Football & Insolvency – A Rough Guide

Ian

Ian began writing Twohundredpercent in May 2006. He lives in Brighton. He has also written for, amongst others, Pitch Invasion, FC Business Magazine, The Score, When Saturday Comes, Stand Against Modern Football and The Football Supporter. Ian was the first winner of the Socrates Award For Not Being Dead Yet at the 2010 NOPA awards for football bloggers.

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6 Responses

  1. Poots says:

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

  2. Dave says:

    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.

  3. Rob says:

    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?

  4. Joe says:

    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.

  5. Martin says:

    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.

  6. Leo Hoenig says:

    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.

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