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FootballNewsLawyer says ‘weird universe of football’ needs to scrap penalty for administration

Lawyer says ‘weird universe of football’ needs to scrap penalty for administration

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By Nick Harris

26 May 2010

A leading law firm that has advised a number of potential buyers of Premier League clubs this season has called for the scrapping of the nine-point penalty for entering administration, arguing that it encourages bad business practice.

Points penalties are now the norm in English football for clubs entering administration; the typical penalty is 10 points in the Football League, and nine points in the Premier League. Only Portsmouth in the Premier League have ever had this punishment applied, after entering administration this year.

The rationale behind the penalty is to discourage “financial doping”, or spending beyond a club’s means to buy success, then seeking financial refuge in administration.

With Uefa about to formally confirm details of its new ‘Financial Fair Play’ rules, which will come into force actively from the 2013-14 season (not 2012-13 as erroneously reported in most places), there are fresh warnings that more needs to be done to help clubs help themselves.

David Roberts, a partner with Olswang LLP, is a corporate specialist with experience in the football sector, and argues that football’s traditional reasoning that the game is a “special case” does clubs no favours.

“What we’re trying to do is highlight this weird universe that football exists in, where the normal forces of capitalism just bounce off,” he told sportingintelligence today. “If for one moment you treated football the same as another asset class, football’s business practices just don’t stack up.”

While conducting due diligence on a variety of unnamed British football clubs, it has “become clear” to Olswang that “the business model being pursued by most of the Premier League clubs is not ultimately sustainable without year-on-year investment from shareholders or the club’s bankers. At some point, lenders need to be repaid, in particular lending banks, who now view exposure to  football clubs as a poisoned chalice . . . banks being unwilling to lend to football clubs is also an ominous sign.”

Roberts argues that in “normal” business circumstances, the law allows businesses to enter administration and emerge as better businesses, but the points penalties in football deter owners from making rational business decisions along similar lines.

“On behalf of potential buyers, we have looked into the finances and practices of several top flight clubs over the last six months and, in some cases, have been startled by what we have seen,” Roberts says.

“Spending 70 per cent of turnover on wages, using cash due to HMRC as a source of working capital, selling long-term sponsorships that revolve around receiving all the cash up front and pre-selling ticket revenues are all measures that show that clubs are unable to fund their day to day businesses.

“Clubs need to step forward, deal with their debts and reach agreements with their creditors so that they can move forward with confidence. We believe the nine-point rule is impeding this process.

“The nine-point rule has not achieved the purpose for which it was designed; namely to encourage good financial practices in the Premier League.  If it had, we would not have seen what we have seen.

“If a business, be it a retailer, hotel, restaurant or a football club, is not able to pay its debts as they fall due, the directors must consider appointing insolvency practitioners.

“Administration gives a business breathing space to enable it to deal with its creditors in an orderly way and hopefully restructure the debt to a serviceable level, recapitalise the balance sheet, and in a perfect world, emerge out of the process a better, stronger and more financially viable business with a future.

“This is the law and this is what the capitalism is very good at delivering, and is in fact delivering in many sectors across the country, but not football.

“And this is why the present situation in football is so dangerous.  For so long as football has been treated as a special case, it is being spared the relief and long term benefits of the restructuring process; the longer a club that is hopelessly indebted avoids dealing with its debt problems, the problems only get worse – ultimately harming the fans and the game.

“The world we live and play football in has changed and the nine-point rule actually penalises a football club for following the law; and that cannot be right.

“Although it wasn’t intended to operate in this way, the nine-point rule is acting as a deterrent to clubs restructuring in order that they may emerge stronger and fitter than before and is no longer appropriate in the current economic climate.

“Olswang LLP believes the Premier League should consider whether the nine-point rule is still appropriate.  We believe it should  be suspended and possibly even revoked.

“In its place, Olswang LLP suggests that the Premier League should consider requiring Premier League clubs to adopt world’s best practices in relation to corporate governance, transparency, thin capitalisation rules and so on – in other words, the same practices that other well managed and funded English companies adopt.”

The Premier League argues that a raft of new measures will improve good business practice at clubs where such improvements are necessary, and that a points penalty is fitting in football as a means of increasing the chances of sporting fairness.

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