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Published: Fri, 02 Feb 2018
Football Club Administration
The object of this dissertation is to examine whether, in relation to football clubs, administration is working effectively as a process which fosters corporate rescue. The examination of this will allow discussion and analysis of the current administration procedure in relation to real, well-recognised companies. This is also a current issue. This is due to the fact that modern football clubs are prone to financial difficulty as they strive to improve their standing. These days, of inflated player wages and transfer prices and wealthy foreign investors can make football a risky business.
There are a number of questions generated by the object of the dissertation. One of which is: ‘what is the current law relating to administration?’ The rules and regulations of the Football Association (FA) and the Football League (FL) which apply to insolvency will also need to be examined. Problems which are encountered by the football clubs in financial difficulty need to be identified and analysed. Then it must be asked if, or to what extent the administration procedure, in its current form, is effective in relation to football clubs. Another question posed is ‘are there any alternatives to the administration procedure for football clubs that are companies?’
In order to achieve its objective this dissertation will firstly look at the current law in the relevant areas, i.e. administration and company voluntary arrangements. It will then look at any FA or FL rules that relate to insolvency. It will then describe the recent insolvencies of four football clubs that are companies. Next it will consider the problems highlighted in the descriptions of the clubs’ insolvencies. Finally, by looking at the aims of the relevant legislation, the dissertation will examine the extent, if any, that administration fosters corporate rescue for football clubs that are companies. Conclusions will then be drawn from this and the question posed by the dissertation title will be answered.
This dissertation will aim to show that administration has proved to be a very successful procedure for football clubs in financial difficulty. This can be shown by the fact that very few football clubs that are held by limited companies are dissolved as a result of insolvency. There are some problems raised, however. The main problems are raised by slight disagreements in the FA or FL’s Rules and the laws of the UK.
It should be noted here that the statistical sample on which this dissertation is drawing is very small. This is due to the lack of time and space available. Given more time and space it would be interesting to extend the study and this may highlight more trends and problems for discussion.
Chapter One – The Current Law
This chapter will be to look at the current law on administrations and Company Voluntary Arrangements (CVAs). Following this will be consideration of the Football Association (FA) and the Football League’s (FL) Rules and Regulations regarding insolvency.
Looking at the relevant law here will provide the basis of the study of the insolvencies of the four football clubs in Chapter Two.
The Current Law on Administration
Administration, as it stands today, was introduced by the Enterprise Act 2002 and the provisions are noted in the Insolvency Act 1986, Schedule B1.
There are three ways a company can enter administration.
One is via an administration order granted by the court. An application can be made to the court by: the company itself; the company’s directors; or by one or more of the company’s creditors.
QFCHs are able to appoint an administrator out of court. There is no requirement for the QFCH to notify the company of the intention to appoint. Therefore a company could find itself in administration against its will.
The company or its directors may also appoint an administrator out of court.
Once appointed, the administrator of the company has a dual status. He is considered to be an officer of the court and, in the exercise of his functions he acts as the company’s agent. In acting as an officer of the court the administrator is able to attack transactions which took place prior to his appointment on the grounds that “they amount to transactions at an undervalue, preferences, extortionate credit transactions, vulnerable floating charges or transactions defrauding creditors”.
The administrator must select the purpose or objective of the administration. There is a hierarchy for him to choose from and he is under certain duties that could enable an effected creditor or member to challenge a negligent decision judicially. The hierarchy states that the administrator must perform his functions with the objective:
(a) of rescuing the company as a going concern unless he thinks that it is not reasonably practicable or that objective (b) would achieve a better result for the creditors of the company as a whole; or
(b) that the administration must achieve a better result for the creditors of the company as a whole than if the company was wound up without previously having been in administration; or
(c) of the realisation of property in order to make a distribution to one or more preferential or secured creditor.
Objective (c) must only be chosen if it is not reasonably practicable to use objective (a) or (b) and it does not unnecessarily harm the interests of the creditors of the company as a whole.
The administrator of the company has to carry out his functions with certain duties in mind. The administrator must notify the company, known creditors and members, and the Registrar of Companies of his appointment. He must also obtain a statement of the company’s affairs and state his proposals for achieving the purpose of administration. The administrator must take control of the property of the company. This is all the property to which the company is, or appears to be entitled to. The administrator has a duty to call a meeting of the company’s creditors. Once the administrator’s proposals have been accepted he must manage the affairs, property and business of the company in accordance with them. The administrator is also under a duty to obtain the best price for any of the company’s property that is disposed of and must also report on the conclusion of the administration.
In order to effectively perform his functions and duties the administrator is given quite extensive powers. The administrator may:
- Do anything which is necessary for the management of the affairs, property and business of the company;
- Call meetings of the company’s creditors and members;
- Apply to the court for directions;
- Dispose of property subject to a floating or fixed charge;
- Dispose of property subject to a hire-purchase agreement;
- Make a distribution to creditors of the company.
The administrator also has all of the powers specified in the Insolvency Act 1986, Schedule 1.
The administrator must produce proposals. The statement of proposals must be accompanied by an invitation to attend an initial creditor’s meeting at which the proposals will be considered.
A creditors meeting will be called by the administrator in order to discuss the administrator’s proposals.The creditors will decide whether to approve the administrator’s proposals at the meeting. The meeting can accept the proposals in full, they can reject them or they can modify them. The modifications require the consent of the administrator. In the event of a continued disagreement the matter is referred to the court. The required majority to pass a resolution to approve the proposals depends upon whether or not the proposal is for a CVA. In the event of an agreement, the administrator must report the outcome to the court, the company’s creditors and the Registrar of Companies. He must then manage the company and it’s affairs in accordance with the accepted proposals. The administrator has the power to call further meetings.
The creditors are afforded some protection under the legislation. Any creditor or member of the company has the right to apply to the court claiming that the administrator is, has or proposes to act so as to unfairly harm the interests of the applicant. Any creditor or member may also apply to the court claiming that the administrator is not performing his functions as quickly or as effectively as is reasonably practicable. In response to an application under section 74 the court may make any such order that it thinks fit. There are also onerous duties placed upon the administrator. One commentator stated that: the “creditors may take comfort in the new onerous duties imposed upon the administrator”.
The creditors’ meeting may also establish a creditors’ committee. The committee may request the administrator to provide it with information about the execution of his functions and could request the administrator to attend on the committee at any reasonable time.
Another important feature of the administration procedure is the statutory moratorium. The commencement of the administration procedure imposes a freeze in proceedings or executions against the company and its assets. This provides the company with breathing space to make arrangements to restructure the company, reorganise or reschedule their debts.
The moratorium ensures that:
- No resolution may be passed or order made for the winding-up of the company.
- No steps may be taken to repossess any goods under hire-purchase agreements that are in the company’s possession or to enforce any security over property of the company.
- No legal process may be instituted or continued against the company or its property unless the court gives leave.
- Section 11 (3) of the Insolvency Act 1986 states that no steps could be taken to enforce any security over the company’s property.
With the leave of the court or with the administrators consent the statutory moratorium may be relaxed. Under the old provisions several test cases have arisen and have been used by the courts to spell out their approach to the granting of the relaxation of the statutory moratorium.
There are nine possible exit routes from administration:
- One year after the company enters administration, administration comes to an end automatically.
- By court order made by the administrator.
- By the administrator, who was appointed out of court, filing a notice that the purpose of administration had been achieved sufficiently.
- On an application made to the court, by a creditor claiming that there was an improper motive on the part of an administrative applicant, for an order under paragraph 81.
- The court making a winding-up provision on the grounds of public interest.
- Where a notice for a creditors’ voluntary liquidation is filed by the administrator.
- Where a notice is filed by the administrator for the dissolution of the company.
- Where the court makes a termination order as the creditors failed to agree to the administrator’s proposals or the revised proposals.
- By court order where the administrator’s actions have unfairly harmed either creditors or members.
The Current Law on Company Voluntary Arrangements
A company voluntary arrangement (CVA) made by a company with its creditors and members under the Insolvency Act 1986 Part I is a “composition in satisfaction of the company’s debts”. This is where the company’s creditors agree to accept a lesser amount than that which is owed to them in discharge of their claims. It could also be a scheme of arrangement of the company’s affairs.
A company may make a CVA whether or not it is insolvent or is likely to become insolvent. Therefore a CVA may proceed, follow, or run alongside an administration or winding-up or may be conducted without prior or subsequent insolvency proceedings.
CVAs typically involve either a sale of the company’s assets and then a distribution of the proceeds to the company’s creditors, or a distribution in accordance to the terms of the CVA by its supervisor from the periodic payments to him made by the company as it continues to trade.
There are now two types of voluntary arrangement procedure: CVAs without a moratorium; and CVAs with a moratorium.
This dissertation will concentrate on the CVAs without moratoria. This is due to the fact that all of the football clubs that are companies, studied here are ineligible in terms of a CVA with a moratorium. CVAs with a moratorium will not be discussed further in this dissertation and the discussion below will refer to CVAs without a moratorium.
A CVA is initiated by a proposal by the directors to the company and its creditors, followed by delivery of the proposal and a statement of the company’s affairs to the intended nominee. The nominee is the person whom the directors intend to nominate as the supervisor of the CVA. The nominee must be a licensed insolvency practitioner.
The proposals may be made by: the directors of the company when the company is not in administration or being wound up; by an administrator; or by a liquidator.
The nominee must summon meetings of the members and creditors of the company. The creditors and members meet to decide whether to approve the proposed CVA. The meetings are given the scope to modify the proposal. The meetings must not approve any proposal that would interfere with: the priority of a debt afforded preferential status by the Insolvency Act 1986, or the rights of a secured creditor to enforce his security. If there is a different decision at the creditors’ meeting and the meeting of the members, the decision at the creditors’ meeting is the one that prevails. The voting at the meetings is governed by the Insolvency Rules 1986. The Rules broadly state that for the creditors’ meeting to approve the proposal more than seventy five percent in value of the creditors present, in person or by proxy, and voting on the resolution must support the arrangement. The members’ meeting requires only an approval of over fifty percent of the members. If the CVA is approved by the required majorities at both meetings it: takes effect as if made by the company at the creditors’ meeting.
Once the CVA has been approved the nominee becomes the supervisor of the CVA. The supervisor now has the role of carrying out the functions that the CVA confers on him. When the CVA is complete the supervisor must notify and provide with an account of receipts and payments, all of the company’s members and creditors who are bound by the arrangement, the Registrar of Companies and the court.
Certain people have the specific right to challenge the decision to approve the CVA. The following are the people who are able to challenge the decision: those who were entitled to vote at either of the meetings; the administrator or liquidator of the company; or the nominee or replacement nominee. The challenge may relate to any material irregularities in relation to or at any of the meetings. It could also be based on the substantive ground that the interests of a member, creditor or contributory of the company had been unfairly prejudiced by the arrangement. If the court is satisfied that either one of the grounds is made, it could revoke or suspend the approvals given by the meetings. It could then summon further meetings and may also give supplemental directions.
One of the most common challengers to CVAs is Her Majesty’s Revenue and Customs (HMRC). HMRC is a non-ministerial department of the British Government. It is primarily responsible for: the collection of taxes; import controls; some aspects of UK frontier protection; and some forms of state support. HMRC was formed when the Inland Revenue merged with HM Customs and Excise on 18th April 2005. Therefore, prior to this date it would be the Inland Revenue who challenged the CVAs of insolvent companies for tax purposes. HMRC used to be a preferential creditor. However, the Enterprise Act 2002 removed the Crown’s preferential rights in insolvencies. The effect of this is that HMRC now have to sit alongside other unsecured creditors of the insolvent companies and may get a lesser percentage of their debt than they used to. This could make them more likely to challenge a CVA as an unsecured creditor.
A CVA may be completed at the end of the period specified in the terms on the CVA or it may be concluded earlier if all of the payments requested by the CVA have been made. The supervisor also has the general right to apply to the court for a winding-up or administration order to be made. Following the completion or termination of the CVA the supervisor must send notice to all the creditors and members bound by the CVA together with a report summarising all his receipts and payments. The Registrar of Companies and the court must also be notified by the supervisor.
The Rules and Regulations of the FA and FL
The clubs operating in the Football League and within the Football Association are bound to operate in accordance with the rules and regulations of the FA (the “Rules”). The Rules require certain general provisions to be entered into the football clubs’ Articles of Association. This ensures that the clubs are legally bound, as a matter of company law, by some relevant rules and regulations of the FA as well as to the laws of the UK.
The Rules mention that a club should not “alter its constitution or make a material change to its financial structure without prior notification to the Association”. The Rules go on to name the appointment of an administrator as an alteration to the company’s constitution or a material change in financial structure. This ensures that the FA and FL are informed if a club go into administration or are involved in other financial difficulties. This allows them to sanction the club in accordance with their rules. The FL deducts a club ten points if it undertakes any insolvency proceedings. The club in question is allowed to appeal, but only on the grounds of ‘Force Majeure’.
When a football club enters insolvency proceedings the FL has three key priorities:
- The continuation of the football club if at all possible;
- Payment in full of the football creditors;
- The best possible return for all of the other creditors.
These should also be the priorities of the club involved and it’s insolvency practitioner.
The Rules stipulate that when an English Football League team goes into administration they lose their ‘football share’. In essence this means that they cease to be members of the Football League and cannot compete. However, the Rules allow the ‘football share’ to be transferred back to the club if the club follows the Football League’s policy when exiting the insolvency proceedings. This includes exiting administration only via a Company Voluntary Agreement (CVA); and within eighteen months of the club entering administration. The Football League do have an ‘exceptional circumstances’ exception.
Another Rule is the ‘Super Creditor Rule’. This rule states that ‘football creditors’ (these include the FA, the Football League, players, etc) must be paid in full as part of any CVA entered into by the club. The football creditors are often very substantial creditors. In effect this gives the ‘football creditors’ preferential status over the other unsecured creditors and operates in practice as a specific distortion to pari passu. This will inevitably substantially reduce the pot of money for the other unsecured creditors.
This chapter has looked at the current law on administration and CVAs.
Administration is a mechanism to protect insolvent companies from their creditors whilst a restructuring plan is completed. It is designed to foster corporate rescue. However, the administrator will select the most appropriate purpose of administration for the company in question from the statutory hierarchy. The selected purpose is then put to the company’s creditors and members in the form of a proposal to be decided upon at the respective meetings called by the administrator.
A CVA is a “composition in satisfaction of the company’s debts”. It aims to give a structured plan for the company in question to repay the agreed amount of the creditors’ debts back to them over a set period of time.
The Rules and Regulations, regarding insolvency, of the FA and FL have the main aim of ensuring the insolvent club’s ‘football creditor’ debts are paid in full. This is done in order to ensure that fair competition is maintained.
There have been recent reforms of the administration procedure and some areas of the provisions relating to CVAs. In relation to the reforms on administration the story so far has been mixed. It is faster than administrative receivership and is widely used. However, it is “used often as a substitute for liquidation rather than as a genuine corporate rescue vehicle and possibly to escape the level of scrutiny that liquidation normally entails”.
This discussion of the current law was undertaken to enable the educated discussion of the administrations of four football clubs that are companies in relation to the relevant law in the next chapter.
Chapter Two – Description of the Administrations of Four Football Clubs that are Companies
Chapter one considered the relevant legal procedures to effect corporate rescue for insolvent companies. The relevant law was examined and it was found that administration is a mechanism to protect insolvent companies from their creditors whilst a restructuring plan is completed. A CVA is a “composition in satisfaction of the company’s debts”. It was also found that the FA and the FL’s Rules regarding insolvency have the main aim of ensuring the insolvent club’s ‘football creditor’ debts are paid in full.
This chapter will now consider what happens in a particular industry: the modern football club. Most football clubs are now limited companies and therefore operate within full body of company law (including insolvency law). However, football clubs are also subject to the rules and regulations of the governing bodies of the sport, the FA and the FL.
This chapter will consider how these legal procedures have related in practice to four football clubs facing insolvency in the last six years. The football clubs which will be studied are: Leeds United Football Club; Wrexham Football Club; Bradford City Football Club; and Carlisle United Football club. First brief comments will be made about why they got into financial trouble. Then the legal processes used by the clubs whilst they were nearing insolvency and in administration will be examined. Finally some analysis is undertaken to extract the common practical and legal issues that were encountered in the process of administration.
Leeds United Football Club
To start there will be a summary of how Leeds United Football Club (LUFC) got into administration.
LUFC was held in a limited company called ‘Leeds United Association Football Club Ltd’ (LUAFC). In the 2002/03 season the club had debts of £79 million. This forced player sales and the club were relegated from the Premier League in 2004 with debts of £103million. In 2004/05 Elland Road, the club’s stadium, and the club’s training ground were sold. This was not sufficient to alleviate the financial position and in the 2005/06 season Ken Bates bought a 50% stake of LUFC for £10million and became the director of: Leeds United Football Club Ltd (company number 05334247); LUAFC; Leeds United Stadium Ltd; Leeds United Retail Ltd; and Leeds United Investments Ltd. On the 28th April 2007 Leeds’ relegation to League One appeared certain. On 4th May 2007 administrators KPMG were appointed as the administrators of LUAFC by the directors out of court under Insolvency Act 1986, Schedule B1, paragraph 22. LUFC were docked ten points and were relegated to League One.
The administration process of LUFC will now be examined in detail.
The administrators KPMG were appointed on the 4th May 2007. They were appointed by the directors of LUAFC. The administrator quickly agreed to sell the business, for an undisclosed sum, to a newly formed company called Leeds United Football Club Ltd (company number 05765697) (Directors – K. Bates, S. Harvey and M. Taylor). The administrator had received bids from other parties but had decided that Bates’ offer was the best option for the creditors and LUFC. The administrators proposed a CVA based on this offer and called a creditors’ meeting in which the creditors would consider the offer and decide whether to approve it or not. If the CVA was approved this would comply with the FL’s insolvency policy which states that a football club which is in administration must exit administration via a CVA.
On 1st June 2007 Bates’ offer was narrowly accepted at a stormy creditors meeting. Bates needed 75% of creditors in value of the creditors present, in person or by proxy, and voting to accept the proposed CVA. He received 75.02%. A recount was ordered due to the extremely narrow acceptance. There were no reports of a meeting of the clubs members being held.
The CVA proposal was approved by the recount as 75.2% of creditors had voted in its’ favour. Therefore as long as there were no challengers to the CVA acceptance in the statutory 28 day period and the FL approved the sale, the sale would be complete. The FL’s approval was required in order for the ‘football share’ to be transferred back to the new company which would hold LUFC.
On the 3rd July 2007, one hour before the end of the 28 day period to challenge the CVA, HMRC lodged a challenge to the CVA “based on procedural matters relating to the way which KPMG conducted the creditors’ vote”. As a result of this, the administrators announced that they would be putting the club back up for sale on the 6th July 2007. This was due to the fact that the legal challenge would have stretched into the pending football season and LUFC may have been prohibited from starting the season whilst the club was in legal turmoil. The CVA challenge of HMRC was avoided due to the club being put back up for sale.
The Football League announced that Leeds could start the new season (the 2007/2008 season in the FL League One).
On the 8th of July Bates stated that he would take legal action if the club was sold to a rival bidder.
On the 11th July 2007 the administrators announced that they had sold the club to Newco (Bates’ consortium) for an undisclosed sum. It was unknown how much of the club’s debt Bates intends to pay off. The club’s administrator stated “The approved deal represents the best result for creditors in the circumstances and we believe provides the club with the best chance of survival”.
On 3rd August 2007 the Newco was transferred the ‘football share’ for LUFC by the FL, allowing LUFC to start the season. However, the FL gave LUFC a fifteen point deduction as they had failed to come out of administration via a CVA. LUFC appealed, but their appeal was rejected on 9th August 2007 by the FL chairmen at a meeting in London. However, LUFC did not accept this decision and decided to issue the FL with a High Court writ claiming that the FL acted ‘outside of their jurisdiction’ in handing LUFC an additional fifteen point deduction. LUFC accepted an offer from the FL of a three man independent arbitration hearing in private. The matter is still ongoing.
I will now summarise the main facts of LUFC’s administration.
The administrators KPMG where appointed on 4th May 2007 by the directors of LUAFC and an administration order was obtained. The club was sold to the Newco on July 11th 2007. This means the club was in administration for nine weeks and five days.
A CVA was agreed but was discarded after a challenge brought by the Inland Revenue. The club was subsequently sold without a CVA.
The Football League’s Insolvency policy was not followed, therefore LUFC were deducted fifteen points from the next season (2007/2008) as well as the original ten points from entering administration. However, LUFC have appealed against the deduction of the additional fifteen points and have agreed to a three man arbitration in private to decide the issue. This issue is still ongoing.
Wrexham Football Club
To start there will be a brief account of the circumstances that led to the financial difficulties and ultimately the administration of Wrexham Football Club (WFC).
WFC was held in the limited company Wrexham Association Football Club Limited (WAFC). In May 2004 the property developer, Alex Hamilton, took over as chairman of WFC after acquiring its stadium, the Racecourse Ground through his company Crucialmove Limited, in June 2002. In August 2004 the club revealed it had debts of over £3 million. Then in October 2004 the Inland Revenue, as a creditor of the company, issued a petition to wind-up the company compulsorily. Hamilton also resigned as chairman of the board of directors, but remained the owner of WFC. On the 3rd of December 2004, with debts of over £4 million WAFC were placed in administration by the High Court after the company’s directors applied for an administration order to protect the club from liquidation. The club became the first to be deducted ten points under to the Football League’s rule change.
There will now be a detailed examination of the administration process of WFC.
On the 3rd December 2004 WAFC were placed in administration after being granted an order by the High Court. The administrators, Begbies Traynor were appointed.
In June 2005 the administrators of WAFC began legal proceedings to seek an order from the court that the legal and beneficial ownership of the freehold to the Racecourse Ground be vested in the club. Ownership was vested in Mr. Hamilton’s company, Crucialmove Limited. This could be done as the administrator of a company is given the status of an officer of the court. This enables the administrator to attack transactions which took place prior to his appointment on the grounds that “they amount to transactions at an undervalue, preferences, extortionate credit transactions, vulnerable floating charges or transactions defrauding creditors”. It is not clear under which of the grounds was brought against Crucialmove Limited. Crucialmove Limited had 28 days to defend itself in the proceedings.
In September 2005 the Surrey property developer Andy Smith and a consortium headed by Wrexham car dealer Neville Dickens emerged as possible buyers for the club.
On 20th October 2005 the administrators of WAFC announced that they had won the battle to regain ownership of the Racecourse Ground. A judge at Birmingham High Court found against the club owner, Hamilton’s company Crucialmove Limited stating that they should not have bought the freehold to the stadium as the evidence was clear that Crucialmove Limited, the buyer of the Racecourse Ground, had notice that a director of the company was making the sale in breach of his fiduciary duty and without WAFC’s informed consent; the buyer was therefore not acting in good faith and so could not rely on the common law rules or statutory provisions protecting third parties in
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