Craig Whyte and the floating charge

During most televised news discussions about the Rangers financial debacle at one point the interviewer, sighing wearily, will say – as if he (it’s usually a he) understands what he’s talking about, “And what about Craig Whyte’s floating charge?”

This question reassures the audience that the interviewer knows his stuff (as long as you don’t know your stuff) and is usually met with an assurance that Whyte’s floating charge doesn’t matter. Sometimes this assurance that Whyte’s floating charge doesn’t matter is accompanied with an assertion that Whyte didn’t extend any finance to Rangers and so his floating charge can’t cover anything.

Now, it may be the case that Whyte’s floating charge doesn’t matter – but the honest answer is to admit ignorance. Why? because the floating charge might matter, and without the background position we don’t know.

However, some things to note:

When a floating charge is assigned then typically the debt which is secured by the floating charge will be assigned with it. That’s legalese so to explain.

Let’s begin with the debt. Assume Ted owes the bank £50,000. From the perspective of the bank it has a right to get £50,000 from Ted. This right to payment is an asset of the bank. If the debt is owed in the future the bank might want to make that asset liquid now. Factors might pay the bank for the right to £50,000. The factors are unlikely to pay £50,000 if the debt is due in the future. The factors will deduct something for the risk that Ted won’t pay. and they will deduct something for the interest they could have made if they had not bought the right to payment. So, assume the factors pay £40,000 and the bank assigns the right to payment (owed by Ted) to the factors and – in Scotland as long as the factors notify Ted – the right to payment is transferred. The end result is that the bank has cash now but has lost the right to payment and so can’t sue Ted for the payment. Ted still owes £50,000 though. As a result of assignation Ted owes the £50,000 to the factors. The factors hold the right to payment. Now at no time do the factors extend any finance to Ted. They have not loaned him any money yet Ted legally owes the factors £50,000.

Therefore, to say – as some commentators have – Craig Whyte loaned no money to Rangers so they owe him no money misses the point. Whyte might not have loaned any money but did he acquire a right to payment held by somebody else?

Well, what we do know is that Rangers owed flipping great wadges of cash to the bank. That debt was backed up by a floating charge, a security over the whole asset base of Rangers. If Rangers defaulted and the assets of Rangers were sold the floating charge meant that (broadly and ignoring other securities) the bank would get first cut of the sale proceeds.

Now, a floating charge is also an asset. It is a right (in security) over the assets of the debtor. As an asset it can be traded. However, for the trading of the asset to be worth anything the debt – which the floating charge secures – needs to be transferred along with it.

So, if Ted plc owed the bank £50,000 and the bank is worried that Ted plc will default the bank may have demanded a floating charge over Ted plc’s assets. The bank therefore has two rights: (a) the right to payment owed by Ted plc; and (b) the right to the floating charge over Ted plc’s assets. If the bank wants to make the right to payment liquid it can assign the debt in the manner described above. If there is a floating charge securing that debt the act of assigning the right to payment of the debt will transfer along with it the right to the floating charge. The end result of selling the right to payment will be that the factors end up with both rights: (a) the right to payment (owed by Ted plc); plus (b) the floating charge over Ted plc’s assets.

Alternatively the factors might seek an assignation of the floating charge over Ted plc’s assets – but that charge is useless without the assignation of the debt too. Only an incompetent solicitor would allow a transaction to proceed without ensuring the transfer of both.

So, applying this to the Whyte case. We know that the bank had a floating charge. We know that floating charge has been assigned to Whyte (one of Whyte’s companies). We are assured (by commentators and the administrators) that Whyte has extended no finance to Rangers. However, if no finance has been extended by WHyte to Rangers that does not mean his floating charge is worthless. We don’t know if the right to payment of the debt owed to the bank was assigned to Whyte. If it was, then Whyte will be owed the money from Rangers (unless he has waived the debt) – and has a floating charge to back it up. That will be the case whether Whyte extended any money to Rangers or not. That will be the case whether the bank got a payment from Whyte that matched the total sum owed to it by Rangers or not.

Assume the bank was owed £20 million by Rangers – if Whyte paid the bank £10 million (wherever the money came from) the bank might have agreed to assign the right to payment to Whyte. Rangers still owe £20 million, Whyte is owed the £20 million, the bank has cut its losses.

Of course if the bank was paid the full sum owed to it by Whyte the one thing that does not do is discharge Rangers’ debt. The transaction between Whyte and the bank was a sale and purchase of a right to payment. Only Rangers could pay off the debt (unless Whyte volunteered to make a third party payment on Rangers behalf – which is competent in Scotland).

Those analysing the floating charge therefore need to keep the debt owed by Rangers to the bank; and the transfer of the floating charge (and potential transfer of the debt) clear and distinct in their minds. Without more information it is not possible to say that Whyte’s floating charge is worth nothing (and that is before considering any right of relief Whyte may benefit from in relation to the cautionary obligations (guarantees) owed to Ticketus in relation to Rangers debt to Ticketus).

 

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About loveandgarbage

I watch the telly and read when not doing law stuff and plugging my decade and a half old unwatched Edinburgh fringe show.
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13 Responses to Craig Whyte and the floating charge

  1. web3dlaw says:

    Dear Mr. La Garbage, (sounds better when speaking in a French Accent)

    I have been arguing this point for so long now and to so many people, that based on what I was hearing on the news from the pundits and “experts”, I was beginning to doubt it myself. Thank you for this timely piece. I can now run around to all those doubters, point them to this piece, smugly screaming, “See! See! I told you so…”

  2. TonyD says:

    Good article, L & G. I knew CW would not walk away with nothing after going through all this pain and suffering. If this FC is in place and is deemed competent then it asks more questions about D & P professional conduct throughout this embarrassing saga. Seems they’ve tried to bully and bulldoze their way through the whole process until they hit the brick wall that is HMRC. More to come I fancy.

    • D&P will have more info, but the CVA document declared figure for Whyte’s floating charge was “tbc” with a note suggesting zero value. The piece is merely to point out that things are not as clear as sometimes are portrayed.

  3. Mainser says:

    At last, someone else who understands – the ONLY thing that rules Whyte out of the deal is if the contracts are badly drafted. Only those who have sight of those contracts will have a valid opinion as to whether that is the case or not, even then until it’s tested in a court of law, or Whyte walks away, NO ONE can say with any certainty whether or not that is the case.

    It’s probably reasonable to assume that D&P have seen them, but their track record on accuracy and validity to date has been less than perfect I think we can agree.

    Great piece

    • He might have waived the debt; the debt might have been extinguished by compensatio (what English law calls set-off) if the company that holds the floating charge borrowed money from Rangers but there are hoops to apply there before compensatio can apply. My main point is to try to say we don’t know and we need more information.

  4. BumblingAmateur says:

    Fair enough. Though the CVA does say …

    “4.29: Pursuant to Rule 1.3(2) of the Rules, the Proposal for a CVA must also include details of the value of the Net Property and Prescribed Part that would become available to creditors if the Company was placed into liquidation. Under Section 176A of the Act, the Prescribed Part applies only where floating charge security in relation to a company has been granted after 15 September 2003. The only registered holder of a qualifying floating charge granted by the Company as at the date of this report is Group, having taken an assignation (in May 2011) of the Bank of Scotland‘s security granted in 1999. It is the Joint Administrators‘ position that no monies are outstanding under that security but, in any event, that security was granted before 15 September 2003 and therefore the Prescribed Part will not apply. Accordingly, no estimate of the value of any Prescribed Part, or the Company‘s net property, is provided.”

    My lay reading of that paragraph is that, according to the administrator, Whyte’s floating charge is worth nothing. Is that incorrect?

    • It is the administrators’ position that no sums are due. However, they note “tbc” in the figures in the appendices to the CVA. Without more information on their basis for saying that no monies are due (eg the debt was waived, it has been paid, it was subject to compensatio under the Compensation Act 1592) it is hard to comment.

      Additionally, I would note my final point about the right of relief. If the floating charge is framed as an all sums floating charge (which is standard practice with those in favour of banks (as this charge originally was), but may not apply here) given that Ticketus is owed money by Rangers, if the company that holds the floating charge pays Ticketus under the cautionary obligation (guarantees or sureties in ENglish law) guaranteeing the sum owed to Ticketus – the cautioner (the party giving the guarantee) can recover the sum it has paid out under that guarantee from the original debtor under what is called a “right of relief”. The charge may ultimately secure that indebtedness (even if not due at the minute, it would be a contingent liability).

  5. Bernard madoff says:

    What haPpens if the money used to acquire said right of payment and floating charge was obtained fraudulently from ticketus? Did bank and David Murray collude? Can’t understand why Whyte, who invested no money of his own, could walk away with 20 odd million after using supporters season ticket money in the first place.

    • Good question. If there is indirect financial assistance from the company for the purchase of its own shares then the transaction is illegal and would be unenforceable. The legislation regarding that (and the way that the legislation has been interpreted) is very complicated and I would not want to comment one way or the other without retiring into a darkened room with the statutes and some case reports.

  6. major clusterfunk says:

    As I thought, not a straight forward no then. Might need to try and read this a couple more times though!

  7. james larkin says:

    6 weeks ago, i didn’t get paid, so i went to my colleagues and borrowed some cash…i borrowed £5 from tom, £10 from dick and £15 from harry.

    i then borrowed £50 from mary and gave a £10 note (no change) to tom and told him to give the £5 to mary, I gave a £20 note(no change) to harry and told him to give the £5 to dick and i gave a £20 note (no change) to dick and told him to give the £10 to mary…

    4 weeks ago, i didn’t get paid, so i borrowed £20 from harry…i borrowed a fiver from mary and i then borrowed a tenner from tom, then i borrowed another £!5 from fred, then borrowed £50 from dick…
    i gave mary a tenner and told her to give fred a fiver…

  8. raingoblin says:

    “That’s legalese so to explain.”

    I was with you until there!

    No, excellent deconstruction of a situation which, as you rightly point out, is appropriated by maby with no real understanding of the situation.

    Good work.

    Oh, what’s your Fringe show?

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