Southampton & Their Points Deduction

By on Apr 25, 2009 in Finance | 2 comments

Reading between the lines, the Football League’s verdict on Southampton’s attempt to put their holding company into administration without incurring a points deduction makes for pretty damning reading. The League’s conclusion stops not far short of stating that there has been a deliberate attempt to play the system by the club. The holding company Southampton Leisure Holdings and Southampton Football Club are “inextricably linked as one economic entity”, according to the League’s independent review of the club’s finances, and it’s hardly surprising that they should reach this conclusion. There is nothing that the football authorities hate more than setting up what they think is a watertight new rule which may significantly benefit the game, only to see someone crash through it. Leeds played the system two years ago and got away with it (though the legality of their escape from insolvency remains open to question and is still being put through a court on the Channel Islands). The Football League wasn’t going to let that happen again.

Holding companies are, by their very nature, an inextricable part of the current problems that the game faces. Created in the first place to circumvent FA rules on club directors not being able to pay themselves sizeable dividends in the early 1990s. In recent times, they have become more and more commonplace and have been put in place for a variety of different reasons. They are, effectively, “shell” companies which do not trade in themselves but act as a cover for subsiduary companies operating underneath it. If, for example, you own three companies, you put all of them under the umbrella of the holding company so that if one of those three goes bust, the others are covered. The idea of a holding company in itself going into administration is a contradiction in terms.

In the case of Southampton FC, it would appear that the debt stems entirely from the construction of the St Mary Stadium. The football club has, as have so many, spent too much money on wages and transfer fees, but they have also benfefitted from some very high value player sales. The reaction of the league and their apparent insistence that Southampton will get the ten point deduction that hits them the hardest would seem to underscore their fury at the behaviour of the management of Southampton.

From an insolvency point of view, it has always seemed strange that so many football clubs have entered into administration. Administration, in all other walks of life – from IVAs and court adminstration orders for individuals down to CVAs for companies should be a last resort, but football clubs seem to use them in a subtly different point of view. Only the adminstrator will know for certain whether Southampton FC or Southampton Leisure Holdings actually is technically insolvent, but it’s difficult to not avoid the conclusion that this could be more about debt evasion than being unable to continue to trade when one tots up the figures from Sky parachute payments, television money and transfer fees that the club has earned over the last few seasons.

It is easy for companies in debt to claim that they are the affronted ones. It has already been said that Barclays Bank are to blame for not allowing Southampton enough time to reduce their overdraft to £4m. This, however, is only half of the story of insolvency. It is very easy, in the current climate, to get carried away with greedy banks, the evil of the taxman and worrying about football creditors, but the fact of the matter is that when Southampton’s list of creditors is made public, there’s a good chance – as with all clubs that find themselves in this sorry position – that there will be a long list of local businesses that are completely dependent on the comparatively small amounts of money that they are owed and, due to the way that CVAs are voted upon, will be left to pick up mere pennies when they need it the most because of the financial proclivity of, well, a football club.

It’s not just Southampton. They are likely to be the first of several. However, from a moral standpoint the practice of spending beyond ones means and then collapsing like a house of cards is morally indefensible. The Football League over-reacted in the case of Luton, Bournemouth and Rotherham United, but in this case they have fired a welcome warning shot across the bows of other clubs. The one thing that we can be certain of is that if Southampton had escaped administration on a technicality there would have been a sudden rush of football clubs setting up holding companies so that they could do likewise. Financially prudent clubs and those who cut their cloth to size deserve a level playing field, and this decision may put other clubs off following the route of spending in haste and repenting at leisure.

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    2 Comments

  1. Spot on. It is undeniable that ten-point penalties are not the ideal solution, that they penalise certain clubs disproportionately and weaken competition, but there seems to be very little in the way of a feasible alternative, and everyone knows that the penalty exists, so there’s no excuse. Personally, I’d relegate every club that goes into administration automatically and have an extra promotion place in the diision below, but I admit there may be logistical problems around this. And you’re right, businesses being run properly, whether rival football clubs or local businesses owed money by the likes of Southampton, are having to deal with the consequences of bad financial management of these clubs, whether picking up vastly reduced amounts than that owed to them, or in terms of being disadvantaged in the competition. And this holding club rule was a total red herring. Perhaps Southampton should have had a 20-point deduction for going into administration twice!

    Gervillian Swike

    April 25, 2009

  2. Thank you for this article. it makes good reading with the situation at liverpool, a precedent has been set, and we fully expect the premier league to bottle it.

    Ste

    October 8, 2010

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