Shifting the goalposts: New rules in football insolvency

While changes to the offside rule and a clampdown on diving have been the most talked about changes to playing rules, the new football season also brings significant changes to the Football League’s insolvency rules. Suppliers and fans alike should be aware of what these changes mean to the £multi-billion UK Football League industry.

While lacking the legal force of statute, the sanctions of being docked points or, ultimately, expulsion from the Football League provide a powerful incentive to minimise the risk of insolvency. The changes affect clubs in the Championship, League One and League Two. The Premier League’s rules are, for now, unchanged.

Tougher points penalty

From the start of the 2015/16 season, any league club that goes into administration will now suffer an immediate 12-point penalty, an increase on the 10-point penalty which has applied since the 2004/5 season. Clubs entering administration after the third Thursday in March may have their 12-point deduction deferred until the following season, although the prospect of starting that season 12 points adrift will hardly be appealing to fans, management or players being targeted for recruitment.

Giving the fans a chance

Where administrators are appointed, they will be required to market a club for 21 days, during which they must meet with the supporters’ trust and provide it with an opportunity to bid for the club. This move will please many supporters, who may feel that the club morally at least ‘belongs’ to its geographical and supporter community.  If their club does fall into insolvency, they will have the opportunity to follow in the footsteps of Exeter City and Wycombe Wanderers’ supporters’ trusts in taking legal ownership and having a real say in how the club is run.

Implications for creditors

Under the new rules, unsecured creditors must receive a minimum of:

• 25p in the pound, paid on takeover of the clubs’ assets by the purchaser, or
• 35p in the pound, paid within three years.

Failure to meet this requirement will result in a further 15-point penalty the following season.

Whilst unsecured creditors will welcome this measure, it may put off would-be purchasers. It is also currently unclear how this minimum repayment rule will relate to the ‘prescribed part’ – the ring fenced fund set aside for unsecured creditors of any company out of the net floating charge realisations.

Creditors will also welcome the abolition of the requirement to exit administration by Company Voluntary Arrangement (CVA). Instead, the club’s share in The Football League may now pass to the purchaser, subject to certain requirements. This certainty of continuation in the league should reduce the insolvency period and the associated costs. It should also deliver a better overall return for creditors by increasing the number of potential purchasers, rather than a CVA process largely controlled by the club’s previous owners.

The controversial ‘Football Creditors Rule’ remains unchanged, despite running contrary to normal principles of insolvency law, including the pari
passu rule that all unsecured creditors should be paid an equal percentage of their debt. The Football Creditors Rule bypasses the statutory order of priority by requiring full repayment of debts to clubs and players for transfers and wages, before any other unsecured creditors.  The justification for the rule is that it ensures the continuation of business in league football.  Other creditors will, however, take some comfort from the new minimum returns required for unsecured creditors.

Going on to prosper

Clubs that have previously entered administration have generally gone on to financial viability. Perhaps the finest recent illustration of this is Bournemouth AFC.  Forced into administration with debts around £4 million, the club was regularly on the brink of liquidation and was almost expelled from League Two in 2009/10. This year, Bournemouth will be playing in the Premier League.  It is a feat that would have been unthinkable a few years ago, when the very existence of the club was under threat.  What it demonstrates is that with a reliable source of revenue, from television rights, sponsors and its fan-base, a club that can successfully navigate insolvency stands every chance of going on to better things.

The Football League’s more robust position on administration is part of a range of recent measures worldwide to bring more stability to clubs and tackle the damaging effects of insolvency upon local communities. Whether the new measures get the balance right will perhaps be better understood only when the next club enters administration.  However, there have now been no football club insolvencies in the last two seasons (there had been at least one every calendar year from 1996 to 2004), which in itself will be comforting to fans and creditors alike.