ROOSEVELT POSITIONING PAPER STRICTLY PRIVATE AND CONFIDENTIAL The matters discussed in this document are based on the

e meeting held with Iain Young on Monday 19th September. That meeting was wide-ranging and no review has taken place of any legal documentation. The document should therefore be read in that context. The matters discussed in this document do not constitute formal legal advice and at this stage Morton Fraser LLP has not been formally appointed to advise Roosevelt. If Morton Fraser LLP is appointed to advise Roosevelt then this paper can be refined and formally resubmitted. 1. Background Roosevelt Group owns and operates a football club in Scotland and is subject to the regulatory power of the SFA and the SPL. The ownership is structured with a holding company and an operating subsidiary. The holding company was the vehicle for the acquisition of the operating company. All of the clubs operations are conducted through, and all of its assets are owned by, the operating company. The principal assets are the club stadium and training grounds. The holding company owns 85% of the shares in the operating company. The balance of the shares is owned as to 10% by one individual and as to the balance by a large number of small shareholders. The operating companys only secured creditor is the holding company. The holding company holds security in respect of the indebtedness which includes a pre-Enterprise Act floating charge. This means that a receiver could be appointed by the holding company if the indebtedness was called in and could not be repaid. HMRC has launched proceedings against the operating company in respect of alleged unpaid tax (the Tax Claim). The potential liability, if HMRC is successful, could be as much as 40M. The operating company has taken its own advice in relation to the Tax Claim and is defending the Tax Claim. The Tax Claim will be heard in November 2011. HMRC has indicated that if it fails at first instance then it intends to appeal the decision. If HMRC is successful in the Tax Claim then it is almost inevitable that the operating company would be unable to meet the Tax Claim in full and therefore would become insolvent. Roosevelts preferred option (Option A) would be to: hive up the business and assets of the operating company to the holding company make good any asset deficit in the operating company by either subscribing for equity or lending money to the operating company by way of convertible debt then liquidate the operating company by way of a mem bers voluntary liquidation, ensuring that all actual creditors have been paid out in full,

on the basis that it would constitute a solvent restructuring of the business The alternative (Option B) would be to place the operating company in receivership o r administration and then acquire most of the business and assets of the operating company via a pre-pack.

2.

Timeline Timing is critical (particularly in respect of Option A). For there to be a solvent restructuring then it would have to take place prior to the hearing of the Tax Claim in November 2011.

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3.

Issues and Risks a. SFA/SPL Under SPL rules, if a club suffers an Insolvency Event then, broadly speaking, it is docked 10 points. Care would need to be taken (and confidential discussions would need to take place in advance with the SFA and the SPL) to ensure that Option A would not be construed as an Insolvency Event. Option B would almost certainly be construed as an Insolvency Event. Under the SFA Articles there is much wider discretion on the part of the SFA Board to impose such sanctions as it sees appropriate upon an Insolvency Event occurring. It would, however, be difficult to envisage circumstances in which the SFA imposed a greater penalty than the SPL. A club participating in the SPL must also hold one share in the SPL. Provisions relating to transfer are dealt with in the Articles of Association of the SPL. Whilst such provisions have not been reviewed in detail at this stage, they will need to be reviewed and any necessary approvals obtained from the SPL before going ahead with either Option A or Option B. The SFA Articles of Association also have a membership requirement and permit that membership to be transferred intra-group as part of a solvent restructuring. Again the position will need to be reviewed, explained and any necessary approvals obtained.

b. UEFA In terms of participation in UEFA organised competitions, UEFA effectively devolves responsibility to the national regulatory authorities. c. Player Transfers The SPL rules impose an embargo on clubs who have suffered an Insolvency Event which prevents them from signing new players whilst the Insolvency Event continues or subsists. d. HMRC It used to be the case that HMRC was treated as a preferred creditor, but since the enactment of the Enterprise Act that has ceased to be the case. Furthermore, football as an industry is treated as a special case and so-called football related debts take priority over any sums owed to HMRC. This concept was recently challenged by HMRC following the occurrence of an Insolvency Event in respect of Portsmouth FC, but the English courts upheld the principle, and there is no reason to believe that a Scottish court would reach a different conclusion. e. Challengeable Transactions If HMRC is successful in the Tax Claim and Option A has been implemented it is likely that the transactions which constituted Option A will be challenged by HMRC on the basis that it constitutes a gratuitous alienation; in other words at the time the transaction was undertaken, the company was insolvent or became so as a result of the transaction and/or the company did not receive adequate consideration for its assets. For these purposes, the definition of insolvent is wider, and in both cases, the onus of proving that the transaction did not fall foul of these provisions falls on the company, which is a notoriously difficult thing to do. If HMRC is successful in challenging the transactions then either the transactions constituting Option A will be reversed or the holding company could be required to make good the loss sustained by the operating company and Option B will need to be considered further.

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f.

Change of Control/No Assignation provisions Under both Option A and Option B, if there is a transfer of the business and assets out of the operating company it will be important to ensure that any key contracts with suppliers do not contain any provisions whereby they either terminate automatically on a change of control or where the assignation of such contracts is either prohibited or requires the consent of the other party to the contract. Frequently there is an exception for a solvent reconstruction, which may be relevant in the case of Option A. The opportunity may also, however, arise either to leave behind any contracts which Roosevelt wishes to discontinue or to renegotiate their terms. Care also needs to be taken that no such contracts have contractual penalties in the event of change of control or purported assignation in breach of their terms.

g. Employees Under both Option A and Option B the transfer of the business and assets will constitute a transaction to which the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will apply and therefore the contracts of employment will be deemed to have continued without interruption on exactly the same terms. There may also be the opportunity to terminate certain employees as part of the process, but the ability to do this and the consequences of so doing should be the subject of specialist legal advice. h. Publicity As discussed at our meeting there will inevitably be massive media interest and publicity in the affairs of Roosevelt, as well as a strong chance of leakage of confidential information. It may therefore be pragmatic to try and preserve confidentiality (to the extent possible) by dealing with Insolvency Practitioners based in London rather than in Scotland. 4. Receivership v Administration Because the security package held by the holding company predates the Enterprise Act then, subject to a review of the terms of the security documents, it should be possible for the holding company to appoint either a receiver or an administrator should Option B become relevant. This means that the holding companys choice of insolvency practitioner will ove rsee the transactions which constitute Option B. If, however, receivership is chosen then Roosevelt should be aware that, unlike in an administration, the appointment of a receiver does not prevent creditors beginning or continuing any legal action against the company (the statutory moratorium), including petitioning for its liquidation, while the company is in receivership. The advantages of receivership are: It is a quicker and easier procedure enabling a rapid response to a perceived crisis in the companys business and does not involve the court It is advantageous to a secured creditor (the holding company) as the receivers primary duty is to the secured creditor that appoints him or her The business may be transferred in whole or in part as a going concern along with its employees

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The disadvantages of a receivership are: It does not involve a statutory moratorium so actions may still be brought against the operating company It is not a collective procedure and the duties of the receiver are owed to the floating charge holder rather than creditors as a whole. This is generally to the detriment of unsecured creditors, particularly small businesses.

5.

Option A pros and cons The biggest difficulty with Option A relates to that part of it which involves placing the operating company in members voluntary liquidation. To do so the directors of the operating company will need to swear a so-called Declaration of Solvency. This declaration will detail the companys assets and liabilities as eviden ce of its solvency and state the belief of the directors that the company will be able to repay creditors together with statutory interest within a maximum of 12 months from the date the declaration is sworn. The directors must, however, be absolutely certain of the solvency of the company taking into account both prospective and contingent liabilities. Ultimately if it is established that the company is in fact insolvent, then the liquidation will be converted to an insolvent Creditors Voluntary Liquidation, and the directors may by virtue of having sworn a Declaration of Solvency become liable to imprisonment, a fine or both. Given the severity of the sanctions you would need to be very comfortable that the Tax Claim was unlikely to succeed. Subject to that, however, the likelihood is that there will be no sanctions imposed on Roosevelt by the SFA or the SPL.

6.

Option B pros and cons The biggest drawback about Option B is that there is little chance of eluding the imposition of sanctions by the SPL and/or the SFA. In the best case scenario you should be considering a 10 point deduction. If Option B is pursued then the process, once started, should be fairly quick and the amount owed to the holding company would be satisfied in full as would all football related creditors before HMRC was able to recover any part of the Tax Claim.

7.

Conclusion We have not yet seen all relevant documentation, nor examined the SFA and SPL Rules and Articles in full detail yet. Irrespective of that our initial view is that even if Option A is pursued then you would need to be extremely comfortable about a favourable outcome to the Tax Claim before you would be in a position to swear the Statutory Declaration. In all the circumstances we would therefore recommend that Option B be pursued in conjunction with a well regarded insolvency practitioner, and that it be implemented as soon as possible so that as little blame as possible is aimed at the present owners (as opposed to the previous regime) and in any event prior to the hearing of the Tax Claim.

Morton Fraser LLP 21st September 2011

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