Football & Insolvency – A Rough Guide
This site could get rather repetitive over the summer if things don’t calm down a bit. Northwich Victoria of the Blue Square North became the latest club to enter into administration, whilst rumours continue to circle a not inconsiderable number of other clubs. With this in mind, tonight we’re going to give you a brief summary of insolvency law and how it relates to football clubs. After all, if fifteen or twenty clubs are to be declared insolvent, the best thing that we can do is be absolutely certain about what happens next.
It will primarily focus on smaller clubs, and this is for two main reasons – firstly, the management of Premier League football clubs is now so dense and complex that you could write several books on each individual club and still be no nearer arriving at any firm conclusions. With smaller clubs, however, although there are no hard and fast rules concerning how they get into trouble, there are hard and fast rules on how they should get out of it. Secondly, there is no serious danger of any Premier League clubs being declared insolvent at the moment, but this is a reality that is happening, it seems, on an almost daily basis in the Football League and below.
It is also worth remembering that football clubs have to jump through two sets of hoops in order to survive a spell in administration – those set by the law, and those set by the football authorities – and that these rules might be in direct conflict with each other. It is critical to remember that each club has its own tale to tell. The circumstances at, say, Leeds United two years ago were very different to those being experienced by, say, Darlington now. They do, however, have one thing in common. They endanger the very existence of the football clubs that we hold so dear.
How Do Football Clubs Become Insolvent?
Before we go any further, it’s worth pointing out that debt is part and parcel of the existence of almost all football clubs, as it is with most businesses. Debt only becomes a problem when it becomes unmanageable, and “insolvency” could be loosely defined as the point at which a business’ income is not sufficient to meet its financial obligations as they fall due. As such, it’s a very loose term. A lot of clubs will rob Peter to pay Paul until Peter, as it were, runs out of money. This may manifest itself in one or more of several different ways – a director that has been putting money into a club finding that his pot has run dry, a benefactor withdrawing support, a sudden fall in income or a bank refusing to extend credit any further.
There are two ways, broadly speaking, that clubs will find themselves in serious difficulty. The first is what could normally be described as a “sudden shock”. The sudden loss of a benefactor (as happened at Gretna) or the sudden loss of Premier League status (as happened at Southampton or Leeds United) suddenly leaves a club with a drastic fall in income which it is unable to address through cost-cutting. The second way is what could be described as “a slow and lingering slide”. A wise man once said that if you give a football club ten pounds, they will spend eleven, and if you give a club ten million pounds, they will spend eleven million. This slow slide towards insolvency may be exacerbated by a “double or bust” tendency on the part of club owners to try and spend their way out of trouble in the pursuit of imagined riches that may not even exist. There is a also third way (which could be described as the link between the previous two) – managerial incompetence. Bradford City’s slide from the Premier League to League Two inside a decade was famously blamed by their chairman on “six weeks of madness”, during which time the club spent lavishly on wages that they could never have hoped to maintain. At most clubs, though, one of the first two models (or a mixture the first two exacerbated by the third) will send a club running to an administrator.
Who Is The Administrator And What Do They Do?
An administrator in this sense is an insolvency practitioner. Their job is two-fold, and is a legal requirement under the 1986 Insolvency Act – to act in the best interests of the creditors, and to do their best to ensure that the company is rescued as a going concern. It’s important to remember that the administrator has no responsibility towards the football club or its supporters, though it could be argued that the best interests of the supporters – to keep the club alive as a going concern – is in line with the administrators stated aims. There is no guarantee that this is how they will view things, though. What actions the administrator takes next vary from club to club. They will often put the club up for sale, hoping that fresh investment will give them the ability to start addressing the clubs debts, or they may start making playing staff and back-room staff redundant. There are no hard and fast rules.
What’s a “CVA”, Then?
A CVA is a “Company Voluntary Arrangement”. A CVA is a deal agreed between an organisation and its creditors to repay a proportion of its debts over a fixed period of time (usually five years). The administrator will put a deal to the football club’s creditors offering to pay back a proportion of what is owed to them, and the creditors then vote upon the deal offered on a pro-rata basis (for example, if a football club owes £10m and £1m of it is owed to me, then my vote is worth 10% of the total cast. Seventy-five per cent of the creditors have to agree to the CVA for it to be adopted and, if it is adopted, no further legal action can be taken by creditors against the company to recover the monies due. The amount to be paid back to creditors could be ten pence in the pound, or it could be seventy pence in the pound – each case is different, though anecdotal evidence suggests that dividends have got lower as a proportion of original debts owed over the last few years.
Why Are CVAs So Important?
Because of Football League rules. Exiting adminsitration through a CVA is football’s preferred method of doing so, and clubs that exit administration without having a CVA in place can expect heavy penalties for doing so. Luton Town, for example, were heavily punished for exiting administration without a CVA in place. Ultimately, the authorities hold all the cards, including a “golden share” which effectively allows them to expel a club from the League should they be exceptionally unhappy at the behaviour of a club during a period in administration. Leeds United initially had their golden share withheld by the Football League in 2007, but were eventually allowed to compete with a fifteen point deduction. No-one has been directly expelled from the Football League over this but it would be unsurprising to see it happen in the next couple of years, considering the number of insolvencies we are likely to see.
Why Would There Be A Problem With Exiting Adminsitration Through A CVA?
All cases are different, of course, but there is one main reason why a CVA could prove difficult for a club to get and that is the game’s rule that football creditors have to be treated as “preferential creditors” and be paid in full, no matter what. This rule has no legal basis and it would be less than surprising to see it challenged in court one day, but this hasn’t happened yet. It is also unpopular both with those who feel that it makes the securing of a CVA more difficult and other creditors, who see no reason in law why some creditors hould be treated differently because they happen to be a football club. There are, however, sound reasons for the rule being in place, at least from the perspective of the game. Let’s presume, for example, that there are two teams at the top of a league table at Christmas. One of them is financially well run, and the other is financially unscrupulous. Without giving football clubs “preferred creditor” status, there would be nothing to stop the unscrupulous club making offers to the best players of their rival teams, signing them with no intention of ever paying the amount that they have “offered” for them, and then entering into a CVA (into which the selling club would most likely be a relatively small creditor with no blocking vote) which paid the selling club only a fraction of what they were due.
Are There Any Other Significant Problems With Getting CVAs Agreed?
Yes. The majority of creditors will reluctantly vote for a CVA (the alternative is usually liquidation and a zero return for them) but HMRC (Her Majesty’s Revenues & Customs – “the taxman” to you and me) won’t. Until 2003, HMRC also held preferential creditor status, but this was removed by the 2002 Enterprise Act (which amended the original 1986 Insolvency Act). HMRC don’t oppose CVAs out of spite. They do it because, ultimately, they have a duty to collect as much money owed as possible. This is money that, ultimately, is owed to you and I. If over twenty-five per cent of a club’s debt are owed to HMRC, it is likely that they will block any proposed CVA, in which case the best question to ask might be, “why has this club not even been paying its tax bill?”.
What’s The Worst Case Scenario?
Way back when, prior to the introduction of these laws, clubs would simply go to the wall completely if they couldn’t pay their way. The most famous example of this was Accrington Stanley, who folded mid-season in 1962 over a (even by the standards of the day) comparatively trifling debt of £62,000. If no agreement can be reached, then the company owning the club will be liquidated. Fortunately, there is an infrastructure in place now to ensure that clubs survive at some level if the company that owns it is wound up. Supporters trusts are usually prepared to run a new club, and there is often no shortage of investors that are willing to start a new club, but didn’t wish to take on the debts of the old one.
From here on, there is a divergence between what happens in the Football League and in non-league football. The Football Conference is particularly tough on this, with an automatic demotion of two divisions being the standard punishment for a club that has folded and restarted. The new club also has to take a name that differentiates itself from the old one – Nuneaton Borough, for example, were replaced by Nuneaton Town. For most supporters, such a loss of status is hard to stomach, but it is preferable to there being no club there at all to support. The absolute minimum that any club entering into administration will get away with is, of course, a ten point deduction.
I Can Find Examples Which Contradict Almost Everything You’ve Said – Why?
The way in which the football authorities deal with insolvency tends to be reactive rather than proactive, and rules tend to get changed after the event rather than before it’s too late. Each case is taken entirely on its own merits and there are no hard and fast rules other than the law and the state of the club concerned. Does your club, for example, own its ground? Chances are that you don’t know, but there’s a good chance that you’ll be wrong even if you think that you do. If your club does, there’s a chance – though by no means guaranteed – that you’ll lose it. To the administrator, it’s an asset which may be better off being sold than continuing to play host to lower league football (this is a possible viewpoint of an insolvency practitioner, not my own personal opinion). Darlington, for example, looked set to die last week, yet it now seems that there is a chance that they may pull through.
Should I Panic If My Club Enters Administration?
No, but you can do your bit. If you haven’t done so already, join your supporters trust. In times of financial crisis, they are the people best placed to organise in case of the worst and, if they’re any good (and the overwhelming majority are) they won’t allow their club to get into that sort of mess again. Of course, if they’re not any good you can stand for election to replace one of them. That’s the whole point of it. If it was my money, I wouldn’t buy a season ticket until the club was out of administration. Any money paid prior to this would go to the old company (and therefore the administrator) who would have no obligation to offer a refund should the worst happen. Indeed, Begbies Traynor, the administrators at Southampton, aren’t putting season tickets on sale “the future of the Club is guaranteed”. None of this is being “disloyal” to your club – it’s merely ensuring that you get what you have paid for.
As I said at the start of this somewhat overwrought piece, this is by no means an exhaustive guide to insolvency and football. The overwhelming truth of the matter when dealing with football clubs that are in serious financial difficulties is that the rules tend to be made up as we go along and that, in the long run, very, very few clubs disappear altogether. We shall keep our fingers crossed that there aren’t too many more of these unfortunate stories to come over the course of the summer.