The special features of football insolvencies

12 June 2019

As recent headlines and media reports have highlighted, a number of noteworthy football clubs are facing financial troubles – a situation that is a worry for any supporter. In this post, R3 will set out what happens when a football club becomes insolvent, and why insolvency does not always mean the final whistle for a club.

A football club: Essentially a business

Despite the socio-economic importance of a strong football club to the local community – and high levels of emotion that go with supporting a local team – a football club, like any other company, is essentially a business. The fans pay money to the football club and in return the football club provides a service: a team capable of fulfilling a fixture (and hopefully winning some silverware). Like any other business, clubs have financial obligations and can face insolvency proceedings if they fail to meet these.

Insolvency

A business is considered insolvent when its liabilities outweigh its assets, or it is unable to pay its debts when they fall due. There are number of different insolvency procedures. For companies, these include: compulsory or voluntary liquidation, also known as ‘winding-up’; administration; receivership (although this procedure is becoming increasingly rare); or a company voluntary arrangement (CVA). All insolvency procedures are overseen by either the Official Receiver (a civil servant of the court) or by a licensed insolvency practitioner.

A company that owns a football club is often financially supported by an individual or another company. It is often when these parties are unable to continue to provide support, for various reasons, that the football club then finds itself in financial difficulty and unable to pay debts when they fall due. In many cases where football clubs have encountered financial adversity, it is down to debts due to HMRC (arrears of employee taxes such as PAYE and National Insurance contributions), leading to a petition to wind-up the company operating the football club.

Restructuring and the role of insolvency practitioners

When a company is experiencing financial difficulties, it can enter into a corporate restructuring process to address its issues in an attempt to prevent it from becoming subject to an insolvency process. Restructuring can involve selling some of the company’s non-essential assets, reorganising its debt (often by coming to an agreement with its key creditors), reorganising its operations, or a combination of all the above.

Administration

In an administration, the insolvency practitioners who have been appointed as administrators will seek, where possible, to rescue the company’s business as a going concern. This may involve a sale of the business to another (or a newly created) company. Portsmouth, Leeds United, and Queens Park Rangers are some of the examples of clubs placed into administration which continued trading while the administrator looked to rescue the business – typically the team, the kit, the stadium and other property – as a going concern. All were eventually sold to a new company to enable the teams to continue.

Company voluntary arrangements

Insolvency practitioners work alongside directors to agree the terms of the company’s rescue and restructure, which are then put to creditors for approval.

In the case of Portsmouth, the administrators proposed to exit administration by way of a CVA, to avoid the possibility of a further points deduction and to oversee the transfer of the club’s business and assets into a new company.

Liquidation (winding-up)

An insolvency practitioner will be appointed to assume control of the company’s affairs in order to wind-up the company’s operations. They are authorised to sell the company’s assets in order to generate funds to be distributed back to the company’s creditors.

The liquidation of any football club would more than likely lead to its demise and it is the last resort option for a director and/or insolvency practitioner. It is for this reason many winding-up petitions issued are often contested to ensure liquidation is prevented. Liquidation would be likely to void players’ contracts, with the consequence that there would not be a team to sell on to a new owner; the procedure is therefore a last resort, and avoided wherever possible.

Administrative Receivership

The term 'receivership' describes the process in which a ‘receiver’ is appointed by the creditor, typically a bank, to administer and ‘receive’ (i.e. liquidate) the company’s assets so the secured creditors can recoup their money. Administrative receiverships are now very rare, as they can only be initiated on cases where the debt in question dates back to before 2003, although Blackpool FC was placed into receivership by the High Court so the club could be sold, and the proceeds used to pay off some of the c. £22m owed by its owners.

The Football Creditors Rule

There is one big difference to how football club insolvencies in England play out compared to all other insolvencies: the Football Creditors Rule (FCR). In league insolvencies, the FCR means that football creditors (those whose debts relate to football activities – typically players and other clubs) are paid all that they are owed, leaving less for other creditors.

The FCR is enforced through shares in the companies which operate the English Premier League (EPL) and the English Football League (EFL). These shares are held by every league club, allowing them to play official league games, and to receive a share of the revenues received by the leagues through broadcast rights and league-wide sponsorship deals.

When an EPL club intends to be placed into or has been placed into an insolvency process, a suspension may take effect rendering the club unable to play a League game unless the suspension is postponed. A deduction of 9 points is made from the club’s total score. The EPL reserves the right to repay football creditors of the insolvent club, using the club’s share of UK and international broadcast and radio revenue, and commercial contract revenue.

When an EFL club intends to be placed into or has been placed into an insolvency process, it receives a deduction of 12 points. Its share in the EFL’s operating company is taken back by the league directors, and can be assigned to another party. Before a club can regain its share, and be allowed to rejoin the league, it must get approval from the League’s board. This approval is dependent on the club complying with the FCR.

For both leagues, the repayment of football debts is prioritised over repayments to other creditors, as a club without the right to participate in league games will lose a huge amount of its value, meaning that returns to all creditors will be much lower.

Following a campaign by R3, the FCR for English Football League clubs was amended in 2015 so that unsecured creditors (such as small local businesses, service providers, and the St. John’s Ambulance Service) are better protected in football insolvencies. Before the amendment to the FCR, there was no requirement to provide any level of return to unsecured creditors; now, the purchaser of an insolvent EFL club is required to pay unsecured creditors a minimum of 35 pence in the pound over three years (or 25 pence on transfer of share), or face a further 15 point deduction at the start of the season following the insolvency. These changes were welcomed by R3.

Conclusion

Any insolvency practitioner who takes on the insolvency of a club will be very aware of its value to fans and to the local economy, and will do their best to rescue the club’s business as a going concern. It is very rare for insolvency to mean the end for a club, which is good news for fans, local communities and towns across the country, and the sport as a whole.