Discover the critical financial challenges facing Rovers in our exclusive analysis. Dive into the intriguing details of HMRC's winding-up threat, Venky's compliance struggles with FEMA regulations, and the club's precarious cash flow situation..! 

What does the recent revelation about a HMRC threat of a winding up order mean in practice? 

• • It’s relatively common for suppliers who aren’t being paid on time to use issuing a petition for a winding up order as a “threat of the last resort” to encourage payment of their debt. It’s the legal equivalent of sending round tall men in dark overcoats to knock on the front door!
• • Regarding Rovers, HMRC were apparently using this tactic to focus the minds of local club management in April 2023, as promised payments had not been made – see attached Indian court documentation –

https://dhcappl.nic.in/dhcorderportal/GetOrder.do?ID=595/2023/1687715550500_59349_2023.pdf

• • Football clubs are not immune from this kind of threat – Southend United for instance allegedly hold the record for most winding up petitions...

• • The fact that no further revelations have emerged regarding Rovers since April 2023 means that payments must have been made to HMRC and satisfactory arrangements put in place
• • This isolated incident can be seen as more of a warning shot than a potentially fatal event

Why didn’t Rovers apparently make these payments on time to HMRC? 

• • We know that Rovers rely upon regular cash injections from the Indian parent to fund UK working capital – this extract from the 2022 accounts - the latest available – confirms the arrangements

• • Any shortfall in working capital would need budgets to be reviewed to make sure all bills were paid on time – think of it as if you were made redundant, you might choose to cancel Sky for instance, cancel holiday plans, sell your car...
• • What is also a matter of public record in the document linked above – is that Venky’s fell foul of Indian authorities regarding their Foreign Exchange Management (FEMA) regulations and as a result, were prevented from sending funds freely to meet the cash flow requirements of the club in the UK
• • With money not being received from India as expected, this presumably affected the club’s ability to meet all of its obligations for a period of time

How can funds now be freed up in India?

• • The Indian courts have agreed an exceptions process - an application can be made to submit funds to the UK if the court agrees with the amounts and purpose detailed
• • A successful application was made late last year and that gave the club some breathing space for a few months, but the next application is due later in January
• • The court allowed sufficient funds to be transferred to the UK to “keep the lights on” – covering overheads like salaries, tax, NI, utilities and the like but – and this is crucial – no amounts for capital expenditure
• • This means that no money can presently be sent from India to boost the transfer coffers for new players

What does that mean for the finance team at the club in the UK?

• • It means some very careful and detailed cash flow forecasting, working out what are all the obligations falling due and predicting what income will be received, when and whether it will be sufficient to cover all of them on a timely basis
• • Clearly if there are any issues with the Indian courts sanctioning the next payment at the end of the month, then the UK business will have to somehow fund the shortfall
• • That could mean renegotiating with the club’s debtors to delay payments, cancelling planned spending...&/or raising money by trying to borrow in the UK, perhaps even selling some UK assets or as some call them, players

What if the Indian courts refuse to sanction further payments...or this exception process has to continue in the long term? 

• • We know from the accounts that the club can only survive (on its current cost base) with the benefit of the substantial funding provided by the parent in India – no parent money means some serious actions would be needed in the UK
• • The big unknown at this point is how long this exceptions process is likely to continue. The longer it goes on, the bigger the challenge to fund any capital spending on the playing squad and infrastructure
• • Each window that closes with no ability to invest in the squad means the club is at risk from offers for players that ordinarily would be declined, but might have to be accepted simply in order to bring in cash

What are the chances of the club going into Administration ?

• • Usually, administration comes from one of two sources:-
  1. 1. A secured lender (the bank) is unhappy with growing arrears and under the terms of their mortgage/debenture, appoints an administrator to protect their position by running the club day to day
  2. 2. The directors are concerned about the entity becoming insolvent (unable to meet its debt payments) and they elect to go into voluntary administration in an effort to keep the business going, whilst a work out plan can be implemented, which may involve new ownership
• • Administration is a last chance option prior to closure/liquidation
• • As at the last published accounts of the club dated June 2022, the bank overdraft was secured by a guarantee, rather than a mortgage/debenture so this potentially prevents the bank from placing the club into administration

• • This leaves the directors, who will have to balance the risk of incurring personal liability (if they continue to trade whilst insolvent), with handing over control to an administrator
• • Would Venky’s try to sell/dispose of the club before a voluntary administration? All things are possible – it means they remain in control of the sale process rather than the administrator; but the insolvency laws in the UK mean that directors have to be wary of opening themselves up to legal challenge and potentially personal liability

What would Administration mean for the football club?

• • Usually a points deduction – the timing is determined by the footballing authorities. If a club is already relegated, or highly likely to be when entering administration, the deduction usually applies to the following season
• • The club also has to pay the administrators fees and as Wigan discovered, this can be a substantial amount for as long as the process continues

Should the fans be concerned ?

• • Well...not paying HMRC on time is rarely good. Not being able to send money as & when from India for whatever purpose isn’t especially helpful. Seeing experienced players depart to save money on wages is bound to cause ripples...the judge in India holds all the aces right now...so probably...at least a bit!