In the United Kingdom, football clubs sometimes choose to enter administration when they are unable to pay off outstanding debts. Under the Insolvency Act 1986, a business will face a winding-up order bringing them to court and if it is shown that a business cannot pay debts as they fall due or cannot repay outstanding debts then the company will be classified as insolvent.[1] Administration puts accountants "in charge of pretty much everything apart from coaching the players and picking the team".[2] For a football club in administration, the "football creditors rule" requires football-related debts such as monies owed to players, staff and other clubs to be paid first.[3]
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In 2000, ITV Digital bought the broadcasting rights to Football League and League Cup matches in a three-year, £315m deal.[4] In March 2002, the company went broke owing the League £180 million which it said it "cannot afford to pay".[5] As a result of this many Football League clubs had financial problems and entered administration.[6][7]
Prior to the implementation of a point deduction it was perceived that clubs had "manipulated and abused [administration] as a way of shedding debts then restructuring, and borrowing again once the hapless creditors had been fobbed off with their 8p in the pound".[2] In September 2003, it was proposed that clubs entering administration would be docked 10 points. A 'fit and proper persons' test was also introduced in an attempt to prevent fraudulent activities. If a person was previously director at a club which was in "administration twice during a five-year period" or at "two different clubs that have each gone into administration in a five-year period" then they would be prevented from becoming the controlling shareholder of a Football League club.[8] A 'fit and proper persons' test was also introduced for directors of Premier League clubs.[9] In November 2009, Stephen Vaughan, Sr. became the first director to fail the 'fit and proper persons' test.[10]
To ease financial problems for clubs that had been relegated, "parachute payments" were introduced to give time to adapt to the financial gulf between divisions.[11] The deductions of 10 points in the Football League and 9 points in the Premier League were ratified in 2004, with the rule in place from the start of the 2004–05 season.[12][13] The League also adopted rules that prevented any side from being in administration for either two successive seasons or eighteen consecutive months.[14] The reason for the deduction being a point less in the Premier League was due to the fact that the teams play eight fewer fixtures than Football League clubs.[13] The first club to incur this new penalty were League One side Wrexham F.C. who entered administration on 3 December 2004.[14]
In Scotland, following the adoption of a points sanction in the English Football League, a similar rule was mooted in December 2003.[15] It was announced in January 2004 that Scottish Premier League clubs going into administration in the 2004–05 season would be subject to a 10 point deduction and be prevented from signing new players. With Motherwell and Dundee already in administration at the time, it was decided that if "they are not in the process of coming out of administration by 31 May", the deduction would be applied at the start of the following season.[16] Furthermore, the Scottish FA would not allow clubs in administration to play in Europe.[17] Both Motherwell and Dundee met the required conditions to avoid the deduction of points.[18] Although the Scottish Football League has no automatic deduction of points for clubs going into administration, it reserves the right to "deduct championship points before or during a season and/or to impose a player registration embargo on any club".[19] The Scottish Football League also will place a team in the bottom tier (Division Three) if there are any doubts that they can fulfill their fixtures for the forthcoming season. Both times this has happened the Club has been in administration in the summer months. [20]
Leeds United filed for administration with only a few days remaining in the 2006–07 season, which automatically triggered a 10 point penalty. This placed Leeds at the bottom of the table and relegated the club, but they were extremely likely to have been relegated anyway. By entering administration during the 2006–07 season, they hoped to avoid starting the 2007–08 season on −10 points. The Football League saw this as a club trying to exploit a loophole and changed the rules. From 2007–08, any club entering administration after the fourth Thursday in March would have their 10 point deduction suspended until the following season. Similarly, if a club were relegated the deduction was also to be suspended until the start of the following season.[21]
On 26 February 2010, Portsmouth became the first Premier League club to enter administration.[22]
In a situation of insolvency, the "football creditors rule" means that debts to other clubs or players are prioritised and must be paid in full before the club is eligible to compete again in the league.[23] The football creditors rule does not apply in Scotland.[24]
The Enterprise Act 2002 made reforms to the insolvency act and, from 15 September 2003, the altered procedures for administration were implemented.[25] Most notably it abolished the Crown's preferential right to recover unpaid taxes ahead of other creditors.[26] As such, HM Revenue and Customs (HMRC) is now often not paid in full (between 2003–2010 outstanding unpaid taxes to the HMRC amounted to £30 million).[27] This legality of the football creditors rule was challenged in 2004 in Inland Revenue Commissioners v The Wimbledon Football Club Ltd. However, it was found that "full payment to football creditors (out of third party funds) ahead of preferential creditors did not infringe the provisions of section s4(4)(a) of the Act" and "differential treatment may be necessary to secure the continuation of the company’s business and may be regarded as supportable".[28]
In 2011 HMRC brought another challenge to the football creditors rule in the High Court, this time on the basis that it breached fundamental principles of insolvency law, including the pari passu rule that all unsecured creditors should be paid on a proportionate basis. However in May 2012 the court rejected the challenge as it found that the rule was not a deliberate evasion of insolvency law.[29]
| Club | Entered administration |
Exited administration |
Sport | League(s) | Deduction(s) |
|---|---|---|---|---|---|
| Crusaders Rugby League | 12 November 2010[140] | 27 December 2010[141] | Rugby league | Super League | −4 pts[142] |
| Wakefield Trinity Wildcats | 1 December 2010[143] | 17 February 2011[144] | Rugby league | Super League | −4 pts[145] |
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