Southampton, Insolvency & Bending The Rules

By on Apr 7, 2009 in Finance | 13 comments

This season, it is probably fair to say, has not been the best of football seasons. Portsmouth are hanging on to their Premier League status and Brighton & Hove Albion seem likely to fall through the relegation trapdoor from League One. Meanwhile, AFC Bournemouth have somehow managed to pull clear of the League Two relegation places after the Football League docked them seventeen points at the start of the season (though they’re far from safe just yet), Lewes spent what seems likely to be their only ever season in the Blue Square Premier anchored to the bottom of the table and fighting against having to enter into administration and Weymouth found themselves close to closure, and not for the first time in the last two or three years.

Bottom of the pile, however, even from this sorry lot, are Southampton. The Saints’ decline has been a rapid and largely unexpected one. Those of us of a certain age will be able to recall their occasional finishes in the top six of the First Division during the early 1980s, and they continued to confound the odds (they finished in eighth place in the Premier League and got to the FA Cup final as recently as 2003) before finally getting relegated in bottom place in 2005. The key to their problem has been the St Marys Stadium. Southampton evacuated The Dell for it in 2001, at a cost of £32m. After they failed to get back into the Premier League, crowds started to fall (from an average of 31,700 in 2004 to 22,250 last season) and, when the Premier League parachute money ran out, they ran into serious problems.

The club has been in a desperate position all season, both on and off the pitch. From a falling out at boardroom level (between much loathed chairman Rupert Lowe and a director, Michael Wilde) down to the teams performance at the bottom of The Championship and falling crowds (down almost 20% this season to an average of just over 17,000), the impression has been of an irreversible rot having set in. High noon came last week, with confirmation that the bank would not extend their borrowing any further or invest in them because they did not feel that the club is financially viable. At this point, the holding company, Southampton Leisure holdings, went into administration, the directors resigned and the club was put up for sale.

One small detail of this tale, however, is vexing other clubs at the foot of the Championship. Because the club’s holding company has entered into administration itself rather than Southampton FC, as things stand the club will not be deducted any points. Under current regulations, any club entering into administration suffers an immediate ten point deduction, but Southampton may be immune from this because the debts are held by the holding company rather than the company itself. The Football League is meeting what to do about this today, but the questions raised by this issue affect all clubs.

You may be wondering why clubs have holding companies in the first place. The short answer to that question is so that club directors can make a profit from the club. FA rules state that clubs directors are allowed to draw a salary and draw a dividend, but these are restricted. The same rules also state that any liquidated club’s assets (after the payment of debts) have to be donated to sports charities and benevolent funds. In other words, they were designed, at the end of the nineteenth century, to counter the danger of asset-stripping. The first club to bypass these rules were Tottenham Hotspur. In the process of setting themselves up to be floated on the stock market, they made Tottenham Hotspur FC a wholly owned subsiduary of Tottenham Hotspur PLC, making the club more attractive to those looking to buy shares and, at the same time, freeing shareholders from those nagging restrictions on their ability to “realise their investment”.

We are, therefore, entering uncharted and dangerous waters. This stunt hasn’t been attempted before, and it may yet backfire on Southampton. The risk is great that the Football League could seek to take punative action against a club that is deliberately seeking to side-step rules that were brought in to force clubs to handle their finances more responsibly. Alternatively, considering the outcome of the affair between West Ham United and Sheffield United, other clubs could seek their own legal recourse against Southampton. These other clubs are right to be angry about this. The likes of, say, Barnsley and Blackpool have (as far as we know) cut their cloth accordingly and, were they to enter into administration, would have to accept their punishment. Why should PLCs or holding companies be treated any differently to other clubs because of the way that they are set up? In the current political climate, having one rule for the rich (and it tends to be the bigger clubs that end up as wholly owned subdisuaries of holding companies because of either having built a grand new stadium or having been floated on the stock market) and one for the poor would surely not be the Football League’s intention.

Of course, other clubs will be watching this all very closely indeed. If the Football League fails to close this loophole, we can probably expect a flurry of other clubs in similar circumstances to follow suit or convert themselves in this way in order to sidestep their punishment. It makes a mockery of the rules, but when did football clubs (or, indeed, any sort of business) give two damns about rules where making a profit is concerned? There remains the possibility that it may not matter anyway, too. Southampton lost at home to bottom of the table Charlton Athletic on Saturday. Ten points off their current total would comdemn them but, without a win in their last five matches, they remain plenty capable of getting relegated even without the Football League sanctioning them any further. Indeed, the League may keep their fingers crossed (as the FA seemed to over the Tevez affair) that they will contrive to get themselves relegated anyway and obviate the need for further action to be taken now. As the Tevez affair demonstrated, though, this is a huge gamble.

In the meanwhile, Southampton supporters probably have a few questions that deserve answers. Where did the Premier League parachute money go? Where the money from the sales of the likes of Theo Walcott and Gareth Bale go? How did it come to pass that a football club with an average home attendance of over 20,000 should find itself in a position in which there are doubts over whether it will be able to complete the season? The sorry truth of the matter is that they won’t get any straight answers to questions like this from the likes of Rupert Lowe. They can at least take grim satisfaction at the fact that his shares in the club are now not much better than worthless. Every cloud has a silver lining.

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    13 Comments

  1. It was the directors of Luton Town’s old holding company Jayten Ltd, that caused the club to go into administration after 13 million pounds of transfer fees disappeared in 3 years. No full accounts have ever been published by Jayten to show where this money went. The club was relegated two seasons running and the punitive 30 point deduction effective from the start of the current season was imposed as a direct result of the former board’s actions.
    This board was ‘punished’ (and I use this term in only because the footballing authorities in this country state that their actions were a punishment, not becuase it is by definition, accurate) by measly fines (I believe a fine of around £250 was imposed against Mr John Mitchell, chief suspect of lining his own pockets with the club’s money) and the ‘best’ thing about this punishment is? It is completely unenforcable. I would dearly love to know if those fined have ever actually paid them.
    So, holding companies are clearly one of the banes of the modern game, ruled as it is by profiteering entrepreneurs instead of true fans of the game, and whilst this sort of person is permitted to excercise any kind of influence over the running of a football club, the integrity of modern football is at risk.
    If Southampton are NOT given a points deduction, I expect the deduction made from Luton Town to be reversed and our 10 points to be returned. Anything less than this would be a display of double standards so blatant, that Luton Town fans will be protesting in a far stronger way than simply booing Brian Mawhinney at the recent JPT Final.
    Take note, footballing authorities, our eyes are on you to make the correct decision, for once. Do not make it lightly.

    Ken L. Worth

    April 7, 2009

  2. Being a Southampton supporter for too long to mention, I believe we should take the points deduction and be done with it. It is just cheating in any other form. If we avoid this punishment the saga is just going to run and run and create more uncertainty over the coming seasons when all we really need now is stability.
    We will bounce back, you wait and see, and we can do it fairly and squarely.

    Jon Kelsey

    April 7, 2009

  3. I am a Saints fan so I am understandably biased on this issue.

    I understand that the club may sidestep the 10 point deduction due to the legalities and precedent. I also understand that other clubs would like to see us receive a 10 point deduction, and those most vocal are, unsurprisingly, close to our perilous position in the league.

    The point I take issue with is that Saints should be penalised for “not handling their finances responsibly”. Southampton have traditionally been a club that has been well run and has lived within its means. Everyone applauded us from finally moving away from the Dell and there was initially talk of whether the new stadium was actually big enough. The cost of £30m does not seem extravagant for a venue deemed good enough to host England whilst Wembley was being built. Our record signing was Rory Delap, purchased for the princely sum of £4m.

    Since relegation, Saints have been very much a selling club, from the initial fire sale of a good set of Premiership players, through to the constant pillaging of one of the country’s most promising youth academies. A lack of financial restraint during Michael Wilde’s first short tenure saw the wage bill creep up to an unsustainably high point when compared to the club’s dwindling revenues, but this has been sandwiched between periods of almost drastic cost reductions and book balancing. I remember reading about Claus Lundekvam paying to have the turf relaid for his own testimonial; closing the corners of the ground; even making the long term kit man redundant.

    Rupert Lowe is quite rightly detested in Southampton for his meddling and his arrogance, and for some of the incredibly poor managerial appointments made over the last few years, but few could argue convincingly that he has been extravagantly profligate and careless with the Southampton finances over that time. Often the accusation was quite the reverse.

    This is all a long way from the reckless spending seen at Leeds and their infamous fish aquarium during their swift fall from grace and should be recognised as such. Southampton may be the first decent sized name that falls during this recession due to the more extreme dangers of relegation in a sport whose finances have been contorted and amplified by TV money and the resulting inflated player wages.

    UEFA intervention is needed before more clubs fall by the wayside.

    Scummer

    April 7, 2009

  4. I think the question that needs to be answered is, why are fans being penalised for directors finical mismanagement?

    I can understand if the board declare the company and re-buy the club (ala Leeds)

    But it would be a travesty to punish saints fans for the actions of Rupert Lowe. A chairman that greeted the FA cup final with player sales and cash dividends for shareholders. A chairman that fans have actively sought to remove for a number of years.

    I have the utmost sympathy for Luton fans who have likewise been bleed dry and have subsequently been left to face non-league football.

    Far from, pulling together clubs in a time of crisis clubs are at each others throat

    David

    April 7, 2009

  5. As a Saints fan I also feel a “moral duty” to take the 10 point penalty.

    BUT rules are rules.

    Southampton Leisure Holdings Plc are in administration. Southampton Football Club Ltd isn’t. SFC Ltd doesn’t owe anyone anything although they are going to have a very tough time getting through the summer if an investor doesn’t step in soon.

    SLH wasn’t JUST the football club. It owned radio stations, retirement homes, insurance services to name but other interests. One by one they were all sold off or closed as they were making a loss. It could turn out that the Leagues forensic accountant could possibly find that the football club was subsidising those other operations over the years.

    Either way we’ll be relegated this year -we simply aren’t good enough to stay up.

    Wurzel

    April 7, 2009

  6. Scummer,

    UEFA will be glad to see the back of half of the Leauge Clubs a view that is shared by Sepp Blatter and FIFA. I can only assume that this is why the Football League are keen to excellerate the demise of these clubs.

    How long do England and Wales have to conform to the formatt of two professional leagues of 20 teams?

    David

    April 7, 2009

  7. The obvious issue here is that with the riches that have been floating about in football, directors have been tempted to put their hands into the till. How else can you explain the mysterious inability to keep a club afloat when in the periods leading up to demise there have been a series of significantly large cash inflows, such as in Southampton and Luton Town’s case.

    In Luton’s case, it appears that large transfer fees received were remitted up to the holding company, after which the whereabouts of the money is still unaccounted for. No accounts for the holding company have ever been filed. The club cupboards appear to have been completely cleared out. Corruption? In football? Absolutely.

    So what can be done? A punishment of points deduction seems effective where, and only where, the directors are blatantly using the administration system to wipe out debts that were unsustainable (eg Leeds, Leicester etc), and start again. This punishment does not serve an effective purpose where due to mismanagement or other circumstance, the club falls into administration and is purchased by a new consortium who intend to rectify and run the club properly. How does virtualy ensuring that the new management will fail help? Whilst we have to accept that it is unacceptable for the club to find itself in this position, we have to find a meaningful way to ensure that living beyond your means, dipping into the till, or mismanaging is deterred.

    An effective way, in my opinion, would be to force directors of football league clubs to lodge a bond with the league. The bond serves to ensure that a director who takes a club into administration suffers a significant personal financial penalty and provides a level of funds to repay creditors. The level of bond would increase as the club reaches higher leagues. This would hit directors where it hurts – the pockets, and consequently, I am sure, raise the standard of financial management.

    Further, the league should seek to improve financial transparency. Clubs could be forced to publish quarterly accounts (subject to independent accountants review procedures) within a 2 month window of period end. Failure to do so would result in suspension from the league, and loss of a percentage of the bond. Again, I think this would raise the standards.

    Draconian? Maybe. But I think it is better that those who are charged with the running of the club are forced to take some responsibility for their actions. Not the fans

    Steve Holmes

    April 7, 2009

  8. I think the comparison between Luton and Southampton is unfair. Luton were punished for the directors fiddling the books and for paying agents whilst the club was in administration – something which is strictly banned by FA rules.

    The misunderstanding at the moment is that people think the club’s debts have been wiped out – they haven’t. The holding company has gone into administration because it is unable to file it’s half yearly returns. The club is still running as a going concern and will be sold as such. If the sale includes a reduction of the club’s debts by it’s creditors then the club will be sanctioned by the FA – I understand the punishment is similar as to going into administration when technically it would be like a person entering into an IVA.

    If the club is bought with the debts then there has been no change in it’s status and the club shouldn’t be punished. The club will still be liable to pay the debts and will be owned as a football club rather than through a holding company (unless the new owners run it in this way). I wish people would stop moaning about something which they quite clearly don’t understand.

    The reason Saints find themselves in this current situation is that we tried to continue running as a Premiership club without Premiership money. The financial disparity between the Premiership and Championship is so vast that Club’s struggle to exist if they don’t return to the Premiership within 3 years of going down – we’re not the only ones – Leeds, Charlton, Derby etc.

    The irony is that if we hadn’t been so prudent in the Premiership and taken some financial risks and bought players for money we didn’t have and couldn’t prove would be worthwhile we probably wouldn’t be in this mess. The rumours were that Strachan left because he knew he wasn’t going to get the money he needed to strengthen the squad which he saw as necessary. Strachan leaving was essentially the crack in the ceiling which wasn’t fixed and has ultimately led to the roof collapsing on us.

    St Shane

    April 8, 2009

  9. Southampton as a football club have patently benefitted from the spending/investment and subsequent massive debts incurred by their holding company and therefore MUST be docked the usual 10 points for going into administration to prevent the League and their policy becoming a laughing stock.

    If anyone maintains that Southampton haven’t benefitted, I suggest they calculate the increased revenue the club has made over the last eight seasons from playing in a vastly improved new 32,000 seater stadium compared with an ancient 15,000 seater one and insist that the club pay that to its holding company immediately.

    Martin Drake

    April 8, 2009

  10. Going back to what Ken L. Worth (geddit?) said at the start of this. Do Luton fans think that Southampton should be punished cause all season they have been bleating on about how unfair it has been that they have been docked points.

    Either it is fair or not but Luton fans seem to think that is it totally unfair for them to be docked points and that those points should be given back on the one hand and on the other hand say that other teams should have a punishment that is unfair applied to them.

    I can get with the idea that they think the same punishment should be given to all but where I lose sympathy is when they say “We were treated wrongly so to make that right other teams should also be treated wrongly”.

    Just goes to show that when it comes down to it Luton are not really interested in fair play or making sure the right thing is done they just want to look after themselves. Perhaps all these Luton fans going around trying to drum up sympathy want to tell us about the boycotts they did of Kenelworth Road in the 80s when away fans were banned? Oh of course. They didn’t cause they were looking after themselves again.

    Fine but don’t expect my heart to bleed for a team that don’t give a stuff about anyone else.

    Mr Harris

    April 8, 2009

  11. St Shane, you’re not telling us that people are selfish? Hold the phone….

    Martin Drake

    April 9, 2009

  12. “Mr Harris” – without boring you with the full story (I doubt you’re interested enough to change your mind anyway), all LTFC want is to be treated the same as Southampton and any other club – I really can’t see what’s so wrong about that. If you can point me in the direction of anyone from LTFC saying that Southampton should be docked points simply because Luton have been, please do so. You sound to me like someone who listened to that moron Adrian Durham the other night and has formed a half-baked opinion based on the half-baked opinions of someone who manages only occasionally to scale the heights of half-wittedness.

    John Gaunt OWB, OMKSB

    April 12, 2009

  13. I for one would be very happy for Saints to avoid the points penalty because it will open up the door for Luton to get their points back. From what I can gather from the mess, Luton’s holding company Jayten went into administration. We clearly didnt use the loophole – actually we were threatened with expulsion from the entire league system if we did not accept the sanctions and also accept that we had no right to appeal. But, if the precedent is set then it must surely be applied consistently, and I think Luton would have good grounds for legal action and the return of at least 10 points, or if not some form of financial redress.

    Similarly, the 10 point deduction for transfer payment irregularities. This was not bungs. This was making payments from the Holding company rather than the football club. Hardly crime of the century. No on field advantage gained, we held up our hands to the error once it was realised, and however you want to argue it, it is not cheating. Compare to West Ham who have just bought their way out of the whole Tevez saga by paying off Sheffield Utd with a whacking great lump of compensation. Similarly, Newcastle United and Birmingham have been found guilty in a court of law regarding VAT evasion arising from dealing with their transfer paperwork incorrectly – points deducted? I havent seen any.

    During the season we understand that Bournemouth, Chester and others were saved from administration by PFA loans. That would have made an enormous difference to the competition if they had been deducted 10 points each (potentially more in the case of Bournemouth).

    Yes we badger on about how unfair it is. Perhaps we did deserve our penalty. But the reason that we keep raising the issue is that we have been massively penalised for living beyond our means and for transfer irregularities. All the while, others are being given the opportunity to sidestep through legal loopholes. This whole thing reminds me of a Viz comic strip, Ray of the Rovers, where it was the accountants and lawyers who were the heroes of the football club.

    Steve Holmes

    April 15, 2009

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