Football Clubs and the Insolvency Act

Football Clubs going into Administration

A football club is first and foremost a business with money being made through such things as ticket sales, shirt sales and sales of players which can then be utilised for such things as investment in the team, stadium improvement and to make income for the owners or directors of the club.

Despite being a business operating in the above spheres makes a football club a unique entity in many respects when compared to other businesses.

It may be of some surprise therefore to learn that football clubs are subject to the same legal ramifications and legislation as any other kind of business.

The Credit Crunch

The credit crunch has had a devastating impact on many businesses throughout the UK of which football clubs are not spared an exception.

The income that fans generate for a football club is huge and as all individuals have been hit dramatically by the credit crunch the commercial income for football clubs generated by fans has started to decrease.

Consequently the issues of debt and insolvency have started to appear in the footballing world much more over the last couple of years.

What happens when a football club becomes insolvent?

The usual process when a football club becomes insolvent is for it to go into administration. This process will bring both legal and sporting consequences for a club which has no other option.

Administration

What is meant by Administration?

Administration is an alternative to liquidation for a business and in essence it is a way of rescuing a business. This is a much more attractive option for a football club than liquidation as it enables the club to stay in existence much to the pleasure of the fans and players.

Why would a football club need to go into administration?

Football clubs often budget for levels of income that cannot be sustained. For example a full stadium may be budgeted for which does not take into account the effect of the recession on the paying public. Similarly a football club may budget for the income received from playing in a particular league not taking into consideration the effects of poor performances on the pitch and the drop in income that relegation may bring.

As the income drops rapidly, costs cannot be reduced quick enough as often many clubs will have players on extremely high wages which simply cannot be met.

There is a strong correlation between clubs being relegated and going into administration the following season. Often the league will try and allay this by providing parachute payments to relegated clubs meaning they will receive proportionately more than the teams in their new league for the first season. This is sometimes not enough, however, to stave off financial difficulties.

Is there any legislation which governs the process of Administration?

The process of administration is governed by the Insolvency Act 1986 which brought new insolvency regimes into English Law that were intended to enable the reorganization of a structure which would hopefully lead to a better financial outcome than that through the traditional rules of insolvency.

Following the enactment of the Insolvency Act administration has been a popular route for football clubs as it enables them to continue running their business.

Following the process of administration a football club will be provided with new directors and a new balance sheet. It is therefore the most attractive option for football clubs.

The Insolvency Act 1986

What is the procedure for administration under the Insolvency Act?

The procedure for administration under the Insolvency act is as follows:

  • Priority will be given to rescuing the company as a going concern
  • If the first objective is not practical the second objective will be to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up
  • Realising property in order to make a distribution to one or more secured or preferential creditors

Football Clubs and the Super Creditors Rule

Professional football clubs, however, have a unique way of dealing with debts through the financial regulations which have been set by the Football Association, the Football League and the Football Association Premier League which are contrary to the above mentioned law.

Under the current football league rules a club which has gone into administration has to initially pay off football super creditors before they pay off preferential creditors as they are required to by law.

What is a football super creditor?

A football super creditor is one of the following entities:

  • Players
  • Managers
  • Other football clubs
  • The Professional Footballers Association
  • The football league
  • The FA Premier League

What does this mean for the HMRC and the Inland Revenue?

Prior to the Enterprise Act 2002 the Inland Revenue had a right to be paid out before any other creditors when a company went into administration by right of the Crown Preference Act. This right has been abolished by the Enterprise Act meaning that the Inland Revenue will be paid out following the football super creditors.

What does this mean for the legal process of administration?

As a consequence of the football super creditors rules Administrators dealing with football clubs has to work with two contradictory sets of rules – one set by statute and one set by the Football Association.

Following on from this HMRC is typically paid out only 5-10% of what it is owed when football clubs go into administration.

This therefore has consequence of football clubs effectively not paying their taxes which in the end is to the detriment of the British public.

Is there any way of improving the situation?

Many feel that in order to ensure that the full tax in paid in the situation of a football club going into administration the football super creditors rule should be abolished.

This would, however, prove extremely detrimental to the football clubs as if they are not able to secure money to their players and other clubs for examples they will be unable to undertake many of the unique business practices associated with football.

Football Association suggestions

Following on from many clubs voluntarily choosing to go into administration the Football Association decided to give clubs a 9 point penalty in order to preserve the integrity of the league and to provide a disincentive to administration.

From March 2010 all football clubs will have to provide the Football Association with a financial forecast showing they have a sustainable financial plan to carry the club forward. If the Football Association deems them not financially viable then the league will have the power to step in.