Scottish Court of Session Decisions

Pursuer: Ellis QC; Balfour & Manson LLP

Defender: Napier QC, MacColl; Warners, Solicitors

23 September 2011

[1] This is an application under section 15F of the Debtors (Scotland) Act 1987 for a warrant for arrestment on the dependence. The action by the pursuer ("Mr Bain") arises out of the termination of his contract of employment in the context of the sale by Sir David Murray and companies in his control of an 85 per cent shareholding in the defenders ("Rangers"). Mr Bain alleges that Rangers repudiated his contract of employment as its chief executive (i) by acts which amounted to a breach of a duty not to undermine the trust and confidence between employer and employee and (ii) by anticipatory breach of contract when Rangers' new chairman, Mr Craig Whyte, stated to the press that "there was no way back" after Rangers had suspended him and that he would not be allowed to return to his duties. Mr Bain avers that he accepted those breaches of contract as a repudiation and rescinded the contract on 20 June 2011. He now sues for damages for those alleged breaches.

[2] I delivered an ex tempore decision on the afternoon of the hearing on 13 September 2011. This opinion is an expanded version of my decision which sets out my reasoning in slightly more detail but does not depart in any way from the grounds on which I reached my decision.

[3] There are three tests which the court has to consider under section 15F when deciding whether to grant a warrant for diligence on the dependence. The burden of showing that those tests are met rests on the applicant for the warrant: section 15F(4).

[4] The first test is whether Mr Bain has averred a prima facie case on the merits of the action: section 15F(3)(a). Mr Bain's principal claim was for payment of £1,308,853.50 in respect of future entitlements which he averred he had lost because of the repudiation of his contract. A major difficulty facing that claim, as Mr Napier QC for Rangers pointed out, was that his contract of employment, which he averred was agreed with effect from 29 September 2009, was for thirty nine months. A long-term service contract of this length is prohibited under sections 188 and 189 of the Companies Act 2006 unless it is approved by a resolution of the members of the company. Mr Ellis QC, who appeared for Mr Bain, asserted that Mr Bain did not know whether the members of Rangers had approved the contract. I found that surprising as I would have expected the chief executive of a public company to be aware whether or not his employment contract had the needed shareholder approval.

[5] But Mr Bain has a fallback position; Mr Ellis pointed out that if the contract was in breach of sections 188 and 189, the statute replaced the offending provision of the contract setting out the term of the contract with a deemed provision that the company could terminate the contract at any time on giving reasonable notice. Mr Bain avers that reasonable notice in the circumstances of his position and employment history is twelve months. Accordingly, Mr Ellis submitted that Mr Bain had a prima facie case that he was entitled to damages on the basis that he had been deprived of the benefits which would have accrued to him in a twelve-month notice period. Mr Bain averred that he was entitled to £59,811.67 in respect of rights which had accrued at the date when the contract was ended and to a further £905,500 in respect of rights which would have accrued during the period of notice.

[6] Mr Napier for Rangers accepted that Mr Bain had a prima facie case on the merits based on this fallback position. Rangers had a substantial counterclaim against Mr Bain for damages for alleged breaches of fiduciary duty. But Mr Napier readily conceded that that case had not yet been developed and he did not found on it at this stage as a ground for opposing the warrant for arrestment on the dependence.

[7] In the circumstances I am satisfied that Mr Bain has a prima facie case on the merits of his action.

[8] The second test, so far as relevant in this case, is that there is a real and substantial risk that enforcement of any decree which Mr Bain obtains in this action would be defeated or prejudiced by reason of Rangers being insolvent or verging on insolvency, if the court did not grant warrant for diligence on the dependence: section 15F(3)(b). Counsel agreed, and I accept, that the law on the interpretation of this provision is clear. First, in addressing this test the court has to look into the future to the time when a pursuer is likely to obtain a judicial determination of his case: Barry D Trentham Limited v Lawfield Investments Limited 2002 SC 401, Lord Drummond Young at paragraph [13], McCormack v Hamilton Academical Football Club Limited 2009 SC 313, Lord Carloway, giving the opinion of the Extra Division, at paragraph [10]. Secondly, as Lord Drummond Young stated in Barry D Trentham Limited in the paragraph cited above,

"[t]he notion of risk is crucial; it looks to the possibility of insolvency, not actual insolvency."

[9] In arguing that this second test was met, Mr Ellis referred me to Rangers' annual accounts to 30 June 2010 which the directors of the company and its auditors had approved in September 2010. He submitted that while the accounts showed an apparently healthy financial picture, that picture depended on the valuation of the company's heritable property, namely its stadium and training facilities. Further, the accounts did not provide for the substantial potential tax liability of £49 million which was now the subject of an appeal to the First Tier Tribunal from a determination by HM Revenue and Customs ("HMRC"). Secondly, Mr Ellis founded on the terms upon which Wavetower Limited, a company in the control of Mr Craig Whyte, had purchased the holding of 85 per cent of Rangers' shares from a company owned by Sir David Murray and companies within his control. I discuss this in more detail below. Thirdly, Rangers faced a claim for about £4 million from HMRC comprising an assessment of about £2.8 million and the balance of interest and penalties. After serving a charge, HMRC had arrested £2.3 million in a bank account of Rangers. Mr Ellis stated that he understood that Rangers had accepted its liability to pay £2.8 million and that it disputed only amount of the interest and penalties. Thirdly, Rangers had paid a debt of about £35,000 to its former solicitors, Levy & McRae, only after they had sued when faced with delaying tactics. Fourthly, Mr Ellis referred me to an interview with Mr Craig Whyte which was reported in an article in the Daily Record on the day of this hearing (13 September 2011). In that article the reporter recorded Mr Whyte as stating that Rangers faced cuts in expenditure because it faced a £10 million black hole in its annual running costs. On the basis of this information Mr Ellis invited me to conclude that Rangers was already in a state of practical insolvency. He submitted that, in any event, if the tax tribunal were to uphold HMRC's claim for £49 million in the current appeal which was to be determined in November 2011, Rangers would be practically insolvent unless it received sufficient outside support.

[10] Mr Napier submitted that Mr Bain had not shown that there was a real and substantial risk of insolvency as (a) there was no basis for challenging Rangers' statutory accounts, which Mr Bain himself had signed, which showed a solvent company, (b) the outcome of the tax case was unknown and it was far from clear that Rangers would lose the case in the spectacular fashion which Mr Ellis suggested, and (c) the determination of the tax case was in any event a long way off. He submitted that, to warrant diligence, the risk of insolvency must be reasonably proximate; it could not be said that it was so in this case. The court should not assume an adverse outcome to the tax case. Thus Mr Bain had not made out one of the essential preconditions of the grant of a warrant for diligence on the dependence.

[11] I am not persuaded on the material placed before me that Rangers is presently insolvent on either of the tests of practical insolvency or absolute insolvency. In relation to the HMRC claim for £2.8 million and penalties, Mr Whyte's affidavit suggests that HMRC have been able to arrest £2.3 million in Rangers' bank account. Discussions are continuing between HMRC and Rangers in relation to the level of penalties imposed. In any event, the purchaser of Rangers has undertaken to pay the debt to HMRC. Thus, while the debt affects Rangers' balance sheet, it does not of itself contribute towards any practical insolvency. The delayed response by Rangers in settling the claim for fees by Levy & McRae may have been coloured by a sense of grievance toward the solicitors that they should not be acting for Mr Bain when they had acted for the club. Accordingly I attach little weight to either claim as demonstrative of actual or impending insolvency.

[12] What is more significant to my mind as an indicator of a potential difficulty in the medium term is the structure of the takeover deal which is recorded in the circular sent to shareholders of Rangers on 3 June 2011. That document disclosed that The Rangers FC Group Limited (formerly Wavetower Limited) ("Group") had purchased 85.3 per cent of the shares of Rangers for the cash sum of £1 and had given certain undertakings. As part of the deal, Group took over Rangers' indebtedness to the Lloyds Banking Group, which Mr Ellis informed me stood at about £18 million, and obtained an assignation of the Bank's securities over Rangers' assets. The summary of material terms of the acquisition disclosed that Group would waive this debt

"if the Club has not suffered an insolvency event within 90 days of the Club's appeal in relation to the tax claim brought against the Club by HM Revenue & Customs...."

Group has undertaken to provide or secure the investment of substantial sums in Rangers but, until it waives the acquired bank debt, such further investment is to be treated as increasing Rangers' debt to Group. Thus those funds will not improve Rangers' balance sheet until the expiry of ninety days after the determination of the tax appeal.

[13] In my view, this carefully structured deal, by which Group has (a) secured its existing investment, by which the bank was repaid, and its commitment to make or procure further investment in Rangers against the assets of Rangers by the assignation of the bank's securities and (b) made the waiver of its loan to Rangers conditional upon the non-occurrence of an insolvency event in the ninety days after the determination of the appeal in relation to HMRC's £49 million claim, shows an appreciation by Group of a risk of insolvency resulting from that claim. When I asked Mr Napier if he could clarify Rangers' position in relation to the HMRC claim for £49 million, which Mr Bain averred comprised a claim for £35 million of tax and £14 million in interest and penalties, he was not able to assist as he had no instructions in relation to that matter. I must therefore treat Mr Bain's assertions as to the extent of HMRC's claim as uncontradicted, although I acknowledge that the claim itself is the subject of an appeal by Rangers.

[14] I accept that the appeal against the HMRC determination is at an early stage and that there is scope for appeals by either party from the First tier Tribunal to the Upper Tribunal and thereafter the courts. I also recognise that a proof in this action is unlikely to occur before the summer of 2012. But the appeal is in respect of an existing HMRC determination relating to events which have occurred. While the outcome of the appeal is not known, the HMRC claim is not to be equated with a future trading debt which has not been incurred and which would involve speculation as to the future. It is also likely that the decision of the First tier Tribunal will be issued before this action is decided at first instance. As I have said, the court has to look to the future to when this case will be decided. I am not persuaded that the outcome of the HMRC claim is too remote in time for the court to form a view as to the existence of a risk.

[15] I am satisfied that there is a real and substantial risk of insolvency if the tax appeal were to be decided against Rangers in the sums which have been discussed. In reaching this view I emphasise that I am concerned with the statutory test which addresses the degree of possibility. I am not speaking of the actuality or even probability of insolvency.

[16] The third test is whether it is reasonable in all the circumstances to grant a warrant, including the effect which that grant may have on any person having an interest: section 15F(3)(c). Mr Ellis submitted that it was reasonable to grant the warrant as Mr Bain had lost substantial benefits from his contract and an arrestment, if effected more than sixty days before insolvency, might confer a preference. Rangers' tangible assets were subject to securities which had been assigned by its bank to Group, and Mr Bain could expect no benefit from those assets. Mr Napier in reply submitted that the tax arrangements which had given rise to the large HMRC claim had been in place when Mr Bain was an executive director of Rangers and the alleged liabilities incurred on his watch. By seeking to use the HMRC claim for tax and penalties to secure a warrant to arrest on the dependence, Mr Bain was taking benefit from his own irregularities. That was not reasonable.

[17] In reaching a view on this third test of reasonableness I take account of the assertion that the tax claim which has given rise to the possibility of insolvency is something which had occurred at least in part under Mr Bain's stewardship. But that of itself does not make it unreasonable to give him some security for his claim. I am satisfied that Mr Bain has discharged the burden of showing that it is reasonable to grant warrant for arrestment on the dependence.

[18] As Mr Bain has satisfied me as to the three statutory tests, it becomes a matter of discretion whether to grant the warrant which he requests. I am satisfied that I should grant the warrant which he seeks but I propose to limit the warrant to reflect the fact that Rangers' claim against him exists and is likely to be developed over time. It would not be appropriate in my view to ignore Rangers' allegation that Mr Bain has been in part responsible for its predicament. I therefore take a broad approach to his application at this stage. The total of his claim on the basis of his fallback case is about £960,000. Allowing for existence and likely development of the counterclaim, I consider it appropriate to limit the warrant for arrestment to one-half of that sum, namely £480,000.

[19] On Mr Ellis's application for the expenses of the motion, which Mr Napier opposed arguing for expenses in the cause, I award Mr Bain one half of his expenses to reflect the fact that I have not granted a warrant to arrest over £1.3 million.