The Melbourne Rebels may have traded while insolvent for more than five years, giving rise to potential breach of director duty claims for the $16.9 million in debts incurred since then, according to an explosive report released by the club’s administrators.

In his long-awaited report to Rebels creditors owed a total of $23.1 million, administrator Stephen Longley concludes: “My preliminary view is that the Company may have traded whilst insolvent from 31 December 2018, and that it is likely that all debts that remain unpaid were incurred which could result in an insolvent trading claim exceeding $16.8m.”

The 111-page report released on Wednesday, a copy of which has been obtained by The Roar, reveals that in the last three calendar years, the Victorian Super Rugby club incurred operating losses of $5 million (2021), $5.3 million (2022) and $5.7 million (2023). During those three years, player and employee salaries alone exceeded the Rebels’ income by a collective total of about $4 million.

The administrator noted in his report those operating losses far outweighed the claims the Rebels board had made against Rugby Australia over those three years for alleged underpayments, stating: “Even if the claims of underfunding totalling $7.6 million the Directors believe the Company has against RA … are added back for this period, the Company still would have reported accumulated losses totalling $8.5 million over the last three years.”

However, rather than placing the Rebels into liquidation to pursue those insolvent trading claims against directors and to pursue RA in the courts, the administrator has instead recommended creditors accept a settlement proposal put forward by an “Investor Group” said to involve “the directors, Leigh Clifford AC, and a group of high net worth individuals.”

“I am of the view that the likely return to creditors under the proposed Deed will provide a materially better outcome for creditors than a winding up,” Longley stated.

The report was welcomed by the private consortium which said in a statement: “The Administrator strongly rejected Rugby Australia’s threats to liquidate the Melbourne Rebels which would have dealt a massive blow to Rugby’s future in Victoria.”

The group’s spokeswoman Georgia Widdup said the Rebels Directors have “twice put offers to Rugby Australia to resolve this and received absolutely no engagement from them.

“We have offered to meet with RA to take them through our proposal in detail, they chose not to take us up on that offer.”

According to the administrator, that settlement offer – known as a Deed of Company Arrangement (DOCA) – would deliver eligible unsecured creditors a return of between 15c and 30c in the dollar. That offer includes full payment to players and other employees collectively owed $1.3 million, but nothing to directors and other related-party creditors claiming to be owed $6.2 million. This is compared to a return of just 9c in the dollar to creditors under a “likely outcome” liquidation scenario.

Longley said another factor influencing his recommendation for creditors to accept the DOCA was that the directors had advised him they intended to “vigorously defend any claim for insolvent trading brought against them” by a liquidator and had “provided details of alleged claims against RA that may form part of their defence against any allegations of trading whilst insolvent.”

Likewise, the administrator said RA had advised “they intend to defend any claims issued against them.”

“Legal proceedings can be long and drawn out,” Longley cautioned. “Litigation carries with it the risk of an uncertain outcome and can be expensive. Accordingly, there is a genuine risk that the recovery action for insolvent trading claims and the RA claims will not be successful.

“An appointed liquidator will be unfunded. Accordingly, a liquidator would require litigation funding in order to pursue the insolvent trading claim and RA claims.”

What’s more, if creditors accepted the DOCA proposal put forward by the directors, the “Investor Group” would provide funding to pursue the $8.5 million in legal claims against RA, thus potentially generating an additional return.

“Litigation funders generally require a significant share of the proceeds of any judgement as a condition of funding the litigation. In the Deed scenario, the Deed Proponents will provide funding to pursue the RA claims without the requirement to pay a funding premium to litigation funders in event that the deed administrators consider there is a commercial benefit in pursuing these claims.”

The DOCA settlement offer put forward by the directors to prevent the club going into liquidation comes with two big catches – the first with major ramifications for the RA board as it contemplates Monday’s annual general meeting which looms as something of an acid test for the future of Australian rugby. That condition is that RA confirms in writing that the Rebels’ so-called participation rights to continue playing in Super Rugby continue for a further two years.

In his report, the administrator noted “the Director’s position is that the Company either continued to have the right to field a team under the previous Participation Agreement or has a legal basis to have its licence reinstated as they allege the Company lost its licence in unconscionable circumstances.”

“The Participation Agreement expired on 31 December 2023 but contained terms that RA was to extend the Participation Agreement by 2 years if the Company had (amongst other things) complied with all its obligations under the Participation Deed. 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. The Directors do not agree with this position.”

During that two-year period, the Clifford-led investor group would “make available to the company initial funding (together with a binding commitment to provide additional funding) sufficient to allow the Melbourne Rebels Rugby Union to operate in the ordinary course business.”

The second condition was that the Australian Taxation Office agree to release the Rebels directors from personal director penalty notices totalling $7.8 million issued in November 2023.

Meanwhile, apart from the potential legal claims against the directors and RA, Longley noted in his report that a liquidator could pursue addition legal claims to recover $671,171 in so-called “unfair preference payments” made to four creditors in the six months prior to his appointment in January 2024 and another $239,498 in “unreasonable director related transactions.”

“These transactions would be further investigated in the event that a Liquidator is appointed. Creditors should note than in order for a payment to be preferential in nature, a liquidator must prove, amongst other things, that a company was insolvent at the time the payment was made. I do not consider this would be an issue for these claims and I consider that the prospects of recovery would be high.”

In his summary, the administrator stated the club’s financial failure appeared to be the 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.

It went on to state the directors’ explanation for the Rebels’ financial difficulties were:

That the Company was at all times effectively controlled by RA as a participating club in the Super Rugby Participation Agreement

Shortfall of funding providing provided by RA; and

Reliance on RA to fund the Company’s operations and part payment of wages and salaries of players that were jointly employed by RA.

The administrator’s independent opinion of the same included:

A history of trading losses, exacerbated since 2020 by the negative impact on revenue as a result of the COVID-19 pandemic. This includes the reduction in annual funding distributions by RALack of readily available alternative funding sourcesExcessive cost structure compared to the underlying revenue base, including employee costs and players wages; andInsufficient revenue being generated from non-RA sources, including membership, sponsorship, and game day receipts to cover increasing costs, including statutory and lease liabilities.