Football insolvency: A game of two countries

IN THE WEEK that Samuel Eto’o is set to become far and away the highest-paid footballer on the planet, Spanish football is going through a financial crisis. Players are striking over the lack of salary protection in the event that their clubs collapse. However, British football has a storm brewing: players’ wages are too-well protected.

So which country has it right, if either?

Not all football players earn mega-bucks. In reality, for each player that has the capability to earn more than a small country’s GDP, dozens of footballers manage financially on a month-by-month basis.

For the players in Spain, more than half of the clubs in the professional league have entered into some form of insolvency in the last two years.

According to reports, 200 players are owed a combined total of about $70m ($42.57m) by their clubs, with many failing to be paid in the last year.

Now the Association of Spanish Football Players has taken a stand and its members are striking in an attempt to gain more protection in the face of their clubs’ insolvencies.

Spanish football clubs follow similar rules to UK companies in the event of a collapse. Lenders are paid first as a secured creditor and all other organisations know their place well, to be paid second as an unsecured creditor. Employees including administrative staff and footballers are paid as unsecured creditors.

Spanish footballers are calling for insurance, or a wage fund to be set up if their club enters an insolvency process.

UK football leagues have taken the issue a step further.

If a UK club enters administration, football creditors such as players, other clubs and managers are pole-vaulted to the front of the queue, and in most circumstances repaid in full. All other creditors are paid afterwards with what is left.

An example of this super-creditor status is the demise of then-Premier League side Portsmouth FC, which saw its players and managers paid in full and unsecured creditors likely to be paid 5p for every £1 owed over a number of years.

Another example is Plymouth Argyle, a club at which players were not paid for up to six months. The footballers continued to play for Plymouth, knowing that their wages were protected by the rule allowing the club to continue playing in the league.

Unlawful?

HM Revenue & Customs has labelled the UK football creditor rule as “unlawful” and has mounted a legal challenge in the High Court to be heard in November, calling for its abolition.

The Taxman is not alone in its argument that creating a super-creditor in football lies outside normal business insolvency rules and circumvents law.

HMRC now has a new ally in the argument: parliament. In a recent Culture Media and Sport Parliamentary Committee meeting, the idea that the rule should be scrapped altogether by any means necessary was kicked around.

The committee’s football governance report suggested that, if HMRC loses its legal challenge against the football leagues and the leagues fail to change, the government should legislate against the rule.

However, the government might be forced to think twice about the implications of canning the rule, such as how this will affect other clubs. If Spanish football is anything to go by, the key asset of a club – the players – could down tools.

The wider issue of why the industry is in turmoil might also need to be addressed before any changes to insolvency processes can be bashed out.

Clubs in Spain and the UK alike are functioning outside their means. As Manchester United’s chief executive David Gill pointed out, the rule is supporting a recent trend of allowing transfer fees to be spread out over several years rather than the previous de facto period of one year.

Failing to pay fees quickly could leave others out of pocket in the case of a club’s collapse. One insolvent club could drag others down.

This trend means, if one club enters administration, that it could end up taking two or three others with it if there was no rule, claimed Crewe chairman John Bowler.

Without the super-creditor status in the case of Portsmouth, it was very likely that several other clubs, including Watford, could have ended up on the administration block due to transfer fees owed to them all.

Spanish clubs are being crippled by transfer fees and player wages to the point that they are struggling to keep the club above water. Yet how can a club compete and gain vital television, merchandise and championship money, unless they pay the inflated costs?

Although this issue is due to rage on for some time – (some Spanish players have said they will sit out the entire season – it is worth noting that football, although a multi-billion pound industry, is unlike any other. It is not judged by its balance sheet but by its success on the pitch.

With this sentiment in mind, parliament, HMRC and the leagues will have to agree if they can meet each other on the halfway line, because the industry deserves to be judged by different rules of success.