While it is very clear that the position on payment of football debts in full, the so-called ‘super priority creditors’, makes it difficult for administrators to rescue football clubs, the Football League’s rationale behind its retention is understandable.
The Football League argue that in such a small community of businesses, which can only survive and prosper as a collective, allowing one club to escape its liabilities to other clubs – to those clubs’ detriment – can not be allowed.
However, what is obvious is that the situation created by the collapse of television broadcaster ITV Digital is exceptional. Not only have clubs lost an important revenue stream – sometimes up to 30% of their income – but it has also resulted in the domino effect that has seen the football transfer market become stalled.
For many clubs, the end of a season provided an opportunity to balance the books by selling players to other clubs. However, at the moment, no one is buying.
Clubs have been forced to release players at the end of their contracts that they may have otherwise given new contracts in order to save money.
However, many clubs are aware that unless they can make further cost reductions – and player’s wages are the highest cost for a club – a financial crisis is looming.
The challenge facing the entire football community is how to ensure that all of its members can continue to play at the highest level while suffering the financial losses brought on by the ITV Digital collapse.
One suggestion is that the Football League temporarily suspends the ‘super priority’ policy for clubs that are in some form of insolvency process, allowing them to restructure their debts and survive.
It is thought that 20 or 30 clubs need help to restructure their debt burden, but are unable to do so whilst the ‘super priority’ policy is in force.
Once a club has exited the insolvency process, the policy would be reinstated and normal behaviour would resume.
Such a decision can only be made after lengthy consultation with all parties concerned (Football League, PFA and clubs themselves) but to do nothing could result in a number of football clubs closing and the impact that this would have on football in the UK would be catastrophic.
- Lee Manning is a Partner at Kroll Buchler Phillips
The protection of the rights of certain creditors of football clubs, known as football creditors, is an accepted part of the structure of professional clubs, and is in place to ensure creditors are paid in full if any restructuring may be required.
Proponents argue that football creditor status has maintained financial probity in a market which may be tempted to excess, but this could now be working to the detriment of clubs who are facing restructuring.
In the wake of the ITV Digital demise football clubs are facing the greatest crisis they have ever experienced. The restructuring that many require is endangered by the requirement that football creditor’s must be paid in full.
These include amounts due under players’ contracts, primarily wages and monies owed to other clubs. They also include amounts due to the FA, League and Football Trust, the PFA, the Inland Revenue and HM Customs & Excise.
The Football League requires all football creditors to be paid in full, unless specifically compromised. These rules were put into place to enable clubs to attract better quality players, thereby giving themselves an unfair advantage over their more financially conservative rivals. To date the system has been largely successful, but such is the recent degree of change it is necessary for these arrangements to be reconsidered.
Wages and PAYE generally comprise the largest expense of running a club.
To achieve successful restructuring, these must be reduced. Football creditor status makes it much more difficult to negotiate a compromise. This problem is not dissimilar to those encountered in restructurings with the transfer of undertakings regulations, which can cause the effective sale of businesses to be impaired.
What is needed is for those currently enjoying football creditor status to agree to a change in the rules that facilitates more radical restructuring.
This may mean greater losses in the short term, but would lead to greater stability in the future. It may also lead to a change in the make-up of the Football League, with clubs relying on realistic wage bills, matching outgoings with their income.
- Mike Hore is national head of corporate recovery at RSM Robson Rhodes. – Mike Hore is national head of corporate recovery at RSM Robson Rhodes.
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