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:

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For more information on:

  • Football Clubs and the Super Creditors Rule
  • What is a football super creditor?
  • What does this mean for the HMRC and the Inland Revenue?
  • What does this mean for the legal process of administration?
  • Is there any way of improving the situation?
  • Football Association suggestions