Q&A: Hearts in crisis

Hearts face an uncertain future. Last weekend the Scottish Premier League club's lawyers informed the three directors of their legal duty to go to court if they knew their business could not continue to trade in a solvent manner.

The club have since lodged papers with the Court of Session in Edinburgh to place them in administration, with £25m owed to Lithuanian businesses connected to owner Vladimir Romanov and with payments due to Her Majesty's Revenue and Customs and Hearts staff.

Here, BBC Sport Scotland tries to clarify what's going on at the Tynecastle club.

Why have Hearts applied to enter administration?

Put simply, Hearts cannot pay their bills. Their debts to parent company Ukio Banko Investicine Grupe (UBIG) and Ukio Bankas total £10m and £15m respectively. Ukio Bankas hold the club's Tynecastle Stadium as security over that debt.

UBIG itself is claiming insolvency in Lithuania. Its assets have been frozen.

Ukio Bankas has been declared bankrupt. Last week it lost an appeal against being liquidated and its business is now being controlled by Lithuanian administrator UAB Valnetas.
Hearts in financial trouble

Feb 2005 - Vladimir Romanov takes a controlling stake at Tynecastle
Season 2005/06 - Hearts finish second in the SPL
Hearts win Scottish Cup in 2006 & 2012
Wage delays become a regular feature from 2011 on
Nov 2011 - Romanov seeks a buyer for club, saying he has has invested more than £50m
October 2012 - SPL imposes registration ban for repeated late payment of salaries
May 2013 - Ukio Bankas declared bankrupt
May 2013 - UBIG unable to meet its liabilities
May 2013 - Hearts avoid points deduction as SPL rules UBIG has not suffered an insolvency event
June 2013 - Hearts to enter administration

Romanov, who was majority shareholder of UBIG, told BBC Scotland in April that the collapse of his bank had led to him "losing" all his assets.

Her Majesty's Revenue and Customs recently threatened a winding-up order if the club did not pay £100,000 in backdated PAYE. Hearts say they have paid the majority of this. In addition, they are due to pay a significant six-figure sum to HMRC on 21 June and must settle a VAT bill at the end of this month.

Further, they agreed a figure with HMRC of £1.5m in December to be paid in three equal instalments over three years for tax and National Insurance payments that were paid through the Lithuanian tax system instead of the UK's.

Also, their inability to pay their players their wages for this month resulted in a second registration embargo being placed upon them by the SPL.

The non-playing staff at the club are due to be paid on 24 June but no funds are available.

Last Thursday, Hearts placed their entire first-team squad up for sale to try to generate funds to keep them afloat.

Hearts say lower than expected season ticket sales - about 6,500 as at last week - has caused a shortfall in cash. They say that if they had sold 2,000 more season books for the forthcoming campaign then they would have had enough cash to tide them over to the start of season 2013/14.
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The club say their financial problems have been exacerbated by their worst league finish in more than 30 years (10th in SPL), the absence of Rangers from the league and increased costs relating to their main stand.

How likely is it that administration will be granted?

It seems inevitable that this will go ahead. What is less certain is which insolvency firm will become the administrator. UBIG has approached BDO to do the job, an option favoured by Ukio Bankas too. However, the club's directors favour KPMG. It is probable that the Lithuanians' choice will be granted as the judge at Edinburgh's Court of Session is likely to give more weight to ownership than directorship.

If administration is agreed, what would happen then?

Typically, the court-appointed administrator's task is to maximise the return for the creditors. Administrators usually look to cut costs and generate income by selling assets. It may argue that keeping the assets intact offers a better return for the creditors.

The possible outcomes are that Hearts continue for months in administration, a route out of administration is effected by a Company Voluntary Arrangement (CVA) being agreed, offering creditors a pence-in-the-pound deal, or that Heart of Midlothian plc is liquidated.

A CVA can only be granted if it is approved by creditors who are owed at least 75% of the debt.

If liquidation follows, as happened with Rangers last season, a party could purchase the assets of the plc and apply to the Scottish Football Association for a licence to operate the club next season, or in the future.

Who actually owns Hearts?

The club is owned by a number of parties. UBIG, which was owned by Romanov, owns 50% of the shares, having first invested in the club in 2004. Ukio Bankas, based in Kaunas, owns 29.9%. Of the remainder, about 15% is owned by Quantum Holding SA and about 5% by a number of small investors.

Who are Hearts' directors?

There are three directors - Vladimir's son Roman Romanov, who has not played a part in the running of the club for some years; Vladimir Romanov's right-hand man Sergejyus Fedotovas, who has been in control of the club most recently and whose relationship with Vladimir is now frosty; and Vitalijus Vasiliauskas, who was in Scotland on Monday and who signed the documents that were filed in court that afternoon.

What will happen to Tynecastle Stadium?

This, of course, is a major concern for the Hearts fans. Ukio Bankas holds a security over the stadium in the west end of Edinburgh. It is possible Ukio Bankas's administrator could sell Tynecastle to recover money for the bank's creditors. But this would make the club itself less attractive to potential buyers. The bank's administrator may wish to keep the stadium and other assets together.

Administrator Gintaras Adomonis said last week his firm had "no desire to harm Hearts". He said: "Our initial assessment indicates that most likely the most extensive return for Ukio Bankas creditors may be achieved by keeping the club operating."

Is it a surprise that Hearts are in such a predicament?
Hearts' early history

Formed in 1874
Club won first trophy, beating rivals Hibs in Edinburgh FA Cup final in 1878
Moved to current Tynecastle in 1886
In 1890 become one of 11 founding members of Scottish Football League
Club won Scottish Cup for first time in 1891
First Scottish league title arrived in 1895
Club formed a limited liability company in 1903
That was wound up in 1905, present company formed
Many Hearts players killed or wounded in First World War

It has been clear that the debt levels were unsustainable, as was the continued ratio of spending on wages relative to turnover - at more than 100% during much of Romanov's period in charge.

Romanov said in November 2011 that he would be willing to listen to offers for Hearts , citing a disenchantment with football, and the club placed a greater emphasis on developing their own players.

In late 2011 news began to emerge of players not being paid their salaries in full on time. Exasperated by continued late payment, one Hearts player, Ryan Stevenson, told the club he would not return until outstanding cash was paid to him.

By February 2012, Hearts were given eight days by HMRC to pay a tax bill or face liquidation , the fifth time in recent years that the club had faced legal action over unpaid tax.

How many people do Hearts employ?

There are 131 staff in total. On the playing side there are 26 staff with a further 10 set to join from the youth set-up. The club employ 30 full-time and 65 part-time backroom personnel.

How many fans do Hearts have?

Last season their average attendance in the SPL was 13,163 , making them the second-best attended team in the league, behind Celtic. The Gorgie faithful responded well to pleas from the board to pack the stadium but the dip in season ticket sales suggests fans are wary about forking out with the club's future uncertain.

Didn't Hearts hold a share issue recently?

Indeed. Last October the club launched a scheme where fans could purchase shares in exchange for 10% of owner Vladimir Romanov's holding. Hearts set a target of £1.79m but gathered £1.05m by the closing date in December.

So what happens to those newly issued shares?

If the administrators go for a CVA, the investors would get a pence-in-the-pound deal for their shares. If a CVA is rejected and Hearts go the way of Rangers, shareholders (and any debenture holders) would receive nothing when the plc is liquidated.

What happens to their place in the Scottish Premier League?
Hearts' prized assets?

Jamie MacDonald
Jason Holt
Ryan Stevenson
Kevin McHattie
Callum Paterson
Jamie Hamill
Jamie Walker

Hearts own a share in the Scottish Premier League, the top tier in Scottish football. The SPL and Scottish Football League will soon become the Scottish Professional Football League and all 42 of its members will have a share in the new league. As soon as Hearts encounter an "insolvency event" as defined by the SPL, they will lose a third of their points total from last season for the beginning of season 2013/14. That equates to a deduction of 15 points (one-third of 44 points, rounded up).

If they continue to be unable to register new players and their best players leave during administration, manager Gary Locke will be hard pressed to field a team capable of staying in the top league, especially with the points penalty.

Is there a danger Hearts won't exist next season?

It would be a surprise if Hearts do not exist in some form next season. If they do enter administration and agree a CVA, they would play in the SPFL top tier next season with a 15-point penalty.

If they fail to agree a CVA they could stay in administration or liquidation could follow. At that point, parties could buy the club's assets - players, Tynecastle Stadium, the Riccarton training base, SPL/SPFL share, Scottish Football Association membership - and apply to play in the new SPFL.

Is there anyone interested in buying the club?

BBC Scotland had learned that there were six potential bidders for Hearts. However, one of the three interested parties that are based in North America has pulled out. The group from New York had been in contact with the administrators of Ukio Bankas in an attempt to gain exclusivity on a potential bid but has withdrawn partly because of the decision by the club to enter administration, but also because of the uncertainty over UBIG's 50% shareholding.

The two remaining North American parties are joined by another in Scandinavia and two UK-based groups, including the Foundation of Hearts, which is pushing for fans' ownership and is led by its chairman, Ian Murray MP.

Taken from the BBC