Barry Hearn On Administration

Barry Hearn On Administration

By on Feb 25, 2010 in Finance, Latest | 9 comments

Michel Platini, with all of the elegance that one might expect from a man with such a playing career, describes it as “financial doping”. It is, in short, the accumulation of debt to purchase success on the pitch. Some clubs do it as a result of the egos of their chairmen, some do it from the fear of what might happen if they don’t, and some do it in the genuine but misguided belief that somehow everything will be okay if they manage to get the team winning on the pitch. The result, however, is usually the same. The players and the manager leave when things turn sour, there is a desperate rush for new investors and, when these can’t be found, it ends in either administration or a close shave with administration.

All of which brings us to the somewhat divisive subject of Barry Hearn. In a recent interview with Talksport, Hearn described clubs that enter into adminstration as “cheats” and stated his belief that all clubs that enter into adminstration should be relegated two divisions. There are plenty of reasons to be cynical of Hearn’s pronouncements on the subject of how to run a football club. Bit by bit, Hearn has sold off areas of the site of Leyton Orient’s Brisbane Road ground (which some people, presumably including Hearn, call “The Matchroom Stadium”), and Orient will be paying £180,000 a year rent there in around three and a half years time. He has also discussed the possibility of moving Orient from their home and out into Essex or alternatively to the Olympic Stadium.

This particular subject, however, is one that does need to be addressed. The issue here is the fact that the current penalties for financial mismanagement are not adequate to prevent such mismanagement from taking place. As Hearn rightly says, a ten point deduction for entering into administration seems unlikely to deter such behaviour from football clubs in the future. The relatively unscrupulous owner will look at the sums and automatically think, “I like those odds”. Crystal Palace, for example, will have to enter a CVA at some point, and this will most likely mean that their creditors will most likely lose around nine-tenths of the money that they have lent the club – and said creditors won’t even have any say in the matter if the only alternative is liquidation.

The Football League has become more aggressive in recent times, fixing higher penalties for clubs that have not exited adminstration with a CVA in place, but they have stood acccused of punishing the wrong people. At Luton Town, for example, the points deduction that effectively relegated the club from the Football League was levied against the new owners of the club, who had nothing to do with the antics that got them into that almighty mess in the first place. Ultimately, the point is that there is no one-size-fits-all reason why football clubs enter into adminstration, and this means that having a one-size-fits-all punishment is likely to be unsuccessful. On the one hand, there are clubs that drive themselves to the point of insolvency and only barely seem to get punished. On the other, there are those that seem to be driven into an even more intolerable situation by dint of the specifics of what has happened to them.

How, then, do the football authorities react to this? Well, the answer is – and you have to excuse the management-speak here – they have to pro-active rather than reactive. They have to take more effective steps to ensure that clubs don’t find themselves in this position in the first place. By the time that the insolvency event is due to take place, it is too late. The action has to start to make such a set of circumstances as close as can be managed to impossible before they can even take place. It is about having a more complex set of regulations concering how clubs manage themselves on a day to day basis.

First up is the issue of tax evasion. Football clubs have used public money in the form of unpaid tax as an optional overdraft for as long as they have been overspending, and it says much for the moral angle of doing this that the overwhelming majority of the public side with HMRC rather than football clubs when a winding up order is issued against a club for non-payment of tax. We have been into the details of why HMRC take such a hard line over the non-payment of tax by footbal clubs on this site before, and the fact of the matter is that this isn’t a situation isn’t going to change until, at the very least, HMRC is given preferred creditor status in the result of an insolvency event under law again, as they had until 2002. Since this is unlikely to happen at any point in the near future, the game’s authorities need to ensure that tax bills are unpaid.

The regular auditing of club’s accounts could be the answer here. Points deductions could be introduced by the people that run the game for clubs that are, say forty-five to sixty days late with their tax payments. Relegation could be a sanction for more serious breaches of the rule. The fact of the matter is that the FA is not going remove preferred creditor status from football debts in the near future and there are, as we have discussed on this site before, sound reasons for doing this. Giving HMRC preferred creditor status under the rules of the competitions in which clubs play, however, would send a sharp message out to those that have been transgressing. For those that believe that this is to be over-zealous, there could be a one year “honeymoon” period before such a rule passes into statute to give clubs an opportunity to sort their affairs out.

Wage caps could prove to be more divisive than this, but we – clubs themselves, authorities and supporters themselves – need to move away from the idea that it is remotely sustainable for a club to spend 80-90% of its annual turnover on wages. Critics argue that wage caps would embed the status quo in perpetuity but this doesn’t necessarily have to be the case, and this is disregarding the simple fact that the game in England is almost paralysed by a status quo that has existed for more than a decade and a half anyway. It may encourage clubs to start investing their money properly, in, for example, youth academies and the fact of the matter is that exclusions to such a rule could be added if the effects of it on competitive balance within the game becomes too much more distorted (in other words, even more distorted than it already is).

These are just two ideas to throw around. With some lateral thinking, English football could translate itself from being a debt-ridden monster (revelations that the Premier League clubs were, between them, £2bn in debt two years ago were greeted with shock, but confirmation that the current debt of the twenty clubs in the same division now is £3.5bn excluding Portsmouth and West Ham United – two clubs that could probably add a further £200m to that total at the very least – have this week been greeted with knowing shrugs) into being something that we can all be proud of. There doesn’t, however, seem to be any great momentum towards making this change from within the game, and the quasi-legal status of the likes of the Football Association means that any change will have to come from within – and the unfortunate fact of of the matter is that, in light of recent events, there doesn’t seem to be any will from inside the game to make this happen.

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    9 Comments

  1. Definitely from a lay-persons perspective this, probably lots of reasons it couldn’t happen. But if clubs were given “a licence to buy” before each transfer window… and only if documents arrived at the league showing that tax bills and finances were in order, then clubs wouldn’t be allowed to use the tax man as a loan company. Either that, or more complicted, any tax debts would be paid by the leaugue out of TV/ advertising monies, before being sent to a club?

    Wyre Forest Red

    February 25, 2010

  2. Football in this country will not change for the better.
    As much as we want it to change and for clubs to be run within their means it just will not happen.

    The people who have the power will not vote against themsleves – it’ll be like turkeys voting for Christmas.

    This will go on and on and on and on and on……

    For any notice to be taken a Premiership club ill have to go completely bust, and I mean right out of the league bust.

    Until that happens people will continue to turn a blind eye to it.

    Even if a premiership side did go bust there is no guarantee the others will bring about wholesale changes…..no one wants to rock the gravy boat.

    It stinks…the whole thing

    Jertzee

    February 25, 2010

  3. Admin can viewed as cheating, but in the case of Luton Town admin was used as a weapon on several occasions to gain control of the club and the underlying issues were not necessarily purely financial.

    As a Luton Town supporter, and whilst thinking the points deductions suffered over past few seasons amount to cruel and unusual punishment, I think the penalties imposed for administration must always be applied to the club (ie the franchise) and not to the owners. Were that to be the case, there would be nothing to stop the owners of the club entering into a prepack administration, buying the club back using a new company and then claiming the new company has nothing to do with the old one.

    We need a better system.

    What about having the projected cashflows of all clubs audited before the start of the season. If their financial planning involves some owner writing a big cheque then so be it as long as the cheque is cashed and the funds are placed in escrow. If a club cannot make a convincing financial case for fulfilling its obligations for that season then it should not be allowed to proceed.

    Big Sim

    February 25, 2010

  4. Turkeys vote for Christmas all the time. People smoke when they know it will kill them, businesses agree to do one thing that they might see as bad for fear of an alternative that could be worse.

    Most often this is seen in the arena of self-regulation. The video games industry put in a set of controls on itself because they feared what would happen should they end up (and I think they did, certainly in some countries) being subject to a less sympathetic Governmental process.

    Likewise the drinks industry started talking about reducing the flow of cut price alcohol because of the spectre of Governmental intervention.

    Which perhaps is the way that football will agree to a range of measures that would protect English clubs from the owners – for fear that should they not do a broader strike will come from Governmental (be it Brown or Platini) agencies.

    Michael Wood

    February 25, 2010

  5. Michael, you say “Which perhaps is the way that football will agree to a range of measures that would protect English clubs from the owners – for fear that should they not do a broader strike will come from Governmental (be it Brown or Platini) agencies.
    “.

    It will only be in the matter of self interest and will bend the rules rather than do anything sensible like force themselves to live within their means.

    Lok at Chelsea, they are worried about the regulation due to come in about debt, so what has abramovich done? Diluted the value of existing shares by converting his loans to more shares, thereby eradicating the debt. Brilliant!
    Now if he decides to sell up the new buyer will need millions to be able to afford it. So it will only be bought by another multi billionairre or, worse still, bought by people with no money and load the debt onto the club, i.e. like the Glazers.

    All smoke and mirrirs and with the football authorities and clubs this self regulation will be like painting over the cracks.

    Jertzee

    February 25, 2010

  6. Barry Hearn is right, on this occasion.

    The current sporting penalty for administration is patently no deterrent.

    Martin

    February 25, 2010

  7. The thing is, football attracts pretty much the dregs of the business class anyway so what on Earth is the point of expecting any binding moves on self-regulation to come from them?

    ejh

    February 26, 2010

  8. Apologies if I am being a little thick here, but there are some points about this whole shambles I don’t understand

    a) PFC own several million to HMRC. Surely they still owe this, rather than a potential CVA share? Can HMRC not demand the money or wind them up?
    b) How has administration even been an option in light of a)
    c) Could they not be forced to sell their stadium to service the debt?

    PFC won the FA Cup and got into Europe on the back of unrealistic borrowed finances. I wouldn’t say this is ‘cheating’ if you genuinely beleive you could pay it back, but what it does expose is the slack legislatvie framework which allows clubs to get into this kind of mess, and the refusal of those involved to accept that liquidation is a suitable punishment. You cant have it both ways. If your only means of glory is to borrow beyond your means, then you need to accept that one day people will come calling for their money back, and if this means winding a business up shouild it not be able to satisfy its creditors, then so be it. All this farce demonstrate is the greed is good paradigm actually works. It is also a smack in the eye for clubs who attempt to run their football clubs on a manageable scale.

    I have nothing against Portsmouth FC, but going into administration means very little for a club that was doomed to relegation anyway.

    As a footnote, all winding up would mean is an AFC Portsmouth starting again in the regional non league pyramid, which would give fans an opportunity to have a true say in the running of their club and visit grounds they have never been to before. Unfortunately too many supporters have been brainwashed into beleieving that the raison d’etre for supporting a team is to watch them in the Premiership, and would invariably see a move to the non league game as a reason to quit supporting them.

    They couldn’t be more wrong.

    London Harrier

    February 26, 2010

  9. London Harrier – yes, Pompey are now protected from winding-up by HMRC by dint of going into administration. The whole financing and governance of football is now beyond parody. In chronological perspective, the 10 points deduction for FL clubs going into admin was introduced after Leicester were deemed to have pushed it too far – they were effectively bust but resurrected the club debt-free, having paid mere pence in the pound to their creditors. The authorities at the time thought fining clubs was a waste of time, the only way to make them change their behaviour was points deductions. Wind forward to Leeds’ meltdown and the way Bates brought the club out of admin. All still very murky but, despite his protestations, he obviously believed a further points deduction was worth it.

    Football should be run in a businesslike fashion (spending on operational costs within its realistic means, etc) but no-one can pretend it’s a normal business. If a fan thinks their club charges too much or is rubbish on the pitch, they don’t go and support the competition down the road. Suggestions such as clubs lodging security before the start of each season, having their finances vetted quarterly, etc, are all laudable but how would transgressors be punished? Fines? Points deductions? Just how huge will the FA’s compliance need to be? If the FA, supposedly the game’s supreme governing body, had the balls and fewer vested interests, they would introduce more draconian measures. For example, any club in financial difficulties who doesn’t pay its creditors in full is expelled from all FA-affiliated competitions, i.e. they’re out, finished. The Conference has introduced that rule, not sure if it’s effective from this season or next. Yes, that’s tough on the fans but it might encourage them to question the way their clubs are run. And talking of fans, I’d have fans’ representatives on the FA Board. Off the top of my head, one from Supporters Direct, one from the FSF (yes, I know they have a rep on the FA Council but that’s the old farts, nice day out at Wembley biscuit brigade). Perhaps a third could be one of the 200% people? :-) Sadly, none of this will ever happen.

    LadyWomble

    February 28, 2010

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