A football club is a business with money being made through ticket sales, shirt sales and sales of players. This can be used for investment in the team, stadium improvement and to make income for the owners or shareholders of the club.
A football club, however, is not subject to the exactly the same legal rules under the Insolvency Act as any other kind of business if it becomes unable to pay its debts and has to go into administration (see below).
Administration is an alternative to liquidation for a business. Unlike liquidation, where the business is wound up, it is a way of rescuing a business and allowing it to stay in existence as it strives to re-balance the books.
Football clubs may run into money problems because they have budgeted for income levels that cannot be sustained. For example, they may anticipate a full stadium on match days, when in reality they are only half full. Similarly, a club may budget for the income received from playing in a particular league, without considering the drop in income that relegation may bring.
As the income drops, costs often cannot be reduced quickly enough as many clubs will have players on extremely high wages which cannot be met.
Administration is governed by the Insolvency Act 1986. Following its enactment, administration has been a popular route for football clubs as it enables them to continue running their business.
After going into administration, an administrator – who must be a licensed insolvency practitioner – will be appointed by the courts, the club’s creditors, or its company directors to take over the day to day running of a football club’s financial affairs, try to pay off its debts and avoid liquidation. It is therefore the most attractive option for football clubs.
The procedure for administration under the Insolvency Act is:
- 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;
- the monetization of assets to distribute to secured or preferential creditors.
Football Creditor 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 Premier League.
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 usually required by law. Football super creditors include:
- other football clubs;
- the Professional Footballers Association;
- the Football League;
- the Premier League.
As a consequence of the Football Creditor Rule, administrators dealing with football clubs have to work with two contradictory sets of rules: one set by statute – which generally demands that all equivalent creditors are treated equally and get a share of what they are rightfully due – and one set by the Football Association.
As a consequence of this rule, HMRC is typically paid a fraction of what it is owed when football clubs go into administration – to the detriment of the British public. Unsurprisingly, HMRC has challenged the Football Creditor Rule in the courts, but so far such challenges have been unsuccessful.
Football Association measures
Following many clubs voluntarily choosing to go into administration, the Football Association now gives clubs a 12-point penalty if they do go into administration to preserve the integrity of the league and to provide a disincentive to administration.
All football clubs must also 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 the league has the power to step in.