League Slammed Over Rule Change Proposal

By: Bill Osborne
Date: 26/04/2003

R3, The trade body representing the business recovery specialists who pick up the pieces when football clubs get into financial difficulty today slammed football league proposals.

The proposals, announced yesterday, mean any club entering into an insolvency procedure could be docked points or possibly even relegated, possibly leading to the loss of some of the UK's most historic clubs.

R3, the Association of Business Recovery Professionals believes the football league has missed the point completely. Following Leicester City's promotion after administration this season, the league seems to be of the view that a club enters into an insolvency procedure to renege on their debts and gain an advantage over its rivals.

An R3 spokesperson said "This over simplifies the true commercial risks facing football clubs - the plain fact of the matter is that financially stricken clubs are forced into administration due to their legal duty to creditors and to avoid prosecution of the directors for knowingly trading while insolvent.

The bottom line is that for many clubs administration is the last resort, not a way of duping the people they owe money to.

What these proposed sanctions are more likely to do is encourage many clubs to trade for longer while insolvent due to a fear of lost points or relegation, and in the long term, as the debts pile up, the main loser will be the creditors who will get paid less as there will be less to go round as losses continue to mount. Stoking up a fear of insolvency is not the answer.

Furthermore, sanctions imposed by the league are likely to damage a club's season. Revenues will go down as fans desert, players will be less motivated and consequently, a competitive advantage will be handed to those clubs who have yet to be played.

The problem lies with inflated wages. A club's biggest overhead is its players' wages. In 2001, these accounted for 105% of the total revenue of the First division alone, and this was before the collapse of ITV Digital which cost each division club £2.5million.

The football league should take action to release clubs form the restrictive super creditor rule which puts a club's players at the top of the pile in terms of who gets paid first in insolvency. It also states that if a club does not pay its players the full amount they are owed in wages then that club faces expulsion from the league.

However, if clubs were able to negotiate with players and alter the amount they were paid according to income levels in order to shake off overheads, reduce arrears and pay creditors, then insolvency would be far less likely. This is what a business recovery specialist would seek to do in any other industry as a mechanism of saving the business. With football clubs, the super-creditor rule prevents them from doing this. R3 believes the answer lies in its abolition.

If sanctions are to be imposed, then they should come at an earlier stage. If clubs do not pay their PAYE consecutively for two months, then they could be docked a point. This would encourage better cash flow management at an earlier stage, not after the final nail has been put into the coffin.

R3 believes these proposals to be bad news for everyday creditors who will get paid less as clubs delay entering into an insolvency procedure, bad news for the clubs themselves because a relegated club is unlikely to attract potentially lifesaving investment and finally bad news for players, as it will inevitably lead to salaries being slashed when they are up for renewal. In short, a measure that is meant to be preventative could lead to the loss of many historic football league clubs."END

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