Football insolvency – the football league changes its policy

Football, like certain other sports, is unique in having its own insolvency policies. 

The majority of industry sectors simply adhere to the Insolvency Act 1986, the Enterprise Act 2002, and other supporting legislative provisions when it comes to restructuring and insolvency.  Football as an industry has added to the legislative framework by developing its own insolvency polices, compliance with which is a necessary requirement for any club competing within the English national league system.

Part of the reason for football’s distinctive regime is the unique, competitive nature of the sport. It is competition which attracts viewers both in the stands and on television, and generates huge amounts of investment into the game. Protecting the integrity of the competitions is crucial to football as a business and the sport cannot allow for a perception of unfairness if clubs are seen to not be paying their debts. 

Historically and more controversially, the football governing bodies have sought to protect ”football creditors” in particular.

The theory behind this was simple: the football authorities have competitions to run and it would play havoc with the running of such competitions if clubs, players and football associated bodies are owing each other money and suing each other. There needed to be stability within the football family on a financial level.

However, this concept of a specific group of unsecured creditors being treated differently from the general body of creditors contravenes the pari passu principle of treating all creditors on an equal footing which is the underlying principle of insolvency law. This has meant a raft of case law which has attempted unsuccessfully to challenge the football creditor rule.

The recent changes to The Football League insolvency policy actually work in favour of the general body of unsecured creditors. While it does not go as far as some insolvency policies, most notably in the Football Conference where unsecured creditors are expected to be paid in full, the new regulations do secure a minimum distribution to unsecured creditors.

On 5 June 2015, the Football League amended its insolvency policy. These changes are due to come into effect from 8 August 2015, the start of the 2015-16 football season. The purpose of the changes appear to build on the the aim of encouraging stability, deterring insolvency from distorting the competition and rectifying any perceived unfairness in light of recent minimal returns to unsecured creditors upon exit from administration, even where a company voluntary arrangement (CVA) has been approved in addition to a lean towards encouraging support owned clubs where boards have failed. 

The Football League and Insolvency

Each of the respective football governing bodies in England is operated by a company limited by shares.  Each member club is transferred a share in the respective league competition (often referred to as the “Golden Share”) and is allowed to operate as a member, subject to its compliance with the rules and regulations of the particular competition that they are a member of. This share is therefore a core asset of any football club.  In the current instance, this would be a share in The Football League Limited.  Any club holding such a share may field a team in Football League (FL) competitions. 

In the case of an insolvency event, the FL regulations prescribe the consequences and conditions under which they will allow the transfer of a FL share from an insolvent company to a purchaser company, thus allowing the club to continue to participate in the FL under its new ownership. 

The FL must consent to the transfer and the purchaser must comply with the minimum requirements set out in the insolvency policy in order for the Golden Share to transfer. 

Football League Insolvency Policy Changes 

Immediate Points deduction upon entering an insolvency event

The current regulations stipulate that any club which suffers an insolvency event will automatically be deducted 10 league points. The amended regulations will increase this sanction to 12 points, and therefore increase the possibility of a relegation following an insolvency event.

Exit from Administration (no more CVA requirement)

Currently, an insolvent football club must exit administration by means of a CVA to ensure an acceptable agreement has been reached with the club’s creditors. Failure to comply results in a further point deduction, usually between 15 and 20 points.

The revised regulations no longer enforce this requirement. The theory behind the old rules was that it allowed the business to continue trading while the administrator negotiated with the creditors to find an acceptable debt settlement. Once achieved, the business entered a CVA with the unsecured creditors, with a legally binding schedule for repayment, and control of the company passed from the administrator to the new owner(s).

The new regulations have dismissed the need for a CVA and instead fixed a minimum payment to the administrator for distribution to unsecured creditors which also mitigates the risk of further challenges being lodged against football CVA’s for being unfairly prejudicial to creditors.  This minimum payment is 25p in the pound of all unsecured creditor claims if paid immediately upon transfer of the FL share or 35p in the pound if paid within three years of the transfer of the FL Share. There is a further 15 point deduction for failing to comply with this requirement.

Marketing a Club for sale in Administration

A new regulation has been introduced stipulating that the administrator of an insolvent football club must market the club’s business for sale for at least 21 days. During this marketing period, the administrator must meet the club’s supporters’ trust and allow the trust the opportunity to bid for the club’s business and assets. This appears to follow on from the purchase of Portsmouth FC out of administration by a supporters led consortium and there appears to be a steer towards encouraging supporter led bids for football clubs.

James Moore is an associate at Bird & Bird