Football League clubs and insolvency events

Sun 26 Mar 2017

With the recent publicity surrounding Leyton Orient Football Club and a winding up petition against it by HMRC (now adjourned until June 2017), some might find it useful to have a reminder of recent changes to the insolvency rules as they effect football clubs who ply their trade in the Football League. Without further ado, Mazars Restructuring Services’ resident football finance expert, Keith Morgan, provides us with some guidance:

In 2015 the Football League, at an owners and executives conference and AGM, changed its Insolvency Policy, to take effect from the 2015/16 season which started in August 2015. The aim was to give clubs a better chance to restructure their financial affairs when facing a financial crisis and to carry on as a registered club in the league, whilst still being liable to sanctions to protect the interests of other clubs.

Under the previous rules, a club would suffer a 10 point deduction upon entering Administration (often causing a significantly increased risk of relegation) and could only exit Administration by means of a Company Voluntary Arrangement (“CVA”) if it wished to retain its share in the Football League and therefore enable it to continue to trade as a League club. The CVA required approval of 75%+ in value of its voting unsecured creditors plus approval of its shareholders and could therefore prove difficult to implement plus often be effectively controlled by existing shareholder creditors. In addition, the procedure was often criticised for paying only minimal dividends to unsecured creditors.

The new rules increased the points penalty from 10 to 12 to retain the deterrent to clubs using an Administration procedure as an “easy option”. However the main change was to remove the requirement of a CVA being the only available exit from Administration. This enables the appointed Administrator to sell on the club and to transfer its League “golden share” to a bidder of his choice without approval by creditors or existing shareholders with the following provisions:

• The purchaser has to be vetted by the League as being acceptable (the old “fit and proper person” test applied in previous years);
• The club has to be marketed for a minimum period of 21 days;
• Within the above 21 day period, the Administrator must meet with a formally constituted supporters organisation of the club (usually its Supporters Trust) and give them a chance to be a bidder;
• A minimum dividend of 35p in the £ has to be paid to unsecured creditors over a 3 year period or a minimum of 25p in £ on transfer of the League share, thereby giving a far better return to creditors than had traditionally been the case in exchange for them having lost their CVA voting rights.

The old rule of Football Creditors (principally wages due to playing staff and any transfer fees due to other League clubs) having super priority as creditors and having to be paid in full was not changed.

Should you have any queries, please do not hesitate to contact Keith Morgan or any other of our Restructuring Services team who will be able to assist you.