Administration and the Football League

Though for football fans it may be much more, at the end of the day, a club is a business which makes money through various different avenues; sponsorship, TV licensing and merchandise sales among others. The last couple of years have seen a worrying trend emerge with a sharp rise in the number of clubs in financial distress, rising from 1% in 2018 to over 8% just one year later. [i]

This phenomenon has been compounded by the Covid-19 pandemic, with clubs losing gate-receipt and merchandise revenue through games being played behind closed doors whilst players and staff remain under contract. The government furlough scheme has helped clubs to pay staff wages, but the scheme’s maximum cap of £37,500 is significantly below the average salary of a League Two footballer not to mention that of a Premier League player. [ii] This leaves clubs no option but to either attempt to negotiate a payment deal or continue to pay their contracted wages in full. Clubs throughout the football pyramid are spending a chunk more than they are currently receiving in income. In May 2020 the English Football League (EFL) chairman Rick Parry warned that EFL clubs were facing a cash shortage of £200 million and were ‘staking up creditors’. [iii] This leaves the potential for many clubs to face insolvency proceedings in the coming years.

On July 1 2020 Wigan Athletic Football Club became the first English professional football club to enter into administration as a result of the global pandemic and many more clubs remain in a worryingly unstable position as the footballing world gets to grips with the new normal. So what does entering into administration mean for them?

Why would a club enter administration?

A football club may be considered insolvent when they are in a poor financial situation. This can take the form of either the club not being able to pay its debts as they become due and or the club’s liabilities (such as players’ salaries, rent and money owed to suppliers) outweigh the value of the club’s assets (the resources owned by the club including its stadium, players and cash in the bank). In other terms, the football club simply does not have the cash liquidity to pay its creditors. This often occurs following a club’s relegation where they have failed to adequately adapt their operations to the lower levels of income they now receive. However, recent insolvency events have occurred when an owner’s financial support has been withdrawn (see Bury FC in 2019) or a prolonged period of financial ambition and ultimately mismanagement (see Leeds United in 2007).

What is administration?

Administration is a form of insolvency procedure that aims to prevent the complete failure of the business and consequently liquidation, where all assets and property are sold. This will allow the club to remain in existence and continue to competitively participate. Once administration is entered all control of the company is passed to an administrator in place of the company’s directors. During this period a statutory moratorium is in place meaning creditors are unable to take legal action against the club to retrieve the debt they are owed.

An administrator will take over all aspects of the running of the company (excluding on pitch decisions) and will either attempt to find a new owner for the club, who has the financial capabilities to cover the club’s liabilities, seek a deal with creditors to reduce the debt or make it more manageable or failing that repay the creditors through the sale of club assets which, for football clubs, normally takes the form of their most valuable players. Similar to that of company administration, there is a hierarchy of creditors who must be paid in a given order. However, due to the unique nature of the football league, an additional tier of creditors are recognised, known as “Football Super Creditors” they are prioritised before other creditors and must be paid in full before the club is able to resume competitive matches (the Football Creditor Rule).[iv] These super creditors consist of players, managers, other football clubs, the Professional Footballers Association (PFA), the EFL and the English Premier League (EPL).

The thought process behind this was to prevent a trickle-down effect whereby many football clubs lose the money owed to them as a result of a club going into administration. The EFL justify this through the argument that football clubs are a community of businesses who can only survive as a collective and allowing a club to escape its liabilities would be unfair to the community around them. Ultimately, this rule is to protect the interest of other clubs throughout the leagues who are reliant on money owed to them.[v]

What does this mean for unsecured creditors?

Unsecured creditors have argued that in prioritising the interests of football creditors the chance of receiving their debt is significantly diluted. To combat this, the EFL introduced regulations which insist that unsecured creditors must receive at least 25 pence for each pound that they’re are owed, rising to 35 pence in each pound should the debt be paid over three years before a club can come out of administration. Failure to do so will result in a further 15-point deduction in the year following insolvency.

Whilst this may bring some comfort to creditors, in so far as they stand to get, at the very least, 25% of their debt repaid, the rule clearly runs contrary to the general principle of insolvency law especially that of pari passu where all creditors are to be treated as equal. There have been a number of challenges to this rule, predominantly from HMRC who, having no preferential status on company insolvency, are treated as unsecured creditors who can remain unpaid whilst football creditors are paid in full. The challenges to the legality of the football creditors rule culminated in a 2012 decision which was found in favour of the EFL.[vi]

What is the penalty for entering into administration?

For a club, entering into administration is no easy decision. It will most likely result in large scale player sales and will most definitely result in a points deduction. For an EFL team the deduction stands at up to 12 points. When this deduction is applied, however, depends on two factors:

When the insolvency occurs
Where the team finishes in the league

If the insolvency event occurs outside of the normal playing season the team will begin the next season on minus 12 points. If the event occurs before the fourth Thursday in March the deduction will apply immediately. Finally, if the event occurs after this time yet still within the normal playing season the deduction is applied when the final league standings are confirmed. If the team ends the season within the relegation zone the deduction is then applied the following season. This applied to Bolton Wanderers who started the 2019/20 League One season with minus 12 points, having finished in the Championship relegation zone the season before. If the team is not within the relegation zone the deduction is applied at the end of the season.[vii] This may still drag the team into the relegation zone and subsequently lead to their relegation.

The Football League’s position was adopted in order to deter clubs from using administrations as a consequence-free method of shredding debt and restructuring liabilities. They aim to bring stability to clubs and reduce the damaging effect that insolvency can have on local businesses. Not only this but they are important in ensuring the validity of the league. The regulations act to discourage clubs from delaying the process of entering administration until they are in a ‘safe’ league position or alternatively confirmed relegated, where a points deduction would have little effect on their subsequent league standings.

Is administration the end?

Entering administration is by no means the end to a football club. In recent years Southampton, Bournemouth and Huddersfield have all entered administration. They were all able to survive, restructure liabilities and enjoy relative periods of success, all reaching the top tier of football in recent seasons.

There are three scenarios in which a team can exit administration:

Sell the club to an owner who has the financial capabilities to run the club – if multiple offers for purchase are made, the administrator will select the option most financially advantageous.
A Company Voluntary Agreement (“CVA”) – an agreement between creditors and the club whereby the repayment of debt is restructured over a set period of time.
Club liquidation and the sale of all assets – The only option if no potential buyer is found and the club assets are insufficient to enable a CVA to be agreed. The money raised from the sale of assets will be used to pay off the remaining debt, with the payment of creditors adhering to the ‘Football Creditors Rule’.

For Wigan, the 12-point deduction acted as an almost insurmountable barrier to remaining in the Championship and they will be plying their trade in League One next season. Only time will tell how severe the impact will be, but if the administrators are able to find a new owner all may not be as bad as it seems. Any owner will, however, need to have the capabilities to take on significant debt and be able to potentially restructure the club around a much lower solidarity payment of £700k for a League One club compared to the £4.5m offered to Championship teams. This could be a tough ask in the current climate, but all that remains is to wait and see if a deal can be negotiated.