Rules, Standards and Sanctions
- 18 June 2012
I am neither a lawyer nor a specialist in jurisprudence. These views may provide a basis for ordinary people to properly consider the position of Rangers at this time of uncertainty.
Rules and sanctions come from many sources.
- Key categories of law which affect the conduct of companies are company law, tax law, insolvency law and employment law.
- A company is formed to carry on a business or undertaking
- A company is the persona which acts by contract and otherwise to operate the business
- A company is run by directors. Directors can be "natural persons" or corporate entities. In either case, directors have an individual “persona”.
- Directors are appointed by shareholders and are accountable to shareholders for the conduct and performance of the business whilst the company is a going concern.
- Each director is responsible for ensuring that they have the information necessary to understand the affairs of the company at all times. It is not an excuse or a defence to allegations of misconduct to say that information was not available or withheld
- When the company becomes or is about to become insolvent, the duty of the directors shifts from the duty to shareholders to become a duty to protect the interests of creditors
- The company incurs sanctions and penalties if it fails to abide by company law.
- The directors incur personal sanctions and penalties, including disqualification as a director for a period of up to fifteen years, for not ensuring the company abides by company law
- The directors act within the powers laid down by the company's constitution, which conforms to the requirements of company law. The company's constitution is in the form of its Memorandum of Association (setting its objects) and its Articles of Association (governing the rights of shareholders, powers of directors including the power to borrow, and the like
- If directors act outside of these powers, the acts can be challenged
- A company becomes insolvent when it fails one or both of two tests. One is when it cannot pay its debts as they fall due - the "cash flow" test. The second is when its total liabilities exceed its total assets – the “balance sheet” test.
- A company trades when insolvent from the point where "the directors knew or ought to have concluded" that there was no prospect of avoiding insolvent liquidation.
- If a company trades whilst insolvent, under company law individual directors may be compelled to contribute to the deficit of assets to the extent that the deficit became worse in the period of trading whilst insolvent
- Under tax law, directors can be compelled to contribute personally to the extent to which National Insurance contributions have not been paid over to HMRC.
The Deloitte website sets out clearly the standard of a director’s conduct as follows.
“Directors of all types of companies are required to meet the same standards of conduct and behaviour as defined in the Act.
A person, acting in the capacity of director, must exercise his/her powers and perform his/her functions:
- In good faith and for a proper purpose
- In the best interest of the company, and
- With the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that director”
Thus it is fair to say
- Directors are individually and collectively responsible for ensuring that a company abides by company law
- The company is responsible for the consequences of its actions
- The business has no persona; its affairs are conducted by the company whose affairs are in turn conducted by the directors. By definition, a business cannot be held to account for standards of conduct of the directors or of the company, which in turn is under the control of the directors
Because these distinctions are not clear within the rules of football's governing bodies or within the minds of those applying the rules, there is lots of confusion about what is appropriate.
WHAT PURPOSES DO SANCTIONS SERVE?
Morally and philosophically, the objectives of a system of punishment should be
- To deliver retribution proportionate to the seriousness of the crime
- To deter the offender and others from offending,
- To deprive the offender of the benefits of having offended
- To deprive others of the benefits of the offense
- To rehabilitate the offender
- To provide recompense to the victim
HOW DOES THIS AFFECT THE RANGERS SITUATION?
Arguably, only retribution has been under public discussion. Notably, the SFA Tribunal applied maximum punishments to subjectively judged offences and attempted to step outside of the SFA rule book to increase punishment. The SPL applied a ten-point penalty, no small penalty, which Doncaster as CEO of SPL in a recent BBC interview said is “insignificant”. The clamour for relegation, regardless of policing and other practicalities, is fierce in certain quarters. What then is just and fair?
- The directors of Rangers who permitted the Club to fail in its obligations must take responsibility for their actions and suffer what penalties, under whatever law, are appropriate.
- The company must do likewise
- These are the proper responsibility of Mr Cohen as Liquidator.
But what of the Club? Here, Rangers fans may dislike some conclusions, but as they follow logically from the analysis above, here goes.
- The Club had no legal persona. The only sanctions which can apply to the Club are sporting sanctions. The Club cannot be punished for the actions of its directors or the company as controlled by the directors
- Sanctions ought to be those applicable at the date of misconduct under sporting regulations. The SPL has levied its penalty.
Next, we see the worst impact of the failure to understand separateness of Club from company.
- The share held by the company is not extinguished upon the insolvency event of the Oldco and yet the Newco cannot be entitled to it without the consent of the SPL. If the SPL rules provided for suspension of voting rights from the date of entry into insolvency proceedings until the date of emerging from it, and for cancellation of the share at the end of the season in which the insolvency event occurred, the question would become one of allocating a new share to the Newco or to another company operating a football club which would then enter the SPL.
- Similarly, no provision exists for demotion from the SPL to the SFL except by relegation according to league position at the end of the season. If such a provision were introduced, and no club could enter the SPL without having spent three consecutive seasons in the SFL, that problem too would be resolved, neatly fitting with ineligibility to enter UEFA competition. Then a Club could resume life in any of the three divisions on a civilly and socially practicable basis.
- The SFA Tribunal has already accepted that suspension or expulsion would be too severe.Perhaps a ban on player registrations to the extent that net registrations were zero would be fair; no-one in before someone is out, in other words.
- This is the unpalatable part. Fans will say they are innocent but are being punished.In fact, this is no more than depriving the fans of the benefits of past offences and is therefore just and fair
In summary it is fair to conclude that
- the company and its directors will be dealt with under company , tax , insolvency and other law
- The Club ought to be dealt with under sporting regulations bearing in mind that
- Retribution through massive reputational damage has already been inflicted
- Retribution through substantial competitive disadvantage was suffered from the SPL points sanction, triggering as it did a collapse in sporting performance mid-season
- Deprival of any benefit of wrongdoingby the companydue tofinancial damage,through inability to compete in European competition for a period of three years
- Deprival of any benefitobtained by the fans through the offense,has taken place because of (1) and (3) above
- Rehabilitation through the sweeping away of the former company and the directors who controlled the company
- Recompense to the victims will be achieved through continuation of the Club and the undoubtedly beneficial impact it brings to the Scottish football industry.
Over to you, Mr Regan and Mr Doncaster.
Professor David Kinnon is a chartered accountant and licensed insolvency practitioner current based in the British Virgin Islands. Views expressed are purely personal