The Football League has recently finalised some important changes to its insolvency policy which were approved at an AGM over the summer. These changes could have significant implications for clubs, funders, investors and potential rescuers.
Background – the Football Creditor Rule
The Football Creditor Rule
The approach of the Football League to insolvency has drawn a lot of attention in the press over recent years. Particular attention has been paid to the “Football Creditor Rule”.
Every club wishing to play in the Football League must hold a share in the Football League Limited. In the event of a club going into liquidation or administration or some other “insolvency event” occurring in relation to them, the board of The Football League Limited may, in addition to a points deduction or other sanction, direct that their shares are transferred to a nominee of the board and so suspend the club’s rights to play in the Football League.
The Football League sets various criteria for the club to be readmitted to the League. Amongst the matters to be addressed before the club is readmitted is for “football creditors” to be discharged.
Football creditors include the League itself and associated leagues, other clubs and full-time employees (including players).
The controversy and challenge
The rule has attracted a lot of controversy.
The effect is that, in the event of a club’s insolvency, when assets are insufficient to pay all creditors in full, highly paid players and large transfer fees must be paid in full from available assets but a lowly cleaner or local contractor can remain unpaid.
The biggest loser from this rule is often HMRC. Since 2003 they have had no preferential status on company insolvency and are treated as an ordinary unsecured creditor. The Football Creditor Rule means that they, alongside other unsecured creditors, can remain unpaid while football creditors are paid in full. As a result HMRC have launched a series of unsuccessful legal challenges to the legality of the Football Creditor Rule culminating in a 2012 legal decision which finally decided the matter in favour of the Football League.
The new policy
At the 2015 AGM, changes to the policy were approved which the Football League’s Chief Executive felt made the system “as fair as it can possibly be for clubs, creditors and supporters”. What were the changes and is this optimism justified?
The seriousness with which the League views insolvency is underlined by increasing the points deduction which a club suffering an insolvency event incurs – up to 12 points from 10. This threatens a real sanction as the points deduction can lead to relegation and a significant cut in revenues. Along with the still relatively new “Financial Fair Play Rules” this sanction may encourage responsible financial conduct by club management.
The Football Creditor Rule would be preserved. Football creditors would then continue to be paid in full in the event of the club’s insolvency before the club is readmitted to the League.
However, an additional requirement is imposed that other creditors must receive at least 25 pence in the pound (or 35 pence in the pound if paid over three years). A failure to meet this obligation could result in a further 15 point deduction for the club.
Clubs were previously required to undergo a company voluntary arrangement (CVA) through which football creditors were paid in full and arrangements for other creditors settled. A CVA is effectively a deal between a company and its creditors which binds all if approved by three quarters of creditors by value. It can be an expensive and time consuming procedure but offers remedies for creditors if rules are breached.
The new policy does not require a CVA. That may save some cost and time but does mean that creditors are denied the remedies for rule breaches that the CVA policy implies.
An administrator is to be required to go through a 21 day marketing process. That is presumably intended to deny private deals which leave creditors exposed but do not satisfy creditors that a proper price has been obtained for the assets. This sentiment is appreciated but the 21 day marketing process may have the unintended effect of significantly increasing the cost of the process as the administrator would need to be involved in management of the club for a longer period with the time, risk and resulting costs which that implies.
Will it satisfy the public?
On the face of the new policy, the position is improved for ordinary creditors. They stand to have at least 25% of their debts paid on a club’s rescue from insolvency where they would previously have got nothing.
However, football creditors are still paid in full.
Other sectors have umbrella organisations which businesses need to join to operate (consider for instance stock exchange members or travel agents). It is not uncommon for those organisations to be required to pay debts to some or all members of that organisation in priority to other debts. However, the Football Creditor Rule is likely to be seen differently.
In the event of a high profile football club collapse, the general public will probably still see this as unfair on the small unsecured supplier while the clubs and players get paid in full.
Will it change the market?
There are a few implications of the new policy for football club deals.
It increases the amount which is needed to rescue a club. Previously a rescuer needed to find money to cover the football creditors. Now they need to find money to pay football creditors and at least 25% of unsecured creditors. That may reduce the chances of a successful rescue.
Further, a funder to a solvent club, looking at the rescue options in the event of the club’s failure, may be made more nervous by the more expensive rescue options and restrict the money available for funding (or increase the cost to compensate for the additional risk).
For many principals in football deals, the position will remain unchanged. Football was and, after the new rules will continue to be, a very risky investment. However, in truth, the actions of many of these principals in the football deals are governed more by hearts than heads. They are then unlikely to be affected much by the new policy.
So for the ultra-wealthy who can fund a purchase without external finance the net effect may be an increased risk. For those using commercial debt or investment to bear the load, deals may become that much harder.
A step in the right direction?
The new policy seem something of a mixed bag. They offer a degree of rebalancing the position in favour of unsecured creditors. However, without addressing the core of the problem – the Football Creditor Rule – the public is unlikely to be satisfied, and funding and investment risks are increased. It seems likely then that this is not the end of the game and the debate on the Football Creditor Rule will continue for seasons to come.