The Derby Debacle: Administration in Football, and Can Rooney Help Derby Avoid Liquidation?
Introduction
Just over two decades into the 21st Century, there has already been a significant number of well-known football clubs in the UK that have been forced into administration. These have included big names such as Wigan, Bolton, Rangers, Southampton, Bournemouth, Portsmouth and Crystal Palace. Most recently, Derby County, the historic, 138-year-old former FA Cup and top-flight champions are on the brink of liquidation after declaring it was entering administration in 2021.
In this blog I will analyse what administration means for football clubs. I will examine the pros and cons of being in administration and the system that the FA currently uses to govern the processes. This topic is particularly relevant as football clubs begin to emerge from the COVID-19 pandemic in a less financially stable situation than before the virus.
What is Administration?
When a club is unable to pay off the debts they owe to creditors, they may be forced to declare their financial crisis and call administrators into the club under the insolvency act. These administrators are given complete control over the club apart from on the football pitch. They are given the license and support to restructure the club to an extent that makes it a more financially sustainable company. Restructuring will often involve offloading unaffordable assets such as the highest-paid players who will be sold onwards, finding more efficient financial strategies and may even include finding new ownership for the club. The main aim of these administrators is to help the club recover from their financial crisis. With administrators taking control of the club over shareholders, the club is protected from further action that creditors may take against them.
Contrary to HRMC’s belief that all creditors should be treated as equals, there is a special ‘Football Creditors Rule’ that is adhered to by football clubs. This rule requires clubs to prioritise certain creditors to which they own a portion of the debt they have found themselves with. The priority creditors for football clubs are the players’ wages, managers’ salaries, other clubs such as through transfer fees and the association by which they are governed such as the FA in England. This legislation protects small clubs by preventing a domino effect within a league. In other words, if the club was not demanded to prioritise paying what they owe to other clubs, these clubs would then
suffer financial losses and may themselves be forced into administration. After the priority creditors are remunerated adequately, clubs are then allowed to compensate external creditors if they are able to.
It is important to note that a club, as with any traded company, can only enter administration if it is seen as still financially viable. This means that there must be a reasonable chance that the club has the potential to return to being a profitable business. The end result of entering administration is hopefully to come out stronger than ever before as a financial entity, through whatever means possible. It gives clubs the best chance of an effective recovery and aims for desirable outcomes. The best examples of these are Southampton in 2009 and Huddersfield in 2003, who emerged out of administration with a properly run and sustainably financed football club and have both enjoyed success at the top level of English football since their restructuring.
Football clubs can struggle financially for many reasons. In the past couple of seasons, clubs, especially in the lower divisions, have had to battle hard to balance the books during the Coronavirus pandemic. Financial pressures have been a result of a loss of gate income with fans unable to attend matches as well as TV Broadcasting income being lost when the season was halted completely. This has driven some clubs to the brink of administration and financial turmoil, with some clubs, like Derby County, suffering this fate.
In more usual times, there are still financial issues that cause a club to require the assistance of administrators. Irresponsible spending by the club owner, excessive wage bills, relegations and other factors have played a role in the administration of some former high-flying clubs in the UK as they suffer a decline. In 2018, only 1% of clubs reported financial struggles whereas in 2019, before the pandemic existed, this statistic rose to 8%, reflecting the increasingly financially vulnerable nature of the football league.
Once clubs have entered administration there are three main exits that can occur. Firstly, a new owner may express interest and a deal will be negotiated that involves the prospective owner agreeing to pay off the debt that the club has and adopt the new restructured club for the future. A large influx of money from a new owner is an effective way of exiting administration as long as there are sufficient strategies that have been installed to ensure the club operates in a financially sustainable manner. The second option is to come to a Company Voluntary Agreement (CVA). Whilst this also includes a significant level of financial restructuring and the offloading of assets, it is a way in which a club can be able to recover. For this to occur, the administrators will negotiate with creditors to agree upon an instalment plan that will mean they are remunerated what they are owed over a period of time in several instalments as the club is able to pay it.
The final exit from administration is one that is seen as an absolute last resort for any companies, let alone for football clubs. Liquidation, also known as dissolution,
requires the complete redistribution of all assets of a football club. Put simply, the football club will cease to exist. Chester and Scarborough have both suffered liquidation recently although both clubs have since re-established themselves under different names, different ownership and financial management. It is the hope of all clubs entering administration that this will never be the case and they will do everything to avoid it but it is always a worrying possibility.
Punishments
Before 2003, there was no further punishment for football clubs for entering administration. It was used as a tactical strategy of eradicating debt and restructuring the club in an attempt to be more financially effective. The English FA recognised that clubs should be deterred from entering administration simply to avoid debts as it was an unethical practice. Consequently, the FA decided to enforce points sanctions and other legislation for clubs entering administration.
For clubs in the leagues below the English Premier League, a 12-point deduction is applied when they enter administration. It is only nine points in the Premier League as there are less teams and fixtures. This was brought into place to preserve the integrity of competition and avoid misuse of administration. However, after this was brought into place in 2003, there was still a loophole in the FA’s deterrent for clubs not to enter administration. Leeds United exploited this in 2007 by declaring they were entering administration at the end of the 2006-2007 season. They were already relegated from the Championship at this point but it meant that they suffered the points deduction in that season rather than having to start in the third tier on -12 points for the 2007-2008 bid to immediately bounce back. This undermined the FA’s commitment to preserving integrity of competition in the English football leagues.
The FA was then forced to bring in a new rule that if a club enters administration after the last Thursday of March, the points deduction will be delayed until the following year. This has prevented clubs from being able to escape further punishment of entering administration by declaring it once the points deduction does not affect their season. They also stipulated that clubs cannot be in administration for more than 18 months and across two seasons otherwise they will be disbanded from the football league unless an immediate resolution is found. Further to this, any prospective owners or directors of a football club is not eligible for these positions under the FA’s rules prohibiting their involvement if they have been involved in two former clubs that have entered administration or if the club they are interested in has been in administration twice in the previous five years.
Derby County
Derby County officially entered administration in September of 2021. This followed over a year of financial hardship perpetuated by the COVID-19 pandemic. Mel Morris, a Derby fan himself and now former owner of the East Midlands club, spoke of how the pandemic cost the club a loss of £20million alone but estimates that in total, owning the club has taken approximately £200m of his fortune.
Derby County has been seeking a new owner and has reportedly been negotiating with three prospective buyers including ex-Newcastle and Sports Direct owner Mike Ashley. However, it is proving very difficult to complete this sale due to the complexity surrounding the debt reportedly owed to creditors by the club. The main problem is the potential for a lawsuit for a compensation claim from Wycombe that may end up in court. Wycombe are disputing their relegation as, had Derby suffered their points deduction last season, it would be them competing in League One rather than Wycombe. If Derby are to survive administration without being liquidated, they must seek a reasonable compromise deal with Wycombe which will appease prospective owners and provide a more hopeful future for the club.
Middlesbrough were also reportedly pursuing £40m in compensation for Derby’s failure to adhere to financial fair play rules in the 2018-2019 season where they beat ‘Boro by a single point to take the final Championship play-off spot. However, they have now struck the kind of deal that will help save the club. Although the details have not been revealed, it has been publicly announced by both parties that a resolution has been found. This is a positive step for Derby in their bid to remain a club in the EFL although Wycombe still pose the threat of driving the club into liquidation.
Currently, Derby County are under strict instructions by the EFL that they are to provide proof that they will be able to fund the rest of their season and fulfil their fixture commitments or they risk being eradicated from the league. Although they were already granted an extension, they have now been given a further month until the 1st March 2022 to provide this proof.
Derby is a historic club in English football. They have existed for well over a century and have collected numerous trophies and footballing accolades. It will be a drastic shame and loss for English football if this club was unable to find a successful exit strategy out of Administration. Fortunately, they are in the enviable position of having the English football legend, Wayne Rooney, at the helm trying to guide them to safety and fill the fans with an unusual sense of hope despite the current situation for the club. Perhaps the influence that Rooney has on English football will help the club recover, attract new investors and avoid liquidation.