Hearts will begin next season with at least a 15-point penalty after the company that owns the club, Heart of Midlothian Football Club plc, applied to the Court of Session in Edinburgh to voluntarily put itself into administration.
Once that request is formally granted, it is expected that the accountancy firm KPMG will be appointed.
While yesterday's move by the HMFC plc directors was unexpected, it was inevitable that the company would go into administration in the near future. A dramatic fall in season- ticket sales contributed to a severe cashflow problem that resulted in the wage bill not being paid in full last Friday and only half of a £104,000 tax bill being met. The latter had prompted Her Majesty's Revenue and Customs to threaten a winding up order.
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Hearts had hoped that an uplift in season-ticket sales, or even advance selling tickets for individual matches once the fixtures are published, would raise enough money to meet their commitments. However, the VAT bill on the season tickets already sold is due at the end of the month – thought to be a seven figure sum – while another PAYE bill is also due at the same time.
Yesterday's move by the directors is an admission that the cashflow problems cannot be solved, although it also brings the situation to a head. The fate of club is complicated by the fact one shareholder, Ukio Bankas, who has a £15m debt secured against the stadium, is in administration, while the other major shareholder, UBIG, which is owed £10m, is on the verge of insolvency. By placing themselves in administration, the HMFC plc directors have enabled the sale process to be speeded up.
"Tactically, they want to sell the club. UBIG's assets, including the 50% shareholding, are frozen as part of Ukio's administration, so anyone who wants to buy the club faces it being very difficult, taking a long time and there being many legal ramifications in Lithuania," said Neil Patey, the football finance expert with the accountancy firm Ernst and Young.
"A UK administrator can now at least take control of the process and can sell the assets, so it could happen much quicker. In the worst case, it can be an asset sale like Rangers, but if he's lucky the administrator can negotiate with the Ukio Bankas administrator and whoever's controlling the UBIG shareholding and potentially get a CVA agreed. That gives them a clean slate; via a CVA they get rid of all the debt and anything else that might be in the woodwork."
There are reportedly six potential buyers, although the Foundation of Hearts – a coalition of fans groups – is considered to be the most likely to succeed if it can raise the finance. After a meeting at Tynecastle last Friday, Ian Murray, the FoH independent chairman and Edinburgh South Labour MSP, warned administration may be required to allow Hearts to be sold. The group has more than 4000 pledges of financial support from ordinary fans, while business people, including millionaire Ann Budge, back its community ownership aim.
The intention is to lodge a bid by July 4, although FoH are prepared to work in conjunction with other interested parties. They have held preliminary discussions with the Scandinavian consortium that has expressed its interest. Of the other parties, three are North American and one is based in London.
"It was inevitable this was going to happen," said Murray. "We'll be trying to open up communication channels with KPMG as soon as we can. I can assure everyone at the Foundation of Hearts, and every single Hearts fan out there, will be doing all we possibly can to avoid liquidation.
"I can't say how much we've raised so far because that's confidential, but I can see we've got 4200 pledgers and are growing by about 10% a week. If there's no white knight riding to the rescue, then the only bid on the table that could potentially be executed would be that of the Foundation Of Hearts. We'd encourage every Hearts fan who can afford to pledge, as little as £10 a month, to do so."
Once a bid is made, an offer can be presented to the creditors, with 75% needing to vote in favour of a Company Voluntary Arrangement – essentially agreeing to write off a large portion of the money they are owed – to allow HMFC plc to exit administration debt free. Since Ukio Bankas hold 29.9% and UBIG hold 50%, an agreement between three administrators could settle Hearts' fate. Selling the club as a whole rather than separately offloading the two shareholdings is also likely to generate more revenue.
There are potential complications, but the Ukio Bankas administrator is likely to accept the highest bid it can receive, so the CVA offer expected to generate more than the sale of Tynecastle on the open market. UBIG's assets are currently frozen as part of the Ukio Bankas administration process, so any deal would require the assistance of the Lithuanian courts.
"Whatever is raised for the stadium goes to Ukio Bankas's administrator, but he can agree a deal as part of the CVA, which needs the administrator onside," said Patey. "If you can't get a CVA agreed anyway, it doesn't matter and it's an asset sale. Given it's the administrator of Ukio Bankas who got the [UBIG assets] frozen, if he agreed to the CVA I assume he could go to the court and ask for the asset to be unfrozen to facilitate the deal
"[Administration] avoids a slow death. Hearts could sell players to get through to the middle of August but then there's a high likelihood they could still go into administration because of what's happening in Lithuania, but by that stage there are no playing assets left.