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).