Insolvent since 2018: Melbourne Rebels’ rescue plan hinges on legal fight

Rugby Australia has accused Melbourne Rebels’ directors of misusing tax funds forwarded by the national body amid revelations the Super Rugby club had been trading while insolvent from at least 2018.

A statement issued by Rugby Australia on Thursday followed the release of the administrator’s report, which supported a proposed rescue deal put forward by the club’s directors to stave off liquidation.

Filipo Daugunu of the Rebels celebrates a try during the round two Super Rugby Pacific match.Credit: Rugby Australia

The rescue deal paves the way for the directors to sue Rugby Australia if the governing body refuses to hand back the team’s licence.

If creditors – owed a total $23 million – vote against the proposal, Rebels directors could face personal liability of $16.8 million for the club’s extensive losses, amid revelations the team had been trading while insolvent from at least 2018.

The administrator support for the deal was outlined in an administration report. It was deemed the proposal, known as a deed of company arrangement, would provide creditors with a better and quicker return than they would receive if the company entered liquidation.

Rugby Australia issued a statement on Thursday claiming it had not made any decisions on whether it would support the proposal, but fired off a scathing response to the directors’ claims made against the governing body throughout the 54-page report.

“RA has complied with all its contractual obligations. This includes the payment of all funding ... and also paying all applicable PAYG amounts to [the Rebels], who misused these funds and did not pay them to the ATO, which was the intended purpose,” the statement read.

Rebels director Georgia Widdup disputed the claims that the club had misused the funds, telling this masthead that: “RA did our payroll, and on all occasions they knew the amounts they were paying us to pay the players were insufficient.”

The PAYG amounts are related to the legal claim the directors are pursuing, alleging the governing body owes $2 million incurred by the Rebels while players were on national duties.

Rugby Australia claimed the directors did not inform the peak body about the director penalty notices issued to them by the Tax Office in December.

Why the Rebels entered into administration

Source: PwC administration report into the Melbourne Rebels

PwC administrator Stephen Longley found the club’s disastrous financial state is likely to result of: 

• “A history of trading losses, exacerbated since 2020 by the negative impact on revenue from the COVID-19 pandemic and reduced funding from RA since that time;
• Insufficient revenue being generated from sources other than RA, such as membership, sponsorship and game-day revenue;
• An increasing expense base, including rising wage costs;
• Lack of readily available alternative funding sources to meet the material net asset shortfall and trading losses; and
• Failure to manage its statutory and lease liabilities.”

“RA maintains that the true financial state of [the Rebels] has not been disclosed to RA for some time – it was only once the company defaulted on its payment plan with the ATO last December that RA was made aware of the full state of the [Rebels] situation.

“Despite multiple requests from RA, the [Rebels] directors have failed to provide any viable proposal or business plan regarding the future of the Melbourne Rebels.”

Widdup denied Rugby Australia was unaware of its financial state, claiming: “On all occasions, we kept them informed on the financial state of the Rebels. The participation deed required us to keep them up to date.”

She added they had on “so many occasions” attempted to reach out to RA. “We haven’t been able to speak to them directly, it’s been through their lawyer,” she said.

Earlier on Thursday, Widdup said Rugby Australia had refused to discuss their proposal, despite invitations, and that their legal action against the peak body was “well advanced”.

“As the administrator’s report makes clear, the Melbourne Rebels were heavily reliant on distributions from Rugby Australia. Unfortunately, RA made a range of representations to us over many years regarding funding that it would provide. We relied on these representations, but RA did not honour these commitments,” Widdup said.

Rugby Australia disputed this, claiming that “RA met with the former directors at their request in March to discuss a potential resolution. Despite RA’s request for a proposal, no fully formed proposal was provided by the group.”

The rescue deal

The proposal outlined in the administrator’s report was put forward by the Melbourne Rebels directors and the group behind the recently announced private equity-backed consortium led by business heavyweight Leigh Clifford.

Will the Melbourne Rebels survive in Super Rugby?Credit: Getty Images

The deal is dependent on Rugby Australia handing back the licence as well as the Australian Taxation Office releasing the directors from their personal liability over the club’s $11.5 million in tax debts.

The consortium announced in April that it was closing in on raising between $20 million and $30 million from private equity to invest in the Rebels over a number of years.

Administrators agreed to accept the proposal on Thursday, given its promises are a return of 100¢ in the dollar to employees, and for unsecured creditors to receive between 15¢ and 30¢ in the dollar.

Creditors will vote at the next meeting on May 3 on whether to support the deal or wind up the company.

Rugby Australia had previously outlined its support for the club to enter liquidation.

The plan to salvage the club also includes the Rebels directors funding litigation against Rugby Australia to regain the club’s licence, which it was stripped of after the club’s entry into administration.

Potential $16.8 million cost for insolvency claim

The Rebels’ eight directors could be on the hook for $16.8 million if the club enters liquidation after the report, authored by PwC administrator Stephen Longley, found that the Rebels had been insolvent since 2018.

“I consider it reasonable considering the date of insolvency is over five years prior to my appointment to assume that the majority, if not all, of the debt that remains unpaid would have been incurred after the date of insolvency. Accordingly, an insolvent trading claim against the directors could exceed $16.8m,” Longley wrote.

A fan hugs the Melbourne Rebels mascot.Credit: Getty Images

This claim could only be pursued by a liquidator or an individual creditor who has the permission of the liquidator.

He also said in his report that his “preliminary investigations have not identified any offences committed by the directors other than failing to prevent the company from incurring debts whilst insolvent”.

Longley said he needed further time to assess the merit of all the directors’ claims against RA, but said he had found that there was no participation agreement for the Rebels to field a team for the 2024 or 2025 seasons after its agreement expired in December last year.

“RA has informed me that its position is that the Company did not comply with all its obligations under the Participation Deed and accordingly the Participation Deed was not extended,” Longley wrote.

However, he noted the directors have argued they could have their licence reinstated as they lost it under “unconscionable circumstances”.

The administrator included in the report a table that showed that even if the Rebels had received the amount from RA the directors claim it was owed in 2021, 2022 and 2023, the company would have still been trading while insolvent.

RA chairman Daniel Herbert told the Inside Line podcast (owned by Nine, which also owns this masthead) on Tuesday they were waiting to receive the report before any decision would be made.

“We have very little communication with the former directors. We keep hearing things here and there through the press, but when we have had meetings there hasn’t been a lot of detail shared. We will sit and wait for that report,” Herbert said.

He added the sport was considering other possibilities for the Super Rugby competition if the Rebels did not return after this season.

According to the report, in December 2021, the Rebels provided RA with its financial accounts and working capital. Directors also expected new funding to be provided by RA following a meeting in October last year.

“[The Rebels were] heavily reliant on RA to provide financial contributions to generate sufficient funds to keep trading,” Longley wrote in the report.

Between the 2021-23 financial years, funding from RA accounted for 60 per cent, 63 per cent, and 52 per cent of the club’s income, respectively.

News, results and expert analysis from the weekend of sport sent every Monday. Sign up for our Sport newsletter.