Administrator: The Reason Warriors Went Into Administration

The reasons for the Company’s insolvency

By 2018 the Club had established itself as an English Premiership rugby club. In addition, the Club had worked to maximise revenue by expanding the range of services offered to include conference, banqueting and hospitality services.

Its shareholder at the time, Sixways Holdings Limited (“Sixways”), had hoped to develop the Club’s infrastructure to ultimately make it self-sustaining with the aim of returning the Club back to the community. Unfortunately, the shareholder was unable to achieve this objective.

Having invested approximately £30 million to develop the Club, it found itself in a unique position as the freehold owner of over 50 acres of land comprising both the rugby facilities and a conferencing and event facility.

Interest in the purchase of the Company’s shares was received from Gerard McCory and Michael Blood in 2018 by way of a newly incorporated purchasing vehicle, Militibus Quanco Ltd (“Militibus”). Gerard McCory was appointed as the sole Director of Militibus on 21 February 2018.

A proposal for the purchase of the shares was put forward to the Rugby Football Union (“RFU”). However, the purchasers required additional funding of £2million to complete on the purchase. An offer to provide the required funds was provided by Colin Goldring and Jason Wittingham in exchange for 50% of the shares in Militibus. The sale subsequently completed on 28 September 2018.

The terms of the sale were as follows:

•           Payment on completion of £1.

•           Undertaking to pay £6,500,000 in respect of the loan owed by the Company to Sixways Holdings Limited (the Company’s parent company) on behalf of the Company.

•           Undertaking to pay the Duckworth Worcestershire Trust Loan of £500,000 to the Duckworth Worcestershire Trust.

Gerard McCory and Michael Blood were appointed as Directors of the Company on 28 September 2018 with Colin Goldring and Jason Wittingham also being appointed on 17 October 2018.

CVC Capital Partners (“CVC”), having already invested significantly in Premiership rugby, made further payments to teams in the league and the Company received £12,532,434.76 on 29 March 2019. A large proportion of these funds were used to pay windfall agreements. The position between the above parties shortly became untenable and Colin Goldring and Jason Wittingham purchased Gerard McCory and Michael Blood’s interest in the Company. The latter both resigned as Directors on 11 June 2019.

Given the losses incurred by the Company in recent years, the decision was made to seek additional funding and discussions commenced with T3 Capital Limited (“T3”). A loan offer was subsequently received for £15m which was expected to provide the Company with sufficient working capital to bring it to the point of breaking even. However, the loan offer was withdrawn following the commencement of the Covid-19 pandemic and associated restrictions.

The Directors have advised that the start of the Company’s substantive financial issues, and the root cause of the eventual failure, was the Covid-19 pandemic, the national lockdowns and the changes to the country’s economic landscape coming out of the pandemic. The Directors reviewed the Company’s insurance cover with the view to making a claim for business interruption. However, the Company’s insurers rejected the Business Interruption Claim and no payment was made.

With the cancellation of all sporting and non-sporting events following Government-imposed restrictions, 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.

The Company applied for and received the benefit of a substantial Covid-19 loan of £11.49m from the Department for Design, Culture, Media and Sport (“DCMS”). As security for that loan, the Company granted a fixed and floating charge in favour of DCMS on 19 February 2021, and DCMS advanced the funds to the Company in June 2021. DCMS subsequently made further loans to the Company, such that the amount owing to DCMS as at the date of the Administrators’ appointment was £16,134,720.40, comprising principal debt of £15,706,000.00 and interest of £428,720.40 (excluding DCMS’ enforcement costs, which are recoverable under the terms of the fixed and floating charge).

The Directors entered into discussions with Macquarie Group Limited (“Macquarie”) with a view to obtaining a cashflow loan facility, which the Directors hoped would assist with the Company’s cashflow difficulties. Whilst the Company obtained credit approval, and the facility was due to complete imminently, the following events occurred which caused Macquarie to revoke its approval:

•           By July 2022, the Company had significant arrears with a number of its suppliers, and during July 2022 a creditor issued a winding up petition against the Company (although the petition was withdrawn after the Company paid the amounts owing to the petitioning creditor in full).

•           The Company’s poor cashflow position meant that it was a week late with a VAT payment of £320,000.00 to HM Revenue & Customs (“HMRC”). Following the late payment, HMRC demanded repayment in full of all outstanding arrears (which included certain tax liabilities which had been deferred during the Covid-19 pandemic). The Company was unable to pay the amounts demanded and on 15 August 2022, HMRC issued a winding up petition against the Company.

The Administrators are informed that, following the events referred to above, the Directors entered into discussions with a potential purchaser of the Company’s business and assets. The prospective purchaser confirmed it was prepared to pay the debts of the Company in full, however, the sale did not proceed as the prospective purchased was unable to obtain the funding necessary to operate the club, including funds needed to fund wages and insurance costs. As a result, the Company was suspended by the RFU from playing rugby matches.

The Administrators are also informed that, following HMRC issuing the winding up petition against the Company, the Directors continued to seek out prospective purchasers of the Company’s business and assets, so as to avoid the possibility of the Company being placed into administration. The Company raised additional short-term finance from third party financers which was used to pay critical creditors and to delay any administration in the hope of completing a sale of the business and assets to a prospective purchaser.

The Administrators understand from their review of the Company’s books and records that the Company continued to trade following the presentation of HMRC’s winding-up petition, while the Directors pursued a deal with a prospective purchaser. However, no sale of the business or Company eventuated.

DCMS, as a secured creditor of the Company, was closely monitoring the Company’s financial position from about February 2022 (discussed in further detail below) and, following a request from the Directors in September 2022 exercised its powers under the fixed and floating charge to appoint the Administrators as Administrators of the Company in accordance with paragraph 12 of the Act. For completeness, the Directors’ proceeded to request that DCMS exercise its powers to appoint Administrators to the Company as the Directors were unable to appoint Administrators using the ‘out of court’ route due to the existence of HMRC’s extant winding up petition against the Company.

On 27 September 2022, Julie Anne Palmer, Julian Pitts and Andrew Hook of Begbies Traynor (Central) LLP consented to act as proposed Administrators of the Company and we were appointed as Joint Administrators on that same day. On 27 September 2022, the Administrators were also appointed as Joint Receivers of the Sixways Stadium. On 5 October 2022, the Administrators were also appointed as

Joint Receivers over certain assets of Worcester Sports Limited, including the entire issued share capital of MQ Property Co Limited (“MQ Property”), following which the Joint Receivers exercised their powers to replace the incumbent directors of MQ Property with an independent director.

These actions were taken to improve the Administrators’ ability to affect a sale of the Club’s key assets, in order to increase the likelihood of the Club being sold as a going concern.

Extent of our Involvement Prior to our Appointment

Around February 2022, Julie Anne Palmer of Begbies Traynor (Central) LLP was contacted by DCMS for advice on DCMS’s position as a secured creditor of the Company (and the wider group of companies).

Begbies Traynor was formally instructed by DCMS on 23 February 2022 to provide a strategic report on the options available. Having conducted a review of the position, it was noted that:

          the Club was loss making prior to the COVID-19 pandemic, and the funding provided by DCMS had not resolved the underlying issues concerning the Club’s financial viability;

          the Club would be unable to pursue any of the options available to it (discussed in further detail below) unless it obtained additional funding, either from DCMS or other external sources;

          DCMS should assess whether and at what stage it would be prepared to take any enforcement action or commence an insolvency process; and

          any new owners of the Club would need to satisfy all applicable RFU diligence requirements, so early and regular consultation with the RFU and other key stakeholders would be necessary in order to avoid delays in a sale or enforcement scenario.

The following options were discussed with DCMS:

•           Entry into an informal arrangement with creditors: This option was discounted because DCMS, as a secured creditor, would be unable to control this procedure and would therefore be reliant on the cooperation of the Company’s Directors and the willingness of the Company’s other creditors to enter into such an arrangement;

•           Part A1 Moratorium: This option was discounted because although a moratorium would provide the Company with temporary relief from creditor action, it would not deliver a solution to Company’s deteriorating financial position;

•           Consensual Business Sale: It was recognised that this option could take a significant period of time, including to allow interested parties to complete due diligence and for the parties to negotiate and agree the transaction documents. Similarly, this option would require RFU approval, as any prospective purchaser would need to satisfy all applicable RFU diligence requirements.

•           Company Voluntary Arrangement: This option was discounted as it was considered unlikely that HMRC, as secondary preferential creditor, would compromise its debt. Without HMRC support, it was considered unlikely that any arrangement could be implemented. 

•           Scheme of Arrangement: This option was discounted as schemes of arrangement are typically complex and expensive to implement, and must be approved by each class of creditors.

•           Restructuring Plan: This option was discounted as the process is perceived as being complex and expensive and, although approval from each class of creditor is not necessarily required, the funds available to implement a restructuring plan were limited, particularly as the business’ cashflow position was continuing to deteriorate.

•           Administrators: This was ultimately considered to be the most appropriate option as notwithstanding that it would trigger certain sanctions from the RFU, it offered the most expedient and efficient way of securing control of the Company and its assets, and the greatest chances of maximising returns to creditors.

•           Compulsory Liquidation: This was considered to be the least attractive option as based on Begbies Traynor’s analysis, it would yield the lowest return for DCMS and other creditors.

Begbies Traynor were subsequently re-engaged by DCMS to provide further advice in relation to the potential outcomes for DCMS, in the event of the insolvency of the Club. Various indicative but realistic scenarios were prepared and discussed with DCMS, together with estimated outcome statements. This work allowed DCMS to internally prepare for an insolvency in the event that the proposed external funding was not obtained by the Club.

For the avoidance of any doubt, all work undertaken by Begbies Traynor prior to the Administration was solely for DCMS and not the Company. Limited information was provided by the Company directly, as Begbies Traynor’s engagement was directly with DCMS.

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P Shares & Fixed Interest Stocks

The Company’s management accounts as at 30 June 2022 record that the Company had allocated a book value of £13,865,000.00 to the P Shares (issued by PRL Investor Limited (“PRL”)) and other Fixed Interest Stocks.

These shares are subject to pre-emptive rights, the terms of which are set out in the relevant Shareholders’ Agreements and which remain confidential. We are currently liaising with the PRL as to whether any parties intend to exercise such pre-emptive rights, but are yet to receive confirmation. Therefore, the estimated to realise value is “uncertain” for the purposes of the Statement of Affairs.

PRL Payment

The Company received monthly payments from PRL. However, the PRL is withholding amounts due to the Company on the basis that the Company owes certain amounts to the PRL. It is not yet clear whether PRL is legally entitled to set-off the amounts it is owed by the Company against amounts it owes to the Company. Discussions between the Administrators and the PRL are ongoing in this respect.

For the purposes of the Statement of Affairs, the estimated to realise value of the PRL distributions is “uncertain”.

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OUR PROPOSALS FOR ACHIEVING THE PURPOSE OF THE ADMINISTRATION

Purpose of the Administration

We are required to set out our proposals for achieving the purpose of the administration which in this context means one of the objectives specified in paragraph 3 of Schedule B1 to the Act as set out at section 3 of this report above.

For the reasons set out in this report, we presently consider that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph 3(1)(a) and 3(1)(b), and consequently the most appropriate objective to pursue in this case is that specified in sub-paragraph 3(1)(c), namely realising property in order to make a distribution to one or more secured or preferential creditors. Furthermore, we consider that pursuing this objective should not unnecessarily harm the interests of the creditors of the Company as a whole.

We are not able to rescue the Company as a going concern as detailed in sub-paragraph 3(1)(a) as we did not receive any offers for the Company’s share capital. This is due to the quantum of creditors including HMRC’s debt.

The objective of sub-paragraph 3(1)(b) is states that the administration achieves a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in Administration). We are unable to satisfy this objective as we anticipate that there will be insufficient asset realisations to enable a distribution to unsecured creditors.

As a result, sub-paragraph 3(1)(c), namely realising property in order to make a distribution to one or more secured or preferential creditors is being pursued. In order that the purpose of the administration may be fully achieved, we propose to remain in office as administrators in order to conclude the following matters:

•           The sale of business and assets to the consortium fronted by Jim O’Toole.

•           Realising the Company’s other assets such as the trade debtors.

•           Our investigations into the Company’s affairs.

Following these events, we propose to finalise distributions to the secured and preferential creditors.

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OTHER INFORMATION TO ASSIST CREDITORS

Report on the conduct of directors

We have a statutory duty to investigate the conduct of the directors and any person we consider to be or have been a shadow or de facto director during the period of three years before the date of our appointment, in relation to their management of the affairs of the Company and the causes of its failure. We are obliged to submit confidential reports to the Department for Business, Energy and Industrial Strategy.

As Administrators of the Company, we are required by best practice guidance to make enquiries of creditors as to whether they wish to raise any concerns regarding the way in which the Company’s business was

conducted prior to the commencement of the administration or wish to bring to our attention any potential recoveries for the estate. If you would like to bring any such issues to our attention, please do so in writing to the address detailed at Section 1 of this report. This request for information is standard practice and does not imply any criticism or cause of action against any person concerned in the management of the Company's affairs.

Investigations carried out to date 

We have undertaken an initial assessment of possible actions in relation to the manner in which the business was conducted prior to the administration of the Company and potential recoveries for the estate in this respect. Our investigations focus on the following matters:

1.           Intercompany debtor and creditor positions.

1.          Wrongful trading 

1.           Land and property transfers entered into by the Company prior to Administration.

          Reviewing the Company’s bank statements to determine the use of funds and whether the Company entered into any preference payments or transactions at undervalue.

Note that we are not stating that there are any valid claims at this stage. However, we have a statutory duty to investigate the Company’s affairs to determine whether there are any claims against the directors or any other party.

Connected party transactions

The Joint Administrators have not sold any Company assets to connected parties.