Directors of limited companies have a number of duties, their primary duty of course, being to look after the interests of the shareholders (members) through the wellbeing (promote the success of) of the company. However additional duties apply also. Under the Companies Act 2006 those duties include to exercise independent judgement, to exercise reasonable care, skill and diligence and to avoid conflicts of interest.

In the case of Everton Football Club Company Limited, our directors comprise of Farhad Moshiri, Colin Chong and John Spellman.

The requirements of the Companies Act 2006 cannot be viewed in isolation however. The fiduciary or equitable duties arising from previous case law remain relevant, as do the duties within other Acts. One such Act is the Insolvency Act 1986. Contained within that Act, amongst other duties, is the issue of what to do around insolvency or a reasonable prospect of insolvency.

Insolvency occurs when a company doesn’t have the cash to pay its bills on time (cashflow insolvency) or when its liabilities (what it owes) exceed its assets (what it owns) – balance sheet insolvency. An insolvency event can occur suddenly (for example when a major debtor can no longer pay its bills, or funders/lenders/banks decide to cease supporting a company) or more gradually over time as a company’s financial position deteriorates to the point it can no longer meet its obligations.

Directors have a duty to act at this point or beforehand, if there’s there’s no reasonable prospect of meeting current and future obligations. Their duties turn to protecting the interests of their creditors (i.e. the people they owe money to).

Going Concern?

The question for the Everton board of directors is when do they recognise the latter point in particular? It is not enough to point at the last set of audited accounts and point to the “going concern basis”.

The Everton Accounts ending 30 June 2023 were signed off on 14 January 2024 when directors firstly recognised “a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern”.  This was qualified with “the board are confident that funding will be secured or refinanced and that they will be able to achieve the levels of revenue and savings to allow the Group to continue in operational existence for a period of 12 months…” It is this belief that permitted the preparation of the Accounts on a going concern basis”.

The question for the board and individual directors to answer is this still the case?

Acquisition by 777 Partners

As discussed in detail here, the Premier League placed four major conditions on the proposed new purchasers of Everton, 777 Partners to successfully conclude their acquisition. All of the conditions have to met. They are (as reported by Josimar):

(i) Conversion of working capital  loans by 777 Partners totalling just over £150 million (now circa £180 million) into equity,

(ii) Funds into an escrow account to keep the club going for the rest of the season,

(iii) Proof of funding to complete the new stadium, and repayment of MSP’s £158 million stadium loan by mid (15th) April.

(iv) Payment to Moshiri : £64 million up front, rising potentially as high as £130 million if a series of milestones are met.

All of the above minimally require an immediate cash injection of £340 – 360 million (assuming £80-100 million to Laing O’Rourke) by 777 Partners to effect the takeover. If the conversion of loans to equity require refinancing elsewhere within the 777 Partnership then the cash requirement is likely and reasonably calculated to be over £500 million.

Even such an amount only gets the club to the end of the season and does not  factor in the potential costs of relegation.

777 Partners (as initially reported by Sky News) have requested a stay until the end of May to repay MSP. Thus the confidence of the directors is totally reliant upon (i) MSP’s willingness to extend (ii) the Premier League’s acceptance of the extension and (iii) most importantly, 777’s ability to raise a minimum of £340 – 360 million in a little over 6 weeks. This having failed to raise the funding required at any time in the last 7 months other than the working capital loans, borrowed from third parties, to keep Everton afloat. Those loans are believed to be highly expensive with interest costs believed to be in the mid-teens per cent. They additionally may have to be repaid in order for 777 to convert to equity (should they meet the other conditions).

MSP are the key and most immediate participants in this situation. Through Blythe Capital they hold security over 50% + 1 of Everton’s share capital (MSP – Blue Heaven Holdings charge document) and additionally security over the entire capital of Everton Stadium Development (Blythe ESDL 1) and (Blythe ESDL 2).

It should be remembered that MSP are creditors and the responsibility of MSP’s managing partners (the decision makers within MSP) is to their limited partners (investors) not Everton Football  Club per se.

MSP have three choices (i) allow 777 Partners more time (ii) exercise the acquisition of 50%+1 of Everton’s shares, becoming Everton’s majority holder or (iii) take control of the lease, land and stadium at Bramley-Moore Dock).

Each is fraught with risk and additional costs. Each has potential knock-on consequences for each party

Option (i) is a leap of faith – do they believe 777 will raise the required funds in the next 6/7 weeks given all that’s gone before, and do they trust the Everton board to keep the club solvent until such a time as MSP are repaid. There must be significant doubts as to either outcome. The list of cash and capital calls in the near term are significant – working capital, stadium repayment and contingency funding for potential relegation. 777 have demonstrated no ability to raise the capital required to purchase Everton and the Everton Board is (in my opinion) failing in its duties to members and creditors.

Option (ii) gives MSP control of Everton but then requires MSP to solve Everton’s immediate cash and capital demands. Those demands include Everton’s working capital requirements in the short term, any obligation to other creditors arising from the change of control, the remaining stadium repayments, and the contingency funding required for potential relegation.

It would require MSP to commit additional funding or have the support of alternative investors immediately available.

Option (iii) provides a stadium worth considerably more than the debt owed to MSP but (a) the stadium is not complete and requires additional funding and perhaps more importantly (b) the stadium’s value is entirely tied up with Everton’s future solvency and capacity to play there in the future and in which League or division.

Acquisition of the stadium alone, does not solve Everton’s liquidity problems and may arguably push Everton Football Club Company Limited into balance sheet insolvency, as without the stadium its liabilities are surely greater than its assets

Duty to other creditors

Everton’s directors have an equal duty to all other creditors which include Rights and Media Funding, remaining Metro Bank debt, football creditors, other trade creditors, staff and HMRC. They have a responsibility to 777 Partners as creditors and indeed the Isle of Man Company Bluesky Capital – the provider of the shareholder loans. Everton’s accounts have always recognised Moshiri’s control of Bluesky Capital but not his 100% ownership – an important distinction when compared to Blue Heaven Holdings, of which Farhad Moshiri is reported the sole beneficiary. Even if Bluesky Capital are prepared to write off their debt, until such a time as this occurs, the Everton Board has an equal duty to them as other creditors. (This should not be confused with the fact that the shareholder loans are unsecured and with no contractually agreed repayment date).

The role of Everton’s directors

I’ve talked endlessly about the role of Everton’s directors for many years. Never has the need for them to act responsibly been greater than it is now. Such is our plight that their legal duties must overcome any other interests or beliefs they may have.

Their recklessness in managing the running of a football club has been laid bare in the Commission hearings (regardless of how one feels about the Premier League, PSR, the Commission’s  decisions etc, this is irrefutable). Their inability to secure long term, sustainable funding for the stadium incomprehensible. To be fair, Colin Chong and John Spellman are recent appointees, but nevertheless carry the full responsibilities as directors.

The decision of Moshiri to agree the sale of his majority stake to 777 Partners and his unwillingness to seek alternatives is beyond comprehension.

He and they’ve got us to this point. A point in which realistically, despite there having been alternatives, the only realistic outcome is insolvency. Whilst I’ve stated previously (and stick by) the belief that the acquisition by 777 Partners was the worst of all outcomes, the second worst, administration is seemingly inescapable.

I don’t believe the directors can ignore this most likely outcome any longer.

It is the most desperate of times.