How the administration procedure applies to British football clubs

Money football

Nowadays, the financial standings of the UK’s top sports teams is widely known. With this information so easily accessible, any problems will soon make their way to the public domain. In fact, watching as long-established football clubs battle for survival is no longer such a shock to the British public – as the recent case of Heart of Midlothian in Scotland has demonstrated. While Hearts may have successfully exited administration – where they had been since June 2013 with debts of around £30million – other clubs haven’t been so fortunate.

Over the years there have been a number of high profile administration cases in British football. The reputations of proud clubs like Wimbledon, Leeds United and Rangers will now forever be associated with their well-documented financial troubles.

In this feature, we’ll be looking at what administration is, how it happens and take a look at a few cases, while discussing the current financial state of British football.

How administration relates to a football club

When a football club is unable to meet its financial obligations, administration is one legal course of action that can be followed under these circumstances.

Since the case of Charlton, which looked like going out of business in 1984 before reforming as Charlton Athletic, football clubs have had to adhere to the legislation set out in the Insolvency Act 1986. This Act of Parliament was brought in to address key issues such as the government of administrative orders relating to company insolvency – including the running of a football club.

Just like when a business cannot pay its debts, a football club can face a winding-up order through the courts, and if it is then classified as insolvent, administration can give it the breathing space it needs to restructure its finances and put the business on a sounder footing.

However, despite the fact that this legal procedure allows the football club to keep operating without having to sell off its assets to pay these outstanding debts, an administrator will be put in charge of most things relating to the running of the club, with the exception of coaching the players and picking the team.

The football creditors rule

Under the “football creditors rule”, all debts related to the sport, such as the wages of players and the coaching staff, plus money owed to other clubs in the form of transfer fees, is expected to be paid first and normally in full. Taxes owed to HMRC are not the main priority and so as a non-preferential creditor, they will have to wait to share what’s left – typically 5-10 per cent of the total owed. This is an exception to the usual situation where all creditors are given equal standing. A challenge to the ruling by HMRC was rejected in 2012 with the court deciding that it was not a deliberate misuse of insolvency law.

How the situation can arise

The financial state of a football club can soon change when there are so many people involved in the decision-making process, and the structure is not built on solid foundations. A high proportion of turnover normally goes on wages and when bad choices are made, it is inevitable that situations like the ones mentioned in this feature can arise. There are no guarantees in football and clubs often overspend on what they have.

Sanctions for clubs going into administration have been introduced to ensure this legal procedure is never entered into lightly. It is then left to the administrator to get the best deal for the business and its creditors, by minimising any losses, or by looking for a buyer.

The collapse of ITV Digital

At the start of the new millennium, ITV Digital purchased the broadcasting rights to show Football League and League Cup games for three years in a deal worth £315million. However, the company went bust part way through the contract (2002) with £180million owed to the League at this point. Many clubs affected by the loss of revenue experienced financial difficulties and entered the administration process as a result.

The 10-point penalty and the fit and proper person test

In 2004, the Football League and the Premier League agreed to enforce a 10 and 9 point deduction respectively to clubs entering this process, with further rules adopted relating to the amount of time the club is allowed to remain in administration before further penalties are applied.

A fit and proper person test was also introduced that year to prevent corrupt or untrustworthy owners and directors from being involved with a football club. Any person who owns a club, runs it or has more than 30 per cent of its shares will need to be assessed. There are a number of disqualifying events that can restrict the involvement of businesspeople in football, especially with regards to the Premier League.

Possibilities for a brighter future

Whether fans like it or not, with the amount of money in football these days, once the World Cup is over, many clubs will, once again, be testing their limits and forking out on high wages and inflated transfer fees. However, for clubs that do have money issues and have gone into administration as a consequence, it is not always the end of the world and there can be a way back to the top.

Hearts may have gone through a long process to get to the point where they are out of administration and can recruit players again, but the outcome should give other clubs hope that the situation can be turned around. In this case administrators managed to overcome the various obstacles and get the club back on track, despite relegation to the Scottish Championship.

The case of Rangers is another story of a club that almost went under due to insolvency. The Glasgow giants were placed into administration in 2012 after experiencing financial problems and an ongoing dispute with HMRC. Not only were the club deducted the obligatory 10-points, but after failing to reach an agreement with creditors they entered into the liquidation process. After eventually coming to an agreement – to rename the company, accept a transfer ban and be placed down in the fourth tier of Scottish football – Rangers are already back in the Championship after successive promotions and the Ibrox club are now launching a share issue to raise £8million before the start of the new season. So, this proves that administration can sometimes give a football club a new start and a chance for redemption.