Always a Wasp

Author Topic: Interesting Legal Outline of WW and Wasps Demise  (Read 970 times)

Neils

  • Hero Member
  • *****
  • Posts: 14690
  • Wasps Rugby Fan
    • View Profile
Interesting Legal Outline of WW and Wasps Demise
« on: March 14, 2023, 02:24:15 PM »

Administrations in Rugby Union: a breakdown of Wasps? and Worcester?s demise
Charles Russell Speechlys
Charles Russell Speechlys logo
United Kingdom March 13 2023

Concern amongst sports aficionados around the financial integrity of the sports industry was raised in late 2022 when rugby union was the latest sport to be dragged into the insolvency conversation. Both Wasps RFC (Wasps) and Worcester RFC (Worcester, and together with Wasps, the Clubs), who can each trace their history back to the mid-19th century, appointed administrators after facing financial difficulties they attributed to the Covid-19 pandemic and resulting lockdowns.

Both Clubs have now been relegated from the top-flight of English rugby, the Gallagher Premiership (the Premiership), losing their all-important P-Shares, after the Rugby Football Union (RFU) rejected their no-fault insolvency appeals.

What industry specific rules did the administrators have to navigate and what is next for these Clubs?

The Administrations

Wasps and Worcester entered administration under a month apart, with both coming under significant HMRC pressure:

    HRMC issued a winding-up petition against Worcester on 15 August 2022 for tax arrears, including deferred liabilities from the Covid-19 pandemic. The directors sought a solvent sale of the club, but this ultimately fell through and thus they requested that the Department for Culture Media and Sport (DCMS) (being a fixed and floating charge-holder over Worcester?s assets by way of security for a Covid loan) exercise its powers to appoint administrators, to circumvent HMRC?s extant winding up petition. Julie Palmer, Julian Pitts and Andrew Hook of Begbies Traynor were appointed as joint administrators of the club on 27 September 2022. It should also be noted that the entity that employed the players, WRFC Players Limited, was wound up by Chief ICC Judge Briggs at a hearing lasting just 22 seconds on 5 October 2022.
    Due to the imminent threat of an HMRC winding-up petition, Wasps filed Notices of Intention to Appoint Administrators (?NOIs?) on 22 September 2022 with a view to concluding a pre-packaged sale of the club. A conditional offer was made to purchase the club as a going concern; however, this fell through due to the prospective purchaser being unable to reach agreement with the Premiership?s board (the PRL) on the transfer of Wasps? P-Shares (discussed below). As such, at the expiry of the NOIs, the club appointed Andrew Sheridan and Rajnesh Mittal of FRP as joint administrators of the club on 17 October 2022.

The survival of both Clubs in looks likely, with a sale of Wasps to connected party, HALO22 Limited, completing in late 2022and a sale of Worcester to a consortium led by former chief executive Jim O?Toole being announced on 1 February 2023 However, their dalliances with the insolvency world have cost both clubs dear.

Relegation

RFU Regulation 5 deals with, inter alia, the insolvency of clubs within its jurisdiction. RFU Regulation 5.5.5 states that,

?where a club suffers an Insolvency Event...[its] most senior first XV team?shall in respect of the following Season be relegated to the League below.?

As a result of the Clubs? respective administrations, in October 2022 the RFU suspended their involvement in this year?s Premiership competition and relegated them to the second tier of the rugby union pyramid for the 2023/24 season.

However, now firmly in the last chance saloon, both Clubs (via their respective administrators) appealed the RFU?s decision citing Regulation 5.5.9, aka, No Fault Insolvency Events. This regulation states that (emphasis added),

?the RFU may in its absolute discretion reduce or waive in its entirety any sanction that would otherwise apply to a Club where it is satisfied that the Insolvency Event would not have occurred but for an event or circumstance which was beyond the control and without the fault or negligence of the affected Club and which by the exercise of reasonable diligence the affected Club was unable to prevent including:?any epidemic or pandemic as categorised as such by the UK Government and/or the World Health Organisation to):?.

The Clubs? appeals were based on the financial toll the Covid-19 pandemic had taken on them and that they considered this was the primary reason they each had entered administration. Begbies Traynor?s Statement of Proposals neatly summarised their arguments:

?The Directors have advised that the start of the Company?s financial substantive issues, and the root cause of the eventual failure, was the Covid-19 pandemic?With the cancellation of all sporting?events following Government-imposed restriction, the Company suffered cashflow issues during the pandemic and was unable to pay its debts as and when they fell due. Covid-19 and the related lockdowns placed an immense pressure on the business, draining it of all cash reserves and the build-up of a significant tax liability while the Company was unable to generate revenue from the stadium, whether Rugby related or otherwise?.

However, on 6 December 2022, the RFU?s Club Financial Viability Group rejected both Clubs? No Fault Insolvency Appeals:

    In respect of Wasps, the RFU considered there was ?insufficient evidence? provided to demonstrate there had been no fault by the club, noting its business plan lacked resilience which left it in a precarious position and the shock of an event, such as the pandemic, was more likely lead the club?s insolvency; and
    For Worcester, whilst the RFU accepted the Covid-19 pandemic had a serious impact on the club, it considered the club?s business model, which appeared to be ?perpetually funded by debt?, was the key reason for its demise. It also drew negative inferences from the fact Worcester had failed to produce correspondence between it and HMRC (who had issued the original winding-up petition). It is worth noting that even Worcester?s joint administrators, who had launched the appeal, noted in their statement of proposals that, ??The Club was loss making prior to the Covid-19 pandemic, and the funding provided by DCMS had not resolved the underlying issues at the club?.

This decision condemns the Clubs to relegation for next season; however, the pain for the Clubs does not stop here.

P-Shares

Wasps and Worcester have also lost their P-Shares as a result of their administrations. These are ?perpetual shares? which entitle shareholders to a percentage of the central income of the Premiership and the right to vote on key issues. They were awarded to the thirteen established top-flight teams in 2005 (which included Wasps and Worcester).

Under RFU rules, in the event a team is relegated it can keep its P-Shares for at least one season giving them an opportunity to regain promotion to the Premiership. It is worth noting that Bristol Bears retained their P-Share money for the eight seasons they were in the second tier of rugby between 2009 and 2018.

Unfortunately for the Clubs, the PRL retain pre-emption rights over the P-Shares and, on 7 December 2022, it confirmed its intention to purchase both Wasps? and Worcester?s P-Shares for ?9.8 million apiece. Interestingly, Worcester?s accounts showed a book-value for its P-Shares as ?13,865,000.

The seizure of the shares has been criticized by, inter alia, Worcester?s joint administrator Julie Palmer who accused the PRL, representing the other eleven clubs, of having a conflict of interest and being able to acquire the P-Share ?as cheaply as it suits them?. The Clubs? P-Shares were one of the most attractive assets to potential purchasers and may have been the key to rescuing the Clubs as a going concern; as noted above, the pre-pack offer to save Wasps as a going concern only fell through because the potential purchaser and the PRL could not come to an agreement about the transfer of the P-Shares.

However, others consider the removal of P-Shares for clubs that have entered an insolvency process as imperative to act as a deterrent. Rob Baxter, Director of Rugby at Premiership team Exeter Chiefs, believes allowing Worcester and Wasps to keep their P-Shares could undermine confidence in the sport:

?why doesn't every club in the Premiership that's got debts organise a pre-pack with an administrator, go into administration, keep their P-Shares, basically keep everything that's going to be of value to them and wipe the debts of everyone they owe money to?.... How can Premiership Rugby run a business that says it's OK to go into multiple administrations every time you run into debt?...We'd have no confidence in the business, we'd have no confidence in a TV deal. Why would a sponsor ever come in to sponsor a rugby club where, in theory, once you feel like it, you can just go into administration and wipe your debts??

Rugby Creditors Rule

There is one further rugby specific rule the Clubs? new owners have to contend with to compete in the second tier of rugby next season.

Appendix 2 of RFU Regulation 5 sets out list of non-exhaustive considerations that the RFU want satisfied if either Wasps or Worcester wish to transfer its membership and / or league position to a new legal entity, defined as a Phoenix Entity (not to be confused with ?phoenixing? under s216 of the Insolvency Act 1986).

Whilst these are tailored to the circumstances of a particular club?s insolvency, in both Wasps? and Worcester?s cases they are likely to want evidence any ?Rugby Creditor? of the Clubs will be paid by the Phoenix Entities. Rugby Creditors are defined (in RFU Regulation 5.1) as, inter alia, players, ex-players, coaches and other employees of a club. Claims can potentially include not just contractual liabilities, but also claims relating to the termination of those contracts (such as wrongful/unfair dismissal or redundancy payments).

Explicit reference to Rugby Creditors is made in FRP?s Statement of Proposals; it notes that whilst FRP have received ?3.4m of claims that fall within the RFU?s definition of Rugby Creditors, they are not incurring the costs in the estate of adjudicating on these claims but understand Wasps? purchaser may be required to ?settle such claims to meet eligibility requirements for participation in RFU competitions going forwards?.

What?s Next?

It is important not to consider the administrations of Wasps and Worcester in isolation; they are manifestations of wider problems facing rugby union. Many in the rugby world see this as an opportunity to re-boot how top-flight domestic rugby is organised and release the commercial potential of a league with competitive, high-quality fixtures and good viewership.

Reforms being mooted to increase the financial viability of the Premiership include sticking to a ?5m salary cap (which was due to rise to ?6.4m next season) and a moratorium on relegation to protect clubs as they endeavour to recover from the financial harm caused by Covid-19. France?s top-flight, the Top 14, is also being cited as a model for the Premiership to consider; French clubs have to fulfil a number of criteria to obtain a licence before the season to compete, including keeping 15% of their cost?s projections in cash deposits and the requirement of a bank guarantee from any owner promising to bankroll financial shortfalls.

Whilst these reforms may be a step in the right direction, they are not going to address the fundamental issue of costs exceeding revenues. Until the RFU is able to address this basic business principle, rugby union?s problems are likely to persist.
Let me tell you something cucumber

baldpaul101

  • Hero Member
  • *****
  • Posts: 1665
  • Wasps Rugby Fan
    • View Profile
Re: Interesting Legal Outline of WW and Wasps Demise
« Reply #1 on: March 14, 2023, 03:23:35 PM »
Quote
Frances top-flight, the Top 14, is also being cited as a model for the Premiership to consider; French clubs have to fulfil a number of criteria to obtain a licence before the season to compete, including keeping 15% of their cost?s projections in cash deposits and the requirement of a bank guarantee from any owner promising to bankroll financial shortfalls.

Not really sure how that is any better, surely that is still relying on rich owners willing to splash their own cash?

Sliminator

  • Full Member
  • ***
  • Posts: 189
  • Wasps Rugby Fan
    • View Profile
Re: Interesting Legal Outline of WW and Wasps Demise
« Reply #2 on: March 14, 2023, 03:57:53 PM »
100% it just requires the Sugar Daddy to prove that they are rich enough.

I don't know enough about the Top 14 clubs to know if they are anymore sustainable/less relient on their owners. But proving you have the cash is different to being sustainable.

baldpaul101

  • Hero Member
  • *****
  • Posts: 1665
  • Wasps Rugby Fan
    • View Profile
Re: Interesting Legal Outline of WW and Wasps Demise
« Reply #3 on: March 14, 2023, 04:02:35 PM »
Quite a few Top 14 clubs get use of a municipal stadium for minimal rent so don't have that expense.
They do also seem to have some slightly odd owners, the guy at Toulon being a good example!

Neils

  • Hero Member
  • *****
  • Posts: 14690
  • Wasps Rugby Fan
    • View Profile
Re: Interesting Legal Outline of WW and Wasps Demise
« Reply #4 on: March 14, 2023, 04:07:14 PM »
Quite a few Top 14 clubs get use of a municipal stadium for minimal rent so don't have that expense.
They do also seem to have some slightly odd owners, the guy at Toulon being a good example!

I think most stadiums are municipal. The likes of Toulouse have two to choose from depending on crowd expectations. 

I think you mean the former owner of Toulon. I think he sold up a couple of seasons ago to move into football. Heyes I think the team is. My friends who support the rugby club tell me (in Dec) that he hadn't been seen there for months. 
« Last Edit: March 14, 2023, 04:14:55 PM by Neils »
Let me tell you something cucumber

backdoc

  • Hero Member
  • *****
  • Posts: 1178
  • Wasps Rugby Fan
    • View Profile
Re: Interesting Legal Outline of WW and Wasps Demise
« Reply #5 on: March 14, 2023, 04:22:49 PM »
Quite a few Top 14 clubs get use of a municipal stadium for minimal rent so don't have that expense.
They do also seem to have some slightly odd owners, the guy at Toulon being a good example!

They also get massive funding from Industry. The relationship between the Council/Mayor and local industry is very tight. I am sure there is a lot of backscratching that encourages financial support for the teams. Michelin, Airbus Group, etc etc.
La Rochelle is a better model for me - I believe around 3000 local businesses all have a stake in the club. You can see how the players respond.