Insolvency In Football

British football clubs are continuing to struggle financially despite the UK finally leaving recession, with Crystal Palace the latest club to bite the bullet and enter Administration. 

Palace follow in the footsteps of clubs such as Leeds United, Bradford City and Luton Town.  Debts totalling £30 million and severe cash flow problems have resulted in players not being paid twice in the last few months.  Lacks of investment propositions and severe creditor pressure from HM Revenue & Customs and the Landlord of Selhurst Park have finally pushed the club over the edge. 

Football league rules state that any club entering Administration will receive a 10 point deduction and also state that a minimum further 15 point penalty will be incurred if the club do not exit Administration via a Company Voluntary Arrangement (“CVA”).   

In order for a Company to enter a CVA, 75% of voting Creditors must agree to the proposal.  However, the Football League insists that all football related debts should have “Super Preferential status” meaning that they get paid before other Creditors.  

Despite the football creditors rule appearing to contradict insolvency laws, when legally contested in Inland Revenue Commissioners v Wimbledon FC in 2004, they lost the case and the ruling continues to operate.   As a result, HMRC have insisted that they will vote against any CVA proposal where football related debts have been settled ahead of their claim.

What does this mean for Crystal Palace?

Despite certain sections of the press claiming that Crystal Palace should be deducted more than 10 points due to the fact they also entered Administration just 10 years ago, this is unlikely to happen.  Crystal Palace will almost certainly be deducted the mandatory 10 points.

However, if the debt outstanding to HMRC equates to more than 25% of the Creditor vote that is unlikely to be the end of the matter.  HMRC will most likely reject any CVA proposal that falls short of paying the Creditors 100p in the £ (which it surely will).  Should any CVA proposal be rejected Crystal Palace will receive a further point deduction of at least 15 points under Football League rules.  The further points deduction could take place either this season or next season depending on the timing of the CVA proposal and the discretion of The Football League.

Therefore, the information that will be crucial is what percentage of the total clubs debt is represented by HMRC?  Of course it should also be remembered that Creditors other than HMRC could also reject any CVA proposal.  No doubt the Administrators will make an announcement soon

Posted at 04:59PM Jan 27, 2010 by Kris Wigfield in Sport Finance  |  Comments[0]