such circumstances. But no unfairness arises in an insolvency when unsecured creditors are treated equally in accordance with their rights.”
So no intermediate right. What about some kind of beneficial
interest?
“[Counsel for Ticketus] did not assert that under Scots law Ticketus had an interest as a trust beneficiary in particular seats in the stadium and I consider he was right not to do so”.
Ok. So no rights at all in the seats. What about rights to
the proceeds of the future sale of the season tickets? After all, Rangers had
undertaken to put those proceeds into a designated account for Ticketus.
“[T]he difficulty which Ticketus faces in asserting a trust over the proceeds of sale of the STA tickets is that the proceeds do not yet exist. On the assumption that the Ticketus agreements are sufficient to amount to a declaration by Rangers of a trust over the STA tickets and the proceeds of their sale, the non-existence of both is fatal to the creation of a trust. Where the truster and trustee are the same person it is our law that there must be constructive delivery of the trust subjects to himself as trustee of an irrevocable trust…. I conclude that Ticketus has merely a contractual right … for the expected income when it is received by Rangers to be held in trust. That is not a trust right”.
Ticketus have, then, no real or intermediate or trust rights
to the seats or the sale proceeds. They are simply ordinary creditors who have
a contract with Rangers obliging Rangers to hand over the proceeds whenever the
tickets are sold. So, the administrators asked, could they break that contract
and keep the money for the general body of creditors?
For understandable reasons, the judge felt that he could not
really answer that question without a full understanding of the whole
background and that couldn’t be given for reasons of commercial confidentiality: the adminstrators are in the process of inviting bids for the company or its assets. What Lord Hodge thought
he was really being asked to do was to set out what legal test or criteria the
court would employ if it was later asked to force the administrators to perform
the company’s obligations under the contract with Ticketus:
“…the direction sought is shorthand for a request for a legal test to be applied by the court if, after the administrators had repudiated the Ticketus contracts, it were to be asked to compel the administrators to arrange that Rangers perform its contractual obligations.”
The judge was alive to concerns that “the formulation of an
abstract test might be an academic exercise where the administrators had not
presented the court with facts about the negotiations which showed that they
ought to disclaim the contracts.” He was also was concerned that
“it may not be appropriate to articulate a succinct test which might wrongly be treated as if it were a statutory formulation, particularly when I have been asked to give guidance in circumstances of no little urgency. I am satisfied however that, when the administrators as officers of the court have requested directions, it would not be appropriate for me to refuse to give guidance of a more general nature which would have to be applied with care to the particular circumstances of an administration.”
Having decided it appropriate to give guidance, he then
undertook a very careful analysis of some pretty fundamental questions of
insolvency law. As a starting point:
“On a proper analysis of contract law, as I explain below, the administrators do not have power to terminate a contract in the absence of a contractual power to do so or material breach on the part of the other contracting party.”
Further:
“It is trite law that when one contracting party breaks his contract in a material way the other party can accept that as a repudiation, rescind the contract, and claim damages… Alternatively, in many cases, the other party may continue with the performance of the contract and raise an action against the party in breach for specific implement. Thus it is possible that an administrator who causes a company in administration to break a contract may be compelled by the court, whether by interdict, order for specific implement, direction or otherwise, to cause the company to perform the contract.”
Against that background, the matters arising for consideration here were
“the circumstances in which an administrator would choose to cause the company
in administration to withhold further performance of a contract and… the
circumstances in which the courts might enforce the contract by recalling the
moratorium and granting a remedy to compel performance.” Interestingly, the
court could find no direct Scots authority. Lord Hodge therefore looked firstly
to the position in the analogous circumstances of liquidation and receivership.
“[A] liquidator had no statutory power to terminate the contracts of a company in liquidation. There is no provision equivalent to section 178 of the 1986 Act which allows the liquidator of an English company to disclaim onerous property. But that does not mean that a liquidator of a Scottish company cannot decline to perform a contract. Such a liquidator is a manager of the company's affairs and acts on its behalf…[and] can choose to make the company in liquidation disaffirm a pre-existing contract by declining to perform it and thereby placing the company in breach of contract."
The judge knew of no case in which the Scottish courts have
ordered a company in insolvent liquidation to perform a contract which the
liquidator had disclaimed and thought that unsurprising:
“In my view, at least as a general rule, if a court were asked to order a company in an insolvent winding up to implement a contract it should refuse to do so because the company could not perform or because such an order would conflict with the statutory duties of the liquidator [to treat unsecured creditors equally]”.
Similarly:
“it is not the practice of our courts to order specific implement against a company in receivership for reasons which are analogous to those which apply in a liquidation.”
The subsequent reasoning is so helpful that it bears setting
out in full:
“It is against this background of statutory provision and practice that the administrator has to decide whether to repudiate a contract. Administration is, as I have said, a flexible process. It can accommodate a circumstance in which a company, which was thought to be or likely to be insolvent, turns out not to be so and can emerge from the administration without having reached a compromise with its creditors. In such a circumstance it is hard to envisage how an administrator could properly repudiate a contract in exercise of his function of attempting to achieve the objective of rescuing the company as a going concern. But where, as in the normal run of administrations, the company is insolvent and will not emerge from administration without a CVA or a scheme of arrangement with its creditors, the administrator has to consider whether he should decline further performance of a contract which would prejudice the achievement of an otherwise achievable statutory objective. In reaching a view on that matter he is under a statutory duty to act in the interests of the company's creditors as a whole: para 3(2) of Schedule B1. Thus he must consider the extent and effect on the company's other creditors of the claim in damages which would arise if a party contracting with the company accepted his repudiation. He must also consider, when addressing the interests of the creditors as a whole, the interests of the contracting party who, if the contract is repudiated, may be a creditor in a claim for damages.…An administrator would not be acting in breach of his duty to the company if he refused to perform a contract having acted reasonably to satisfy himself that the continued performance of the contract (i) would impede his achievement of the objectives of the administration and (ii) was not in the interests of the company's creditors as a body. If he could establish reasonable grounds for being so satisfied, I consider also that he would be likely to have the legal justification which would exclude a personal liability to the counterparty of a company's contract for inducing the company to break that contract. …I do not see how an administrator could perform his statutory duties in many insolvencies if he were not able to plead justification. As the delict is an accessory liability it appears to me that a third party who contracts with the company in administration, for example in acquiring the company's assets after the administrator's repudiation of a contract, will not incur liability for inducing breach of contract if he merely responds to an invitation to treat from the administrator who is properly exercising his statutory duties.…I consider that where the company in administration is clearly insolvent there are close parallels with insolvency in the context of a receivership or a winding up. …I consider that the analogy of a receivership or a winding up is close and the court, if asked to enforce the contract against the company in administration ought to have regard to the considerations which I discussed … and would order performance only in exceptional circumstances.…Where a creditor has only contractual rights against a company I consider that the court would be slow to disrupt the administration by allowing enforcement of such rights. To do so would be to depart from its approach in other circumstances of insolvency.”
Lord Hodge summarised all this in a series of propositions:
- an administrator must perform his functions in the interests of the company's creditors as a whole;
- where the company in administration is insolvent, an administrator may have to decline to perform a contractual obligation of the company in pursuit of the statutory objective or objectives in his proposals if that is in the interests of the company's creditors as a whole;
- should he do so, the court would not, other than in exceptional circumstances, force the company to perform those contractual obligations to the detriment of the creditors as a whole;
- the court has power to interfere under paragraph 74 of Schedule B1 if the administrator's decision is conspicuously unfair to a particular contractor or creditor; but
- treating unsecured creditors in accordance with their legal rights in an insolvency would not of itself involve such unfairness.
In this particular case, he specifically concluded that "the
legal nature of the rights which Ticketus has in the Ibrox stadium, the season
tickets for that stadium and the proceeds of future sales of the season tickets
are purely personal contractual rights.” Over to the administrators now, but we’d bet
that they’re happier than Ticketus with all of this and really are not sure how
much clearer the judge could have been.
So what, in your view, should the Administrators do? What do you think they will do?
ReplyDeleteWell, as I said, over to them and that will depend on the full background which was not before the court, or any of us. It'd be quite wrong to give what would be at best a partially-informed view on what should or might be done in an ongoing case in which we're not acting, for that very reason. My point really was that the court didn't refuse to give any guidance. Lord Hodge made it clear that he felt that he should do so if he could and then did. The administrators got guidance to the effect that, generally:
Delete"An administrator would not be acting in breach of his duty to the company if he refused to perform a contract having acted reasonably to satisfy himself that the continued performance of the contract (i) would impede his achievement of the objectives of the administration and (ii) was not in the interests of the company's creditors as a body."
I don't suppose that anyone was ever arguing that the administrators were considering repudiating a contract which they thought actually was beneficial to the general body of creditors so that guidance must have been of reassurance to them, insofar as it went.
Now, Ticketus responded by saying that the administrators would find it difficult to be reasonably satisfied of these things here because (if I understood them right) the continuation of the agreement with Ticketus was part of the Blue Kights bid which was, in turn, the best prospect of saving the club as a going concern (see the link to Ticketus that I posted in the main article). I see that the BBC is tonight reporting (http://www.bbc.co.uk/sport/0/football/17516796) that the Blue Knights are prepared to consider proceeding without the Ticketus contract. As I say, though, none of us can know how things will pan out or presume to advise without the full facts.
As an insolvency professional (not in the legal profession) I find this fascinating and your analysis excellent. compelling reading and very relevant.
ReplyDeleteThanks for that. If you're in the insolvency profession I'd be interested if you have any views on our posts about validation orders under s127 of the 1986 Act. We've also recently been asked for a view about the actions of a bank against the background of a winding up application, a CVA, a validation order and a subsequent arrestment on the dependence. If I can get my head round all of that, there may be a post in it.
DeleteDavid Halliday