Football & Insolvency – A Rough Guide

By on May 19, 2009 in Finance, Latest | 6 comments

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.

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    6 Comments

  1. well, overwrought or not, this is an excellent piece/blog post/whatever.

    Poots

    May 19, 2009

  2. The football creditor rule was challenged back in 2003 when the Franchise went into admin and proposed to pay everyone else 1%; the High Court upheld it. If you tead the judgement though, what’s intriguing is that they accept it is legitimate for an industry to have additional riders on it which alter the operation of insolvency law. All you have to do is say that business sector x has specific rules which have no legal basis, but in order for business y to continue to trade, it must be a member of business sector x, and hang the law. It’s not beyond the bounds of possibility to see the same logic extending to businesses with franchises, such as McDonalds.

    Also, there are also two administrators appointed, who have a liabiity to fund any ongoing costs until the club exits admin. This emans that there’s a moratorium on all existing debts, but any new debts – such as existing player wages – must be funded by the administrators if there’s a shortfall between what’s coming in and what’s going out.

    Two factors to add to the excellent analysis above are who appoints administrators, and the relatively small room for latitude for them.

    In the first instance, whilst ultimately, a court appoints them, someone has to ask the court, and that’s a crucial, If it’s the existing board, there’s every chance that they have a plan to exit administration having cleared the existing debts. In so far as there is such a thing in practice (if not in law), they’re a friendly administrator. The clearest one that springs to mind was at York City, where John Batchelor/B&Q/Fucking gibbon appointed someone who, well, lets say didn’t give the impression of wanting to shepherd the club into a period of stability under new owners. The other possibility is a hostile one, appointed by a creditor who wants to force the hand of the existing board (this is what happened at Stockport).

    Secondly, the twin options for an administrator are to increase income, cut costs and find new capital to restructure and pay off existing debts. There’s usually some form of lump sum, and a promise to continue to pay at a certain rate over the next x number of years. The problem comes from the afct that income is hard to increase – club incomes are from 4 sources:

    1) Gate money – often paid up front months back and spent in the form of season tickets
    2) Commercial income – the lower down the league, the less important and less likely to be of any use
    3) Football money (from TV, cup runs etc) – this is either (in the case of TV) distributed by a formula and you ain’t getting no more than you’ve already had and in the case of cup runs, administration tends to be after Christmas when the season ticket money has run dry, and when most lower league clubs’ interest in cups has long since ended
    4) Player sales – difficult, as once the other clubs know you’re broke, it’s a buyers’ market.

    4 is critical, and we’ll come back to it.

    So income increases are hard to achieve. What about cost cutting? This hard, because by far and away the largest source of costs are the players, who can’t be sacked (as would happen in any other industry). This is because of the contarct system. Essentially, players cannot do what you are I can when we sign a contract and look for another employer and ove their having given appropriate notice. Players forego their right to up sticks and leave (see Pierre van Hoijdonk at Nottingham Forest) and as a quid-pro-quo, since they can’t bugger as they please, the clubs can’t force them to bugger off when they please, either (this is where Scottish football administrators have it easier, because they don’t have this rule in place). The follow-on here is that the only time the players become available to leave is when they’ve not been paid for two months or the club is liquidated. Upon that, the players contracts are null and void, which means that essentially, the options for the administrator are now two-fold (this is because in another line of work, the business could be liquidated and assets sold off, but the main assets at a club are intangible – the players – and cannot be realised.

    So, we’re at an impasse. The club can’t cut costs much, and can’t raise cash. It can’t wind things up as there’s no point – the players can’t be sold. The only option here is if they own the ground which is a tangible asset and does have a value. It probably won’t help the creditors in full, as the ground is usually on a charge, which means that someone has first dibs on the proceeds of any sale. take Scarborough, who owed millions to a variety of people. The money the administrator got for the ground went to he charge-holder, HSBC. The taxman, also owed a fortune, got diddly squat.

    This is the dangerous time though. Owning your ground means the chances are that someone will borrow money against it, in order to come in for the club. This is because the land itself is being sold as a potential asset, not a live one, which means it is comparatively cheap. Selling land for development has a going rate. Buying exiting facilities is much cheaper. That’s not a problem, as who would buy a football club on the basis that they can get hold of land at cheap rates? You’ll be saying that boardrooms are full of people with a professional background in property development and construction next. Oh, that’s right.

    Now, the previous owner of the club wouldn’t have any truck with some of these, but the administrator not only doesn’t care, he had a legal duty to not care if the property developer who has pitched up offers the most cash for the creditors, then c’est la vie. Or to put it another way, when Bury were in admin in 2002, they advertised the club for sale in the Times and got 29 enquiries. 28 were from property companies whose interest ended when they were told the ground was not owned by the club.

    Dave

    May 20, 2009

  3. Excellent post, but I feel I should correct one part of it – the so-called “golden share”, which was explained badly by the media in the Leeds case.

    Each club in the football league has a a share, essentially they are the shareholders of the Football League. Whenever any club enters administration, the share is suspended, regardless of the point in time of the season. A club can carry on playing games without their share, but they can neither vote at League Meetings nor sign players without approval of the league (only usually if they cannot field a team, or if they have no goalkeeper). Clubs can begin the season without their share and continue playing as normal – the reason the “golden share” kept being referred to in the Leeds case, was because in the 30+ administrations of league clubs before them, every club had exited administration with a CVA, and because none of these had ever affected a really big club, the national media hadn’t bothered trying to find out what happenned in these cases. The rules did allow for clubs to exit administration without a CVA, but the rules only cited exceptional circumstances. The league only returns the share back to the club at the first league meeting after the club has exited administration (usually in the first week of the month)

    I’d also like to add something to the excellent comment Dave has made above:

    “The follow-on here is that the only time the players become available to leave is when they’ve not been paid for two months or the club is liquidated.”

    There is a loophole in the transfer window, (called something along the lines of the “clubs in crisis rule) that allows the administrator to sell players outside of the transfer window, and allows the clubs that buy them to play them. This allowed Ipswich’s administrators to sell Hermann Hreidarsson to Charlton, and Darren Ambrose to Newcastle for a combined amount of £2m, and Birmingham to sign Barnsley’s Andy Marriott in March 2003.

    “This is the dangerous time though. Owning your ground means the chances are that someone will borrow money against it, in order to come in for the club. This is because the land itself is being sold as a potential asset, not a live one, which means it is comparatively cheap. Selling land for development has a going rate. Buying exiting facilities is much cheaper. That’s not a problem, as who would buy a football club on the basis that they can get hold of land at cheap rates? You’ll be saying that boardrooms are full of people with a professional background in property development and construction next. Oh, that’s right.”

    Ipswich are also in what appears to be in a unique position, which protects them in this respect. They own their own ground, but the land the ground is on, is owned by the local council, which means the club can develop the ground as they wish, but a property developer can’t buy the club with a view to demolishing the ground and selling it for property. Of course, it’s not in the interests of most clubs to pursue this sort of deal, but I wonder if any Trust-owned clubs that have their own ground would be in a position to strike up a similar deal with the local council?

    Rob

    May 20, 2009

  4. Brilliant. This reads like a PI piece directed by the GPO Film Unit from just after Churchill’s ascension to power, or ‘Protect and Survive’. Whichever, a thoroughly admirable piece of jargon busting.

    Joe

    May 20, 2009

  5. An excellent explanation by “admin” that every football fan should read. Well done.

    The way Bates at Leeds engineered creditors to prevent HMRC closing the club down was appalling and has made the current situation far worse IMO.

    Martin

    May 20, 2009

  6. One thing that is not explained here, is what the procedure is for a club exiting administration without a CVA. I can understand liquidation, (the club going out of business with whatever assetts it has being sold piecemeal to pay creditors), and I can define a best possibile solution, (whoever takes over the club, takes on 100% of the debt, so none of the creditors lose money – this of course never happens).

    What I do not understand is how a club can move to exit administration (except by liquidation) if the creditors refuse to accept a CVA, and who decides how much they get in this case.

    My own club was reported in trouble earlier in the season, but did not end up in administration. This of course means the debt is still all there – a worry at a time when I could buy a five year season ticket. Clearly good value, so long as it remains valid for five years. It appears that at the start of the season, about 30% of the clubs debt was owed to the directors themselves, and a similar amount to the taxmen.

    On a personal point, my wife was owed a considerable amount of money when Crystal Palace went into administration. If as reported, their total debt was £21 million, our share was less than 0.1% and so we did not have any real voice. But that is over £10,000 – all of which was lost, (there was no payment to creditors at Palace). The money exceeded 10% of our joint income for the year and left us seriously strained. Much of the money was not a fee, but expenses, which we had to pay. We were at risk of losing our house.

    There are a lot of people like us owed money whenever a club goes in administration.

    Leo Hoenig

    May 26, 2009

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