Graham Down from insolvency practitioners Burton Sweet talks the beautiful game....

Football clubs rarely seem to have been out of the insolvency news over the last few years, with several managing to stave off winding up petitions at the eleventh hour and Glasgow Rangers and Portsmouth being just the latest in a long line of clubs to be put into administration.

By all accounts, several more league clubs are in dire financial straits and facing the prospect of insolvency – in a number of clubs, payroll costs alone exceed their entire income. Often HM Revenue & Customs are amongst the largest creditors. Indeed, it sometimes seems that clubs are able to keep their heads above water only by assuming that payment of their tax liabilities is optional.

If the reports are to be believed HMRC have had enough of being used as the game’s bankers, and are keen to set an example to other clubs by finding at least one to wind up. As well as chasing overdue PAYE, by all accounts fees paid to agents, payments for players’ image rights and testimonial match receipts are all in HMRC’s sights. What they have certainly had enough of is the so-called “football creditors rule”.

In short, the football creditors rule states that, if a club goes into administration, then a notice is served suspending its membership of the league. The membership will only be revived if the club exits the administration into a company voluntary arrangement (CVA) and pays all its debts to “football creditors” in full. During the period of suspension, television revenue is withheld and diverted to football creditors.

If the football creditors are not paid in full then, quite simply, the leagues’ view is that the club can go and play in some other competition. The Premier League’s stance (and that of the Football League) is that the rule is essential to protect the integrity of the competition, and that clubs need the certainty that they will receive the funds from the sale of a player to another club - without the rule, it is argued, the transfer market would collapse. In effect, the rule provides selling clubs with a form of security.

Meanwhile creditors are left with a straightforward commercial choice. Either they accept the demands of the football authorities, in the hope or expectation that future income from playing in their competitions will produce sufficient income to produce a dividend and repay at least part of what is owed, or they reject those conditions, leading to the probably inevitable demise of the club and the certain knowledge that they will get nothing.

There is a difference between what can happen in a CVA, and what is permissible in other forms of insolvency. In a CVA, 75% by value of creditors can agree pretty well whatever they wish, HMRC have not yet been able to block a football club’s CVA by having 25% or more of the vote. An aggrieved minority cannot argue that a CVA is unlawful or unfair, only that the arrangement is “unfairly prejudicial”. 

HMRC have tried twice before to challenge the rule, with challenges against Wimbledon AFC’s CVA in 2004 and, more recently, that of Portsmouth (the first time around). The difference this time is in the fact that the challenge is against the Premier League, not against an individual club. Whether or not they will succeed remains to be seen.

Meanwhile, the Government has threatened to intervene if the football bodies don’t force clubs to get their financial houses in order. Domestically, “HMRC reporting” has been introduced for PAYE, so that, if a club falls into arrears with its PAYE commitments, a transfer embargo is placed on the club to prevent it spending on more players and thus compounding the problem. The 2013/14 season sees the introduction of UEFA’s “financial fair play” rules, which initially allow a club to lose no more than £37.5m over a two-year period (with annual losses not permitted to exceed £8.8m after 2018), may reduce the risk at least of any big clubs going to the wall.

However, the system will quickly lose its credibility if a major club which flouts the rules is not seen to be punished in an effective way, and time may well tell whether UEFA has the stomach for some serious sanctions. However, none of that necessarily means that football will stop making the insolvency news for the foreseeable future.

If you would like to discuss any issues surrounding insolvency, please call Burton Sweet on 01743 233603.