Project Roosevelt v 2

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C:\USERS\WILLIAM\DOWNLOADS\PROJECT ROOSEVELT V 2.DOC

ROOSEVELT POSITIONING PAPER STRICTLY PRIVATE AND CONFIDENTIAL

The matters discussed in this document are based on the meeting held with Iain Young on Monday19th September. That meeting was wide-ranging and no review has taken place of any legaldocumentation. The document should therefore be read in that context. The matters discussed inthis document do not constitute formal legal advice and at this stage Morton Fraser LLP has not been

formally appointed to advise Roosevelt. If Morton Fraser LLP is appointed to advise Roosevelt thenthis paper can be refined and formally resubmitted.

1. Background

Roosevelt Group owns and operates a football club in Scotland and is subject to theregulatory power of the SFA and the SPL. The ownership is structured with a holdingcompany and an operating subsidiary. The holding company was the vehicle for theacquisition of the operating company. All of the clubs operations are conducted through,and all of its assets are owned by, the operating company. The principal assets are theclub stadium and training grounds. The holding company owns 85% of the shares in theoperating company. The balance of the shares is owned as to 10% by one individual andas to the balance by a large number of small shareholders.

The operating companys only secured creditor is the holding company. The holdingcompany holds security in respect of the indebtedness which includes a pre-Enterprise

Act floating charge. This means that a receiver could be appointed by the holdingcompany if the indebtedness was called in and could not be repaid.

HMRC has launched proceedings against the operating company in respect of allegedunpaid tax (the Tax Claim). The potential liability, if HMRC is successful, could be asmuch as 40M. The operating company has taken its own advice in relation to the TaxClaim and is defending the Tax Claim. The Tax Claim will be heard in November 2011.HMRC has indicated that if it fails at first instance then it intends to appeal the decision.

If HMRC is successful in the Tax Claim then it is almost inevitable that the operating

company would be unable to meet the Tax Claim in full and therefore would becomeinsolvent.

Roosevelts preferred option (Option A) would be to:

hive up the business and assets of the operating company to the holdingcompany

make good any asset deficit in the operating company by either subscribing forequity or lending money to the operating company by way of convertible debt

then liquidate the operating company by way of a members voluntaryliquidation, ensuring that all actual creditors have been paid out in full,

on the basis that it would constitute a solvent restructuring of the business

The alternative (Option B) would be to place the operating company in receivership oradministration and then acquire most of the business and assets of the operatingcompany via a pre-pack.

2. Timeline

Timing is critical (particularly in respect of Option A). For there to be a solventrestructuring then it would have to take place prior to the hearing of the Tax Claim in

November 2011.


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3. Issues and Risks

a. SFA/SPL

Under SPL rules, if a club suffers an Insolvency Event then, broadly speaking, it isdocked 10 points. Care would need to be taken (and confidential discussions would

need to take place in advance with the SFA and the SPL) to ensure that Option Awould not be construed as an Insolvency Event. Option B would almost certainly beconstrued as an Insolvency Event. Under the SFA Articles there is much widerdiscretion on the part of the SFA Board to impose such sanctions as it seesappropriate upon an Insolvency Event occurring. It would, however, be difficult toenvisage circumstances in which the SFA imposed a greater penalty than the SPL.

A club participating in the SPL must also hold one share in the SPL. Provisionsrelating to transfer are dealt with in the Articles of Association of the SPL. Whilstsuch provisions have not been reviewed in detail at this stage, they will need to bereviewed and any necessary approvals obtained from the SPL before going aheadwith either Option A or Option B.

The SFA Articles of Association also have a membership requirement and permit thatmembership to be transferred intra-group as part of a solvent restructuring. Again theposition will need to be reviewed, explained and any necessary approvals obtained.

b. UEFA

In terms of participation in UEFA organised competitions, UEFA effectively devolvesresponsibility to the national regulatory authorities.

c. Player Transfers

The SPL rules impose an embargo on clubs who have suffered an Insolvency Event

which prevents them from signing new players whilst the Insolvency Event continuesor subsists.

d. HMRC

It used to be the case that HMRC was treated as a preferred creditor, but since theenactment of the Enterprise Act that has ceased to be the case. Furthermore,football as an industry is treated as a special case and so-called football relateddebts take priority over any sums owed to HMRC. This concept was recentlychallenged by HMRC following the occurrence of an Insolvency Event in respect ofPortsmouth FC, but the English courts upheld the principle, and there is no reason tobelieve that a Scottish court would reach a different conclusion.

e. Challengeable Transactions

If HMRC is successful in the Tax Claim and Option A has been implemented it islikely that the transactions which constituted Option A will be challenged by HMRC onthe basis that it constitutes a gratuitous alienation; in other words at the time thetransaction was undertaken, the company was insolvent or became so as a result ofthe transaction and/or the company did not receive adequate consideration for itsassets. For these purposes, the definition of insolvent is wider, and in both cases, theonus of proving that the transaction did not fall foul of these provisions falls on thecompany, which is a notoriously difficult thing to do. If HMRC is successful inchallenging the transactions then either the transactions constituting Option A will bereversed or the holding company could be required to make good the loss sustainedby the operating company and Option B will need to be considered further.


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f. Change of Control/No Assignation provisions

Under both Option A and Option B, if there is a transfer of the business and assetsout of the operating company it will be important to ensure that any key contracts withsuppliers do not contain any provisions whereby they either terminate automaticallyon a change of control or where the assignation of such contracts is either prohibited

or requires the consent of the other party to the contract. Frequently there is anexception for a solvent reconstruction, which may be relevant in the case of Option A.The opportunity may also, however, arise either to leave behind any contracts whichRoosevelt wishes to discontinue or to renegotiate their terms. Care also needs to betaken that no such contracts have contractual penalties in the event of change ofcontrol or purported assignation in breach of their terms.

g. Employees

Under both Option A and Option B the transfer of the business and assets willconstitute a transaction to which the Transfer of Undertakings (Protection ofEmployment) Regulations (TUPE) will apply and therefore the contracts ofemployment will be deemed to have continued without interruption on exactly the

same terms.

There may also be the opportunity to terminate certain employees as part of theprocess, but the ability to do this and the consequences of so doing should be thesubject of specialist legal advice.

h. Publicity

As discussed at our meeting there will inevitably be massive media interest andpublicity in the affairs of Roosevelt, as well as a strong chance of leakage ofconfidential information. It may therefore be pragmatic to try and preserveconfidentiality (to the extent possible) by dealing with Insolvency Practitioners basedin London rather than in Scotland.

4. Receivership v Administration

Because the security package held by the holding company predates the Enterprise Actthen, subject to a review of the terms of the security documents, it should be possible forthe holding company to appoint either a receiver or an administrator should Option Bbecome relevant.

This means that the holding companys choice of insolvency practitioner will ove rsee thetransactions which constitute Option B. If, however, receivership is chosen thenRoosevelt should be aware that, unlike in an administration, the appointment of a receiverdoes not prevent creditors beginning or continuing any legal action against the company(the statutory moratorium), including petitioning for its liquidation, while the company is

in receivership.

The advantages of receivership are:

It is a quicker and easier procedure enabling a rapid response to a perceivedcrisis in the companys business and does not involve the court

It is advantageous to a secured creditor (the holding company) as the receiversprimary duty is to the secured creditor that appoints him or her

The business may be transferred in whole or in part as a going concern alongwith its employees


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Project Roosevelt v 2

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