Football, Finances and League Two

By on Aug 24, 2009 in English League Football, Finance, Latest | 18 comments

The new League Two season has started with everybody financially stable – more or less – but Lincoln City supporter Keith Duncombe doesn’t feel that the authorities are going far enough.

In 2002 Lincoln City FC nearly closed down. In fact, the club was 24 hours from having its application to enter administration in court considered when two of the then Board got together to try to secure enough funding to make that a reasonable possibility. One re-mortgaged his house; the other pledged a not inconsiderable sum of money. I shall be eternally grateful to them that they made these selfless gestures, as it ensured the survival of the club that I have followed all my life, and that has had fans from three generations of my family on the terraces and in the stands cheering on the “Mighty Imps” since the 1920s. But it was touch and go, and I know several fellow fans that travelled to Birmingham for the court hearing and who thought at the time that we just wouldn’t make it.

The fans played their part too, and not just those who supported the Imps. I spent many a long hour on the net  at work persuading, cajoling and plain begging fans of other clubs to buy a seat (for £10) at Sincil Bank as part of the “Sponsor a Seat” initiative that eventually raised over £80,000. We borrowed the idea from Bury who had recently entered administration themselves. Surprisingly (or perhaps not so), many fans from other clubs contributed and wished us well. In Lincoln, a march in support of the club was held, and buckets taken to every location you can imagine to help raise funds. We survived, agreed a CVA with our creditors, and looked to the future.

Since that time, LCFC have posted an operating profit in all but the last two financial periods, cutting our cloth to our income, and setting the budgets accordingly. Recently, the recession has hit us like every other club, with falling attendances and reduced commercial income streams, and small deficits in the last two years have had to be covered by inward investment form new Board members, and transfer fees for players sold such as Lee Frecklington (to Peterborough) and Danni N’Guessen (to Leicester). But again looking to self-sustaining investment, our youth development programme has been expanded, and we have some of the product of that investment entering the first team now, with Danny Hone leading the way for a whole batch of promising, home-grown youngsters.

The LCFC Board has been the very model of prudence, ensuring the financial stability of the club first, and worrying about promotion second. After 5 heady seasons in the play-offs (but heart-breakingly no promotion), the last two efforts have seen a return to mid-table mediocrity. But still most fans support this prudent approach and are proud of what the club has achieved since administration.

Nevertheless, some are starting to ask: why should we bother? They look at Darlington, Bournemouth and Rotherham and wonder what the point of our honesty and prudence is. All three of these clubs have entered administration twice in the last few years, and as a consequence have written off massive debts. No prudence and living within their means for them; instead, they spend ridiculous sums on their playing squads, and then happily write off the subsequent debts by offering a pitiful amount in the pound to their creditors when their profligacy starts to catch up with them and they have to enter yet another administration.

Just this season, Rotherham – who don’t even play in Rotherham any more – have come out of administration and days later splashed £150k on a player. Meanwhile, the £750k bond that they should have paid to the Football League as a guarantee that they will return to a ground within the city boundaries within four years remains, if persistent rumours are to be believed, unpaid.

In all of this (Chester being the latest example in the Conference), the FL and FA are completely complicit. It’s even the case that if you don’t mind taking a paltry points deduction, you can exit a CVA without paying a penny to your creditors. The list of Darlington’s creditors included a local woman owed £3,000 for having put up a player in her B&B, and the local branch of St. John’s ambulance.

To many Lincoln fans, this looks like blatant cheating, aided and abetted by the football authorities. It means there is no level playing field for honest clubs who try to live within their means. It means that clubs like those mentioned above sign players on inflated wages that we can only dream of signing. It is highly likely that all three of the clubs mentioned above will once again be flirting with insolvency within a couple of seasons, because there are no signs that they have any intention of reforming their financially profligate ways. But so what? They’ll just do the Administration Shuffle again and laugh all the way to the play-offs.

It is clear to all thinking football fans that actually care about the way the game is run financially that this has to change. I would suggest the following reforms as an absolute minimum in order to stop the kinds of abuses listed above:

1. The FL abolishes the “football creditors” rule. This ensures anyone who is a football creditor (including players) will be paid 100% in any CVA agreement (local businesses, of course, often have to make do with 1p in the pound). This would allow financially prudent clubs with lower budgets (like LCFC) to offer deals to players that might be less than the likes of Rotherham, but would at least be guaranteed to be paid.

The PFA only pays a subsistence amount to players when a club cannot pay their wages, and for a limited time: clubs should not be allowed to rely on the PFA to bail them out when they mismanage their finances.

2. No club in administration should be allowed to play in their current division unless and until they agree a CVA with their creditors. This would both stop the ludicrous points deductions that have distorted L2 especially lately, and ensure that creditors receive a reasonable deal.

3. Penalties for clubs entering administration repeatedly should be increasingly severe and far more than they currently are. To err once is human, twice or more is frankly taking the piss.

There are some fans who think that even these measures don’t go far enough, but realistically it is doubtful that even these reforms would be considered by the football authorities. In the meantime, the FA and Football League fiddle while Rome that we citizen fans have built burns.

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    18 Comments

  1. Excellent article.

    The price of failure is success, it would seem. George Houghton has come out of the Darlington mess owning the ground. And Jeff Mostyn is back at Bournemouth despite his considerable involvement in their troubles.

    I look more favourably on the “football creditors” rule than some. It should deter “ambitious” (reckless) owners from “ambitious” (reckless) spending on salaries.

    What I’d like to see is HMRC similarly guaranteed their (our) money back. When my club Kingstonian went into admin in 2001, the IR were secured creditors. Making them so again should provide a further deterrent to recklessness.

    Mark Murphy

    August 24, 2009

  2. Another excellent Twohundredpercent article. As a supporter of another “prudent” club, the utter recklessness of clubs around us, and the failure of them to learn from their previous mistakes makes me think that it is time for the FL/FA to up the anti on those who are (and there is no other word for it) cheating the system.

    Where I’d differ in views from you though is in your solutions. What benefit would we get from abolishing the “100 percent for Football creditors” rule? That’s the one rule that currently ensures integrity in the game between football clubs. What would getting rid of it do?

    The other area that I’m less convinced about is your second solution, where I think you’re implying that a club that DOES agree a CVA is maintaining its integrity and fairness. With some CVAs worth as little as one penny in the pound, a club with £3m in debts can reduce down to £30K with one show of hands from creditors. Frequently it seems we have the former club board, the list of major creditors and the prospective future owner to be all closely related to each other (check out this site’s Chester articles) that allow a coach and horses to be driven through current regulations.

    No, I think the FA/FL have got to start becoming brutal in their approach to insolvency. As you say, repeat offenders should be punished severely, and even the initial punishment should reach the stage where instant relegation (on top of any actual league finish) should be the norm. At present, 10-15 points for junking millions of pounds worth of debt just isn’t a punishment – it’s a tactical move that benefits a club beyond that initial season. The FL need to increase that punishment until it actually does become a proper punishment for reckless over-spending in the game. We’ll then find that far more clubs are able to operate within Lincoln’s limitations than do today.

    Martin

    August 24, 2009

  3. I can’t help but agree with the author here. I support Lincoln’s local rivals Grimsby and we’ve had a desperate time recently as a sensible and prudent board has tried to keep the club afloat and not enter into administration. As we have suffered other clubs have walked away from their commitments and gone from strength to strength. Another club to mention in the list above is Leicester City who came out of administration and built a new state of the art stadium!
    You can’t help but think that the ‘right’ way is actually the wrong way.

    Mark Wilson

    August 24, 2009

  4. Good post. As one of Mark’s fellow Mariners, I can confirm that we also get increasingly fed up of watching these clubs outbid us for players, outplay us on the pitch, and then cry administration when the red letters arrive.

    The introduction of points deductions should be seen as just the beginning.

    Pete

    August 24, 2009

  5. Excellent article. Funny enough I popped into Sincil Bank on Saturday morning to take some photos and to reflect on my previous visits as a fan of Scarborough FC before continuing out of town to watch Scarborough Athletic play at Lincoln Moorlands Railway in the North East Counties League!

    The authorities should show some balls and hammer the lot of them who cheat the system and everyone as fans has a responsibility to say no to boards playing the system.

    They laid down a terrible president when they let Mr Bates walk all over them.

    Now is the time to get tough.

    Rob Bernard

    August 24, 2009

  6. The only way to stop this outright cheating is to ensure that ALL clubs have to agree to pay back ALL their debts in the event of entering administration or they don’t play in the Football League.

    I think that these clubs could be financially micro-managed by Football League appointed experts to ensure that they re-pay all their debts over a 5-year period. Only after the completion of an agreed debt repayment programme can they have the freedom to wholly manage their own funds. If they then go into administration within a further 5-year period they are thrown out of the League.

    I know that there are one or two non-league clubs with honest Boards and a desire to do the right thing by their local creditors in particular have done this voluntarily and there is no reason why Football League clubs cannot do the same.

    Rob Arnold

    August 24, 2009

  7. An excellent article. However, basing deductions on the CVA is flawed. Darlington had a CVA but paid their creditors less than 1p in the pound. Luton Town’s creditors received over 15p in the pound without a CVA and Luton Town were deducted 20 points. There can be little doubt who got the better deal, and it wasn’t Darlo’s creditors.
    However, the bottom line is to exert greater control over clubs, and not allow those with debts over a certain level to compete. Something like an annual licence scheme that will limit the possibility of building such damaging debt to start with. Those who operate sustainably should not suffer at the expense of those build unmanageable debt.

    Keith Hayward

    August 24, 2009

  8. However, the bottom line is to exert greater control over clubs, and not allow those with debts over a certain level to compete. Something like an annual licence scheme that will limit the possibility of building such damaging debt to start with.
    —————–
    Whilst I absolutely agree with what has been posted, just the above sentence highlights why this would never be implemented by the FA or the rulers of the game (The Premier League), they would have to try and stop Msn Utd and Liverpool from not competing for starters.

    What a mess!

    Gareth Thomas

    August 25, 2009

  9. [quote]What benefit would we get from abolishing the “100 percent for Football creditors” rule? That’s the one rule that currently ensures integrity in the game between football clubs. What would getting rid of it do? [/quote]

    It would offer a disincentive for players to join clubs with a history of administration to join them for an attractive salary above the clubs means to pay. Currently players are “football creditors” are therefore guaranteed their salary / back pay.

    Changing this rule would allow prudent clubs to say to the player “Yes we are offering you £200 a week less than xxx, but we can pretty much guarantee you’ll be getting it for the 2 years of the contract…”

    If players started turning down ridiculous contracts because of the financial reputation of the club making the offer then this would be a start…

    Ben Tate

    August 25, 2009

  10. Excellent article, but I disagree with the three suggestions that Keith Duncombe suggests to try and change the situation.

    “1. The FL abolishes the ‘football creditors’ rule.”

    Players wages (as in the case of other staff) isn’t related to the football creditors rule. The rule only relates to money owed to other English clubs and Associations.

    By removing the Football Creditor rule, prudent clubs like Lincoln are more at risk of being ripped off, because as transfer fees are not payable immediately a club who are living beyond their means can ‘spend’ more, only to not pay up in the end. As an example, we’ll say a club (let’s call them Spendthrift FC) agree a fee of £400k with Lincoln for Lincoln’s best player. The player signs a three year contract, which enables them to pay £100k a year over four years. Spendthrift FC pay the £100k up front, then enter administration. Lincoln get 5p in the pound for the remaining fee (15k instead of £300k), so Spendthrift FC still have Lincoln’s best player, and Lincoln lose £285k that they would have budgeted to receive. The Football Creditor rule is there to protect clubs like Lincoln.

    “2. No club in administration should be allowed to play in their current division unless and until they agree a CVA with their creditors.”

    This would be chaos, would it not? Even at a club where the administration process is fairly straightforward and the current regime retain the club and get the CVA agreed with no issues, it can take at least four months (based on Ipswich Town’s 2003 Administration). That’s four months where that club doesn’t play games, and therefore distorts the league even more, in terms of teams that have outstanding games against the side in administration. Not to mention the fact that the club would have no income for that four months, and would almost certainly be asset stripped at best, and be liquiidated at worst.

    “3. Penalties for clubs entering administration repeatedly should be increasingly severe and far more than they currently are.”

    Why should it always be the clubs and therefore the fans that have to suffer? In a lot of cases (especially Luton, Chester and Darlington), fans have been unhappy with the regime that’s taken them into administration, and they have been the one’s punished before, during and after the adminstration, whereas the individuals that have been responsible have generally escaped scot free.
    If the authorities are to really stamp down on clubs overspending and ending up in administration, they have to stop punishing the clubs, and start punishing individuals. In order to be a director of a club, you should have to apply for a licence (which would involve a financial deposit as a bond), where you have to meet certain criteria to even receive a licence – part of which would involve passing the ‘Fit and Proper Persons’ test, whcih would be reduced to one administration, and would be back dated to before the test was introduced. If you are involved in a club that has an “insolvency event” (as the Football league refers to them), you lose your licence, and your deposit, and have to re-apply, stating your case for the “insolvency event”. If you step down up to 12 months before the club concerned has an “insolvency event”, your licence is suspended, and you have to attend a hearing explaining your position and any relationship between yourself and your successor. If the situation is one of “convenience”, then your licence can then be revoked. If you have left a club in a stable position, only for your successors to be wholly responsible, you would have your licence returned.

    Sadly, it’s very unlikely that the authorities will start punishing individuals as much as clubs, because they don’t want to fall foul of their own rules in the future (and certain people involved with the FA and Football League over the years would struggle to get a licence, if such a system were to be implemented.

    Rob

    August 25, 2009

  11. Just a quick note on the Football Creditors Rule:

    “When a football club goes into administration, the “football creditors rule” requires all football-related debts – to players, coaching staff and other clubs – to be paid first and normally in full.”

    From here:

    http://news.bbc.co.uk/1/hi/uk/7741859.stm

    So assuming the Beeb haven’t got it wrong, I think you’re wide of the mark with your first point, Rob.

    I do take your point about trust between clubs with rtespect to transfer fee payments, however. Perhaps the rule could be changed to guarentee these, but not other creditors, such as players?

    Keith Duncombe

    August 26, 2009

  12. “This would be chaos, would it not? Even at a club where the administration process is fairly straightforward and the current regime retain the club and get the CVA agreed with no issues, it can take at least four months (based on Ipswich Town’s 2003 Administration).”

    I agree this is an issue, but some clubs have managed it (LCFC being one). At other times, clubs have been in administration for extended periods and have still been allowed to compete whilst they sort out an agreed CVA.

    The CVA process as a whole seems deeply flawed when applied to football clubs, to be honest, but they come under general business practice in this respect so it isn’t likely to change.

    It’s also true that an agreed CVA doesn’t mean creditors necessarily get a good deal. But at least there is *some* sense that some kind of input from creditors has been taken account of.

    Personally, if I were dealing with a football club in this day and age, I’d want cash up front. :)

    Keith Duncombe

    August 26, 2009

  13. “Players wages (as in the case of other staff) isn’t related to the football creditors rule. The rule only relates to money owed to other English clubs and Associations.”

    http://news.bbc.co.uk/1/hi/uk/7741859.stm

    “When a football club goes into administration, the “football creditors rule” requires all football-related debts – to players, coaching staff and other clubs – to be paid first and normally in full.”

    Which is why Bradford had to cut a deal with Carbone to only pay him part of the wages owed to him

    Source here…
    http://www.independent.co.uk/sport/football/football-league/beleaguered-bradford-may-face-expulsion-from-football-league-644746.html

    “The insolvency policy, though, while institutionalising loyalty to players, puts the clinical sacking of other “ordinary” club employees in a cruel light. While the likes of Carbone’s £4m, two-year salary must be paid in full, 39 people working in Bradford’s ticket office, administration and shops in Dewsbury and Wakefield have been made redundant with no protection at all. Their minimal statutory redundancy pay will be picked up by the Government, as happens in all insolvencies. The administrators, Kroll Buchler Philips, did not confirm the figures, but it is unlikely the modest annual wages of the 39 amount to three months’ pay for Carbone alone. Even within the League, senior figures are now concluding that the policy of favouring football creditors, while understandable and valid in terms of competition, morally stinks.”

    Ben Tate

    August 26, 2009

  14. Ah, Buchler Phillips, God bless ‘em. Receivers to Oxford United and the Maxwell empire in general, from which, if you recall, they were able to recover an amount of money almost equal to the fees they paid themselves for recovering it.

    ejh

    August 26, 2009

  15. Keith,

    “So assuming the Beeb haven’t got it wrong, I think you’re wide of the mark with your first point, Rob. ”

    The BBC article only relates to owed money to the taxman, not the wages of the club’s employees/players. PAYE isn’t a football debt, outstanding payments to former players are a football debt, but my original point – wages of the current playing staff are part of the day to day running costs that the administrators have to deal with and are only treated as a debt if the club cannot afford to pay them, and the PFA steps in (and it then becomes a football debt).

    “I do take your point about trust between clubs with rtespect to transfer fee payments, however. Perhaps the rule could be changed to guarentee these, but not other creditors, such as players?”

    Why should the employees and ex-employees suffer because of mismanagement? The PFA would have all the players out on strike the moment something like that happenned.

    “I agree this is an issue, but some clubs have managed it (LCFC being one). At other times, clubs have been in administration for extended periods and have still been allowed to compete whilst they sort out an agreed CVA.”

    Leicester were in administration for almost six months.

    Ben – that article states that Bradford had to pay Carbone in full: “While the likes of Carbone’s £4m, two-year salary must be paid in full”. Any deal Bradford may have cut with Carnone would have been dealt with privately, and not been part of the CVA.

    Rob

    August 27, 2009

  16. “Why should the employees and ex-employees suffer because of mismanagement? The PFA would have all the players out on strike the moment something like that happenned.”

    And indeed why should local businesses? That’s the whole problem with the CVA proces. My original point is that preferred creditors punish local businesses and other clubs who choose to play with a straight bat. You’ve not convinced me the point doesn’t stand, Rob.

    The article also clealry states that outstanding wages must be paid, as does the article concerning Carbone. Why on earth would the club pay him £4m if it didn’t have to outside of the CVA process?

    Keith Duncombe

    August 29, 2009

  17. “And indeed why should local businesses? That’s the whole problem with the CVA proces. My original point is that preferred creditors punish local businesses and other clubs who choose to play with a straight bat. You’ve not convinced me the point doesn’t stand, Rob.”

    I totally agree with that, but when any business goes into administration, there are always losers. The league and the FA keep the football creditor rule so that Overapending Club A cannot spend money it doesn’t have on players from elsewhere and then not fulfil the payments. Removing that rule would put sensible clubs like Lincoln in situatons where they would suffer like local busineses. And because of the nature of football (and those owners that take the piss), a club like Lincoln would be out of business within two years. As an example, a club could have offered sums well above their worth for players like Dany N’Guessan and Lee Beevers last season. Let’s say £2m for the pair. Too good for Lincoln to refuse, and they offer the players enough to leave there and then. The fee is paid over the length of the initial contract. The club know this, and have this income guaranteed by the football creditor rule. Without the football creditor rule, apart from the first instalment, the Imps (and any other clubs in the same boat) could end up with 10%, 5% or even 1% of what else they’re owed, and by now ill have budgeted for. Lincoln now could be anything up to £1.65m out of pocket for money they should receive. That would push a side like Lincoln (and any others in the same boat) into administration, and the whole league collapses into a farce.

    “The article also clealry states that outstanding wages must be paid, as does the article concerning Carbone. Why on earth would the club pay him £4m if it didn’t have to outside of the CVA process?”

    Well, for a start, all of the money that Bradford owed Carbone at that point was for present and future clauses in his contract from when the point they went into administration. Wages and bonuses. Standard employee contract payments. These only become a debt if they’re late – but if a club misses these payments, the PFA steps in and pays the wages, so the debt isn’t to the player/employee, but to their union. Only then does it become a football debt because it’s owed to a football-related company.

    Also, as far as the football authorities are concerned contracts between clubs and players are sacrosanct. If you don’t pay the players you risk being suspended and/or expelled from the league, regardless of the rest of your financial situation.

    That’s a league (and FA) rule outside the boundaries of CVAs.

    Rob

    August 30, 2009

  18. Provided it was done with reasonable consultation and notice (yeah some hope!), ending the football creditors rule would not hurt the prudent clubs in the long run.
    Let’s say Spendthrift FC offer AFC Prudent £500k for a player to be paid in 3 installments. AFC Prudent would want to assess Spendthrift’s ability to pay, much as a company would look at the strength of a customer’s “covenant” in any major transaction. If it had doubt’s AFC Prudent could demand most of the money upfront.
    OK this could lower the market value of lots of players (in a sort of mini football credit crunch) but in the long run the prudent clubs would benefit by not having to pay such big fees themselves.

    ChrisP

    October 4, 2009

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