INSOLVENCY is becoming more common for football clubs. So how can clubs avoid administration in the hard times ahead? What can administrators do to prevent it?
The unique – and controversial – element of a football club insolvency is the requirement that certain football related creditors be paid in full as a condition of the club being allowed to continue in the league. This “football creditor rule” is currently subject to a challenge in the courts by the Inland Revenue. This challenge is unlikely to succeed, however, as there is nothing to prevent an orderly insolvency process being undertaken with football creditors being treated the same as all other unsecured non-preferential creditors. The requirement to pay football creditors in full is only necessary to enable a club to continue in the relevant league and therefore is one factor which the administrator must take into account when considering the best way to fulfil his duties.
Even the most successful clubs are not immune. Manchester United’s highly leveraged buyout resulted in a financial burden being placed on the club which is hampering its ability in the transfer market. Clubs such as Manchester City, which have wealthy owners allowing them to invest heavily in players and infrastructure, aren’t financially self-sufficient. Indeed, were the owners to withdraw their support, such clubs are likely to face financial uncertainty. However, where such support is by way of equity or subordinated debt, creditors should not be prejudiced on insolvency.
How can clubs avoid financial collapse? They have a fan base that remains loyal whatever the quality of the football, but this is coupled with the unpredictability of relegation or the loss of players, which adversely affects revenue from gate receipts, television and merchandise.
Clubs, while looking to be ambitious, need to be prudent. Player contracts should be flexible to allow for reduced terms on relegation. The football creditor rule has encouraged teams to sell players on unrealistic, often deferred, terms knowing that in any insolvency of the purchasing club their claim would be protected. The purchasing clubs find such terms attractive, but should avoid the temptation. If HMRC is successful in its challenge to the football creditor rule, practice will no doubt change. Should a group of unsecured non-preferential creditors be given priority over a club’s other creditors? Do non-football unsecured creditors suffer disproportionately due to the “football creditor” rule? Is the rule necessary to maintain a level playing field between clubs?
Clubs should try to ensure wages are less than a sensible percentage of turnover – though some with little debt will argue that their high wages as a percentage of turnover is preferable to significant annual interest payments.
Unconvinced that clubs can self-regulate, UEFA, European football’s governing body, has introduced financial fair play relegations which aim to impose financial restraint on clubs.
There is no magic solution to football club finances: to many supporters success is more important than financial stability. Long-term success can only be built on secure financial footings.
Julian Turner is a football insolvency expert at Reed Smith LLP