With football clubs up and down the pyramid facing financial difficulty due to the coronavirus (COVID-19) pandemic, chartered accountant and licensed insolvency practitioner David Kirk looks at what happens when a football club goes into administration.

How has the coronavirus pandemic affected football clubs?

By their nature, football clubs have high fixed salary and wages costs. In order to meet those costs, they need gate income from games. A successful club will play higher profile games and therefore take a larger share of gate income, while an unsuccessful club will sink down the league and have less income to rely on. Clubs do also get income from TV licensing, sponsorship and the sale of merchandise. However, sponsors and fans are naturally more interested in being associated with successful clubs than they are failing ones.

The coronavirus (COVID-19) lockdown rules have meant that all sports, including rugby and football, have been temporarily stopped. This has meant no gate income and no TV licensing. Companies like Sky generate their income from subscribers and advertising during games; they won’t pay football clubs unless there are games to show on TV.

But while they may not be receiving income, clubs are still contractually committed to paying players and staff wages or make them redundant. The furlough scheme has helped, but this is capped at salaries of up to a maximum of £37,500 - some way off the average salary of a League Two footballer, let alone Premier League player.

There are also other effects of coronavirus on football clubs. Our local club, Exeter City Football Club, for example, had a main sponsor of the airline Flybe. Flybe went into administration on the 5 March 2020, so will leave a hole in Exeter City’s funding for 2020/2021. There will be similar issues for other clubs.

In short, COVID-19 has been disastrous for sport and football.

What happens if a football club goes into administration?

Given the financial implications, there are clearly going to be some clubs that cannot survive as they are. Even if the football season resumes, many clubs will not be able to survive without gate receipts and match day revenue.

Although there is the wide remit of the Insolvency Act 1986 on rescuing businesses, such as using administration or a company voluntary arrangement (CVA), there are special rules which apply to just football clubs. There are also collective bodies which regulate them, such as The Football Association (The FA) and the English Football League (EFL).

What is the football creditor rule?

The football creditor rule is a rule that states which creditors of football (and rugby) clubs must be paid back 100 per cent before other creditors.

This is unusual as the general rule of insolvency law is that all creditors should be treated equally. However, when a football club goes into administration, the players become preferential creditors and receive a payment ahead of unsecured trade creditors.

This priority creditor ranking applies to:

• players’ salaries
• management salaries
• other clubs (transfer fees etc)
• the league and associated leagues

Why was the football creditor rule introduced?

The reason the football creditor rule was brought in was to stop a club going into administration and causing a domino effect through the league if it could not pay other clubs the money it owed. In essence, it was meant to protect smaller clubs down the league.

However, HM Revenue and Customs (HMRC) does not like this rule, arguing that it goes against the established principle that creditors should all be treated equally, as intended in the Insolvency Act. HMRC even challenged Exeter City in court in 2012. However, unusually, it lost.

What measures are in place to protect ‘unsecured creditors’ of football clubs?

The creation of the football creditor rule, ranking one creditor above another, has the effect of diluting what is left for ‘unsecured creditors.’

However, there are some protection measures in place with a so-called ‘fit and proper persons test’. They state that a director cannot be a controlling shareholder of a club if:

• a club enters administration twice in five years
• a director has been involved with two clubs that have both entered administration in five years

Football clubs can also not be in administration for 18 months or more, or for two consecutive seasons.

What should a potentially insolvent club football do?

If a football club finds itself potentially insolvent, the sooner they take advice from a Licensed Insolvency Practitioner (IP) the better. A solicitor who understand the league rules is also recommended.

On a first meeting, an IP would want to see:

• a list of aged creditors, highlighting the football creditors
• the level of VAT and PAYE arrears and what recovery action has been taken by HMRC
• the bank debt or available credit balances
• an agreed debtors list with the likelihood of recovery
• a list of other club assets, such as land, equipment, and the value of players
• some cash flow projections based on various re-opening date scenarios

The biggest uncertainty in the current climate is when can games be played again and when fans can come to matches. With no guarantees, clubs should work out the cash flow needed if matches are delayed to December or if the whole of next season is played behind closed doors. In all cases early action by the directors and being realistic always sees the best outcome.

Where can I see insolvency notices in The Gazette?

You can view all corporate and personal insolvency notices on The Gazette website.

The Gazette also provides a data service which gives access to official intelligence on all UK businesses, corporate and personal insolvencies. Benefits of The Gazette’s data service include:

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About the author

David Kirk is a chartered accountant and licensed insolvency practitioner at south west-based insolvency specialist firm Kirks.

See also

UK company insolvency statistics - Q1 2020

The pros and cons of pre-pack administration for insolvent companies

Footballers who have received UK honours from the Queen

Find out more

Insolvency Act 1986 (Legislation)

Image: Getty Images

Publication date: 4 June 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.