There has been a longstanding focus upon the ways of achieving financial stability in football and the emotional balance that exists between chasing the dream and being financially secure. This challenge has become ever more prevalent as a consequence of COVID-19, and with no end in sight for when spectators will return to football stadia across the country, the timeframe to receive the crucial boost in cash from ticket sales and match day merchandise that is so important to so many clubs, is unknown.
In our 2019 annual survey of football club Finance Directors report, we reported that “structural change was needed in football to promote and enforce a credible sustainability mechanism”. We also questioned whether the time was right to “consider whether the current structure of the English leagues and income distribution requires adjustment”. Indeed, a mix of high profile administrations, point sanctions and other matters suggested an unfavourable pre-COVID-19 direction of travel in English football.
Fast forward 12 months and we are faced with an extreme set of global circumstances which has highlighted areas for change across our lives and society in general. In the context of football, the financial fragility that exists through all levels of the game has become even clearer and in our 2020 survey of Football Finance Directors, 50% of Clubs are telling us that their finances are in need of attention or are a cause for grave concern – up from 27% in 2019 and 18% in 2018.
Financial stress in football clubs
Financial stress is clearly (and quite rightly) high up on the agenda of most Clubs as well as the footballing authorities, but from adversity it is important to recognise the opportunities that exist. Football has remained the cornerstone of our society that it has been throughout many lifetimes, television audience figures have remained at extremely high levels since Project Restart and steps have been taken (such as the revised salary caps in League 1 and League 2) to provide a platform for more financial robustness.
But have many Clubs run out of time? Have their options now been exhausted to find a solution to navigate their way through financial distress and maintain solvency?
The answer to this question will often depend upon different individuals’ perspectives and whether the glass is half full or half empty. There is always consistency, however, when considering the insolvency of a football club – nobody wants to see an insolvency event happen and if there are options that exist to mitigate such an eventuality, then it ought to be explored.
There are a couple of definitions of insolvency. The first is whether the value of a company’s liabilities exceeds the value of that company’s assets (“the balance sheet test”) and the second, and more widely used, is do you have sufficient cash to pay your creditors as they fall due for payment (“the cash flow test”). Within football, it is not unusual for a Club to have an insolvent balance sheet (i.e. more liabilities than assets) but its solvency is maintained through various cash management techniques, including player sales and shareholder injections.
An important factor when considering the insolvency of a company is the conduct of the company’s directors. For instance, have the directors concluded to continue trading despite “being insolvent” thereby worsening the position for the creditors and increasing the level of loss to those impacted. This brings with it risk to directors of personal liability for wrongful trading, for which the temporary suspension introduced by the Government in March 2020 came to an end at the end of September.
Options available for football clubs facing difficulty
It is not as simple as suggesting that Clubs should immediately head to insolvency if faced by financial adversity. However, it is simple to suggest that directors should be considering the options available by taking appropriate advice as to the steps available to them and the Club.
An “insolvency event” in football brings with it additional penalties, the most immediately visible of which is a points deduction that can cause immediate relegation and can be difficult to recover from for many years into the future. The definition of an “insolvency event” includes the more commonly known types of insolvency such as liquidations, administrations and company voluntary arrangements (CVAs), as well as other restructuring procedures.
However, some new options now exist for Clubs to consider at times of financial stress. These were introduced as part of the new Corporate Insolvency and Governance Act 2020 (CIGA) and came into law with immediate effect from 26 June 2020, as a means of supporting UK restructuring reform in the face of the COVID-19 pandemic. They are further supported by restrictions on the ability of creditors to commence winding-up proceedings until the end of 2020. Importantly, the current rules governing insolvency events in English football do not appear to have been updated to reflect the new options available due to CIGA; indeed, new articles of association for The Football League were filed at Companies House on 21 October 2020 (nearly four months after the introduction of CIGA) and the definition of insolvency event has not been updated.
The CIGA legislation provides powerful new measures to improve the potential for distressed companies to survive, stabilise and prosper and primarily comprise a rescue moratorium and/or a restructuring plan. Details of each of these are provided below.
Rescue moratorium, which provides a standstill from creditor action to enable a restructure with the directors remaining in charge of delivering the solution. The key components include:
- Company is considered to be unable, or is likely to become unable, to pay its debts.
- Moratorium is considered likely to result in the rescue of the company as a going concern, thereby preserving solvency.
- Creditor consent is not required for an initial period of up to 40 days and directors remain in control of the company throughout.
- Extensions of up to one year can be granted with consent of the majority in value of pre-moratorium creditors, or potentially longer via court consent.
- Subject to limited exceptions, a company has a payment holiday on pre-moratorium debts.
- Moratorium is overseen by a licensed insolvency practitioner (“the monitor”), who has to confirm that the company is an eligible company and the moratorium is likely to result in the rescue of the company as a going concern.
Restructuring plan, which is a debtor-led compromise procedure that provides greater levels of flexibility than previously available under English law, including reducing the power of dissenting creditors to obstruct a viable restructuring. This means that:
- Creditors and members are divided into classes. An application can be made to exclude any out-of-the-money creditor or member from voting.
- 75% in value of creditors or members voting in each class must approve the plan.
- Capable of being approved despite a class of creditors dissenting, so long as that class would not be worse off than they would otherwise be in the relevant alternative.
- Court has ultimate discretion to sanction the plan and must be satisfied that the plan is fair.
The CIGA reforms represent the biggest change for many years to the UK’s restructuring and insolvency legislation and, as a consequence, to insolvency in football. The new measures go to the heart of many of the components of a successful turnaround and therefore provide an opportunity for football clubs to achieve this. It is not yet known whether football will update its definition of an “insolvency event” to specifically include the moratorium and/or the restructuring plan, but it would seem contradictory for (in particular) a moratorium to be defined as an insolvency event given its intent is to provide breathing space to mitigate a formal insolvency.
The new measures bring a number of potential positive opportunities to a Club in distress, including:
- Seeking early engagement – the new moratorium allows strong boards with credible plans to act early and drive company rescue, supported by turnaround professionals with valuable situational experience and expertise.
- Precious time – the greatest barrier to an optimal outcome is often “runway”. The new measures afford Clubs enhanced scope to develop and deliver structured turnaround plans with an increased opportunity to drive operational/financial restructuring.
- Building confidence – the monitor role strikes a balance between giving a Club space to implement a solution and providing independent comfort to creditors and other stakeholders that the company’s plan is realistically deliverable and is being pursued with due regard for their interests. This should make it easier for Clubs to obtain the level of buy-in needed from interested parties to deliver effectively.
- Removing obstacles to success – the temporary measure to limit the destructive power of winding-up petitions for challenged but ultimately viable companies is an important advancement.
- Creativity – the protection afforded by the Moratorium could increase the scope for more creative solutions involving CVAs, while the increased flexibility of the restructuring plan offers a wider range of approaches than previously available. Ultimately, embarking on a CVA or restructuring plan may still bring with it a points deduction, but from a more stable platform the Club may ultimately be able to deal with this adversity in a more positive manner than would previously have been possible, and within a shorter timeframe.
Consistent with Rethink, the application of these reforms in football will require ever increasing levels of collaboration between the directors, creditors, shareholders, footballing authorities and other financial and non-financial stakeholders, as a means of developing positive solutions in challenging circumstances.
Therefore, although financial stress in football was not uncommon in pre-COVID-19 times and is even more prevalent today, there have been important advancements that potentially bring with them powerful options and alternatives available to deal with cash flow issues in football. The opportunity to secure more time and protection to consider these options is expected to be crucial in the months (and years) to come and should be welcomed by all in football.
Our experienced professional sports sector group and our national team of restructuring professionals have a long track record of working with businesses experiencing cash and working capital pressure. We help our clients to rapidly assess their situation, analyse the options available and support them in implementing the right solution. The new CIGA reforms undoubtedly enhance the range and quality of options available and we at BDO are ready to respond to the needs of our clients. We are ready to support you as a trusted advisor to navigate your challenges.
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Read the latest Football Finance Directors Report to for further insights into the 2020/2021 football season.