Time to boot out the super creditor rule

And if that wasn’t enough include an arcane rule that presents a major, if not, insurmountable obstacle to insolvency practitioners trying to restructure a club.

And that rule? The now notorious and much fought over ‘super creditor’ principle.

The vast majority of insolvency practitioners involved in restructuring football clubs agree that the rule, which forces the clubs to pay football creditors before others when restructuring, should be scrapped or at least changed temporarily.

National law attempts to put all creditors on an equal footing. But in the Football League clubs are forced to obey the super creditor rule before formal insolvency law if they want to continue playing the game in the league.

Super creditors include football players, managers and coaches, as well as government creditors and the bank, except in the case of a mortgage.

Sensitive subject
But the place where the rules makes most difference is on the sensitive subject of players pay. Insolvency practitioners agree that one of the biggest costs to clubs are player’s wages. Experts estimate that, while club incomes have been increasing by 20% per year, players’ wages have grown by 30%. And because the rule says players’ contracts must be observed, clubs short of money are therefore placed at a distinct disadvantage.

The rule does not completely rule out renegotiating contracts. But it does mean that if it does happen, it must be done with the player’s authorisation.

RSM Robson Rhodes partner Matt Dunham, who recently negotiated a company voluntary agreement between Bury FC and its creditors, explains the dilemma: ‘If the players do not agree to renegotiate the contract, the shortfall would have to be met by the club moving forward. Dismissed players would have to be paid going forward along with extra costs.’

But insolvency experts do not blame players. They say footballers have just been taking what the market was paying prior to the downturn. They add the super creditor rule to protect players, who argue they have a shorter professional life than people in other jobs and need the large salaries to survive after retirement.

A change to the rule
So practitioners have been calling for a change in the rule since March, when many clubs found themselves in financial dire straits due to the collapse of the £178m broadcasting deal with digital channel ITV Digital and its subsequent demise.

They say current circumstances are ‘unprecedented,’ as it is the first time clubs have been faced with an economic downturn, a drop in advertising revenues, exceptionally high wages, and the collapse of a major contract that affected all clubs all at the same time.

Alistair Beveridge of Kroll Buchler Phillips, the firm advising the Football League, explains: ‘The clubs need to get a break from their significant ongoing liabilities. They may be reasonably good businesses, but because of the weight of the payment of wages, the clubs cannot survive. They need to be able to structure in the same way as a normal commercial scenario.’

And according to Philip Long, head of business recovery at PKF, 50% of the league’s clubs are facing difficulty and possible liquidation. ‘The problem going forward is that practitioners will not be able to restructure the business unless they can deal with all creditors fairly,’ he says.

But will the League entertain the idea of removing super creditors? So far, calls to change the rule have fallen on deaf ears.

Decision to maintain the rule
Last month, ‘after careful consideration,’ the League decided to maintain the super creditor. This was despite the fact that advisers to the League were being given serious advice that the rule should go.

Two weeks ago another option emerged. Amongst a raft of proposals put forward to the League by advisers Kroll Buchler Phillips was the idea that the super creditor status should be suspended for six months providing clubs with a small window to restructure in the face of tremendous financial pressures.

This week a spokesman for the league told Accountancy Age it would not be changing the super creditor rule. It is difficult to tell what the thinking is at the league but it is clear that if they were to go down the suspension route they would meet with a fair amount of opposition not least from the players themselves. A change is also likely to prompt huge amounts of media coverage, especially if the league makes the decision after the end of the World Cup when the UK’s footballing community will have their focus firmly back on the future of the clubs facing the worst of the crisis.

Still money up for grabsA spokesman told Accountancy Age that the clubs could still get money from the lawsuit which the league filed against ITV Digital partners Carlton and Granada. The result is expected at the end of the summer. The odds are against the league winning quite so much and even if it did it is impossible to know whether it would secure the long term future of clubs without some serious reform of the league and its rules.

What are the alternatives for clubs now? In a rare statement a league spokesman was quick to point out that ‘the clubs still have their rights which they can sell to another broadcaster,’ and that insolvent clubs will be getting preferential treatment, as solvent clubs were able to manage their finances under the the super creditor rule.

But PKF’s Philip Long is sceptical an alternative broadcasting contract will be a solution to the problem. He said: ‘I can’t see any buyers for a satellite television deal. [The league clubs] will be locked in with Sky. Some sort of composite will have to be made, but they will not get nearly as much as before.’

Keeping the rule as it is, leaves practitioners with little room for manoeuvre.Insolvency practitioners trying to get clubs out of insolvency will be forced to find a rich ‘white knight’ to buy the club, reach alternative agreements with creditors, or sack players and negotiate the fallout with the future buyer.

As there are so many clubs in dire straits and so few buyers, the first alternative is highly unlikely.

But the second alternative has already been used by BDO Stoy Hayward, which was able to negotiate Queen’s Park Rangers out of administration by renegotiating players’ contracts and by one of the creditors writing off a substantial debt. Kroll was also able to take Bradford City out of administration.

But its method was more like the third option, as it made redundant 16 players, one being the expensive Benito Carbone, believed to have earned £40,000 per week.The club will now have to thrash out a deal with prospective buyers to be able to pay off the sacked players.