Football League rules: a level playing field?

Football League clubs are effectively members of a private club with
membership rules. To preserve the integrity of the game, and ensure that no club
gains an unfair advantage, the rule is pay your debts in full.

In return, you operate in a high profile league, with TV income at 100% gross
margin and you may, if you are lucky, be able to sell your employees.

The definition of football creditors is primarily monies due to other clubs,
monies due to the leagues/FA/PFA and players contracts. The league’s insolvency
policy aims to ensure contracts are honoured in full, both in terms of arrears
and future entitlements.

Certain unsecured creditors (notably HM Revenue & Customs) argue that
this amounts to unfair preferential treatment. But is it really such an issue
today? It is not that they object to football creditors per se; they object to
any creditor enjoying priority that is not firmly established in legislation.

The fact is, most businesses that survive insolvency are obliged to meet the
demands of key creditors who may attempt to obtain force majeure (or ransom?)
payments in order to guarantee their continued support. Why are football
creditors any different?

If clubs are well managed, but suffer unfortunate occurrences (player
injuries, loss of key sponsor, relegation, etc), they should still be in a
position to meet football creditors.

The Football League distributes TV monies centrally and simply witholds TV
income until it is satisfied that debts will be paid in full. If the amount due
to players is significantly higher than the short-term TV income entitlement,
the accepted rescue procedure is the formation of a new company, with all
employees’ rights and entitlements transferring under well-established Transfer
of Undertakings Regulations.

Four years on from ITV Digital, most clubs have had ample opportunity to
renegotiate player contracts to ensure they are in line with income. But footb
all is mostly about winning, so there will always be those that enter into
onerous contracts. The issue is how to make football clubs operate in a
responsible manner.

Dave Acland is head of the football finance unit at Begbies Traynor

Relegation issue

In previous football club administrations, super creditor priority was a key
factor in determining the ability to rescue the club.

So, as the new football season begins, should it be viewed as a barrier to
rescuing a football club?For those football clubs in the lower leagues, the
answer now is perhaps a resounding ‘no’.

They have understood that revenues are difficult to increase, can reduce very
quickly and that overheads can take years to reduce, and have taken action to
bring their overheads in line with revenues.

Nowadays, if a lower league club entered administration, its football
creditors would be less likely to either dwarf other significant creditorsor
make a rescue insurmountable.

Unfortunately, this can’t be said for many of the clubs chasing the dream of
Premier League football or of breaking through into the upper echelon and
securing the riches of European football.

For these clubs, ever increasing wage costs and transfer fees create
liabilities so significant that the super creditor rule could make rescue
impossible unless football creditors are willing to compromise.

Some sensible business practice is starting to materialise – for example,
Southampton FC ensured contracts for its players included a wage cut upon
relegation, having recognised that Premiership wages could not be sustained on
Championship revenues.

Nevertheless, not all Premiership clubs have taken such action and were they
to drop out of the Premiership, they may face financial distress and possibly
administration.

Asking simply whether or not the super creditor rule should be retained
misses the point, it is within a club’s control to cut its cloth according to
its means.A club enters contracts with players willingly and it can decide not
to overstretch itself by chasing the dream.

Unfortunately, club chairmen and managers know that such sound business
advice is not what the majority of football fans want to hear.

Simon Wilson is a partner of Kroll’s corporate advisory and restructuring
group