Football has grown into such a big money industry that we barely bat an eyelid at multi-million pound transfer fees and colossal weekly salaries. For the most elite leagues, the numbers behind deals and contracts are so large they almost seem entirely abstract. There is nothing abstract, however, about the financial reality each and every club finds themselves in. Ultimately, football clubs today operate as businesses with hundreds or thousands of people relying on the clubs (and their ongoing survival) for their own livelihoods.
Many clubs find themselves trying to locate the sweet spot of the often-precarious balance between risk and reward. In order to compete, teams need to spend, this is a simple fact of the sport. The correlation between expenditure and success is undeniable at this stage and this encourages many clubs to take significant risks. Sometimes, these risks end up paying dividends, such as Aston Villa’s promotion push in 2018-19 season. That seasons the West Midlands outfit recorded huge losses totalling £68.9m, but it proved a worthwhile investment with Premier League riches estimated at around £170m.
Aston Villa’s success should not be used as a case to encourage clubs to spend beyond their means, however. For every tale of success in which there is of a club benefitting from a risky gamble, there are many more that have run into financial despair. Sometimes struggling clubs can come back from the brink of destruction, Bolton Wanderers being a more recent example, but others are not so fortunate. For these clubs, going “bust” marks a tragic consequence of their financial mismanagement, often with a hefty dose of bad luck thrown into the mix. This article will explore how teams may end up going down this path and what exactly it entails for the ill-fated teams involved.
Going bust is not something that merely happens overnight. You will not wake up one morning to find that your club suddenly ceases to exist because they are buried to the neck in debt. The process is often extremely drawn out and painful, full of appeals, fund-raisers and usually a fair bit of fury and sadness from the fans. There will usually be warning signs that appear long before administration, but this often marks the first formal checkpoint in the road to going bust.
This is not to say that going into administration is the start of an inevitable demise, far from it. Many clubs who have administrators brought in manage to get back on their feet; after all, this is their primary purpose. In some instances though, a club will be beyond saving due to completely misjudged spending and/or the sudden departure of an owner who had been personally covering losses.
So, what does going into administration actually mean? Administration is a legal procedure triggered when a club can no longer pay its bills or other financial obligations. In doing so, the club will pass control of all off-pitch activity to administrators. The administrators themselves will be a court-appointed accountancy firm or potentially a named individual if the club is small. Clubs are free to request a particular firm or individual and this is usually granted, provided there is no conflict of interest. The selected firm will then enjoy free rein to impose whatever changes they deem fit. This is, of course, providing that the court accepts the grounds for administration in the first place. It is possible, albeit unlikely, that the court will rule that the club does not need to take such measures.
As an alternative to administration, some clubs may also negotiate a company voluntary arrangement (CVA). Using a CVA, a club would agree to repay any money owed over a set period of time in several instalments, without needing to bring administrators in. While not the same as administration, it is still an insolvency event, punishable with the standard 12-point deduction… as Bury FC found out in 2019. With points deductions greatly increasing the chance of a side suffering relegation, which would lead to a reduction in income, this can make paying back any money owed even more difficult.
Administrators Get to Work
One of the main things an administrator will aim to do is pay back certain creditors in the following order of priority:
- The players
- The management staff
- Other clubs
- The Professional Football Association
- The Football League
- The Premier League
This is what is known as the Football Creditors Rule. In order to pay financial obligations to these parties, administrators may look to sell off assets, whether it be players, training pitches and so on; or they could attempt to raise funds through sponsorship deals or external investment. They may also look to cut costs by issuing redundancies to non-playing staff. In rarer cases, they could also instruct the manager not to play a certain player, for instance because he is a game away from triggering an appearance-related bonus.
This is what happened in the case of Portsmouth striker Aruna Dindane who was on loan from RC Lens. Had the Ivorian played just one more game, Pompey would have had to cough up £4m, which – despite his excellent form – was far too much for a team in administration.
No Lifeline Available
In most cases, the administrators can acquire enough money through these sales and expenditure reduction measures to pay off any bills owed. However, if the company does not have enough assets to pay its creditors, then liquidation looms. The only hope of survival by this point is attracting a new owner, and one who is capable of taking on the current debt. If a number of offers to purchase the club are submitted, the administrators will decide who is likely to provide the greatest financial security.
For lower league clubs, fans may look to purchase the club via a consortium. This is what happens to Portsmouth in 2013 with the Pompey Supporters Trust taking control from former owner Balram Chainrai. If no bids come forward, or rather no viable bids, then administrators will have no choice left but to liquidate the club.
The Liquidation Process
When we talk about ‘going bust’ this is just another term for liquidation or being ‘wound up’. At this stage, the club ceases to exist and begins selling off assets in an attempt to pay back as many creditors as possible. Players, if there are any still contracted, will be released and free to find a new club. Even small items owned by the club, from computers to furniture, will be sold off as the club is gutted of anything remotely valuable. Liquidated items are often bundled together and sold at auctions to the highest bidder. The stadium, if owned by the club, would shut immediately and a prospective buyer would be sought. Attempting to sell a stadium can be a tricky process, as the now-dissolved Scarbrough FC discovered.
A covenant existed on the McCain Stadium, which meant it could only be used for sporting activities, preventing them from selling it off to a housing developer. A battle between the liquidators and the resulted in a situation of deadlock. Meanwhile the stadium, lacking security, was heavily vandalised and damaged by fire. Eventually, the council voted to demolish the tattered stadium while Featherstone Rovers RLFC purchased the East and West stands. A few years later, the former site became the location for a new supermarket.
As stated before, clubs will look to pay back creditors in a fixed order of priority. This way of repaying creditors faced a challenge by HMRC in 2011, as they believed it breached fundamental principles of insolvency law. This includes the pari passu rule, which states all creditors should be paid proportionally. The High Court rejected this appeal though, allowing the ranked system to stand. The reason the Premier League/Football League insisted on this alternative approach is to prevent a domino effect. If a club fails to receive a full transfer fee, for instance, this could lead to that club also incurring financial problems themselves and thus develop their own inability to pay outstanding bills.
While most players at the club should be fine to find new suitors, non-core staff may face a harder time. Some key members may continue to be employed for a short-term after liquidation but the administrators will determine this on a case-by-case basis. Employees remain entitled to any statutory redundancy entitlements. If an employee is made redundant before liquidation occurs, in order to make the club more attractive to a potential buyer, this can be considered ‘unfair dismissal’ (Spaceright Europe Ltd v Baillavoine and another). However, in Crystal Palace FC Ltd and another v Kavanagh and others, the Court of Appeal ruled in favour of the club, stating such dismissals were vital in order to continue trading.
Who is to Blame for Football Clubs Going Bust?
If it boils down to liquidation and a club is dissolved, naturally there is a lot of anger and upset. In some cases, there is truly a villain: often an owner who has made a series of harmful decisions. Although the fans came to the rescue of Chesterfield in 2001, stopping the club from dissolving, former owner Darren Brown (not to be confused with TV mentalist Derren Brown!) remains a great example. A Serious Fraud Office investigation led to charges of false accounting, theft and furnishing false information, resulting in a four-year prison sentence.
Usually though, it is more a case of a series of unwise decisions rather than anything malicious. Darlington FC owner George Reynolds, for instance, funded a new stadium with high-interest loans despite slim chances of ever being able to fill it. He had always been an optimistic and ambitious owner though, seeking to sign players, such as Paul Gascoigne and Faustino Aprilia, in 2002. Unwise decisions do not have to take the form of building an ill-judged new stadium though. Even things such as neglecting to put relegation clauses in contracts can have a hugely damaging impact on a club’s finances, as Sunderland found out. The Black Cats ended up paying Jack Rodwell £73,000 per week following their relegation from the Premier League. At the time, this was much more than double the average highest wage across the division.
A New Beginning
Occasionally fans can join forces, raising enough money to keep their team afloat (although sometimes only temporarily). In cases where this is not viable, fans can only watch on in horror as the full extent of their club’s financial woes come to light. As inevitable as liquidation seems, it still comes as a crushing blow when the official announcement is made. At this stage, there is no saving the club in its previous form but the team’s spirit can live on via a ‘phoenix club’.
These are new entities, often starting very low down in the football league pyramid, designed to replace the dissolved original club. There are examples across the world but English examples include Darlington 1883, Chester F.C., AFC Rushden and Diamonds and Maidstone United.
How Often Do Clubs Go Bust?
We have talked about why clubs go bust and what the process involves but not how often it occurs. Historically, administrators have had an impressive success rate when it comes to keeping clubs afloat. Between 2000 and 2019, there were 42 cases of English league clubs falling into administration (excluding Bury who arranged a CVA), involving 35 teams.
Out of these, only four of the clubs involved subsequently met their demise: Chester, Farsley Celtic, Rushden and Diamonds, and Darlington, with the rest able to secure their future.
|Club||Year entered administration|
|Queens Park Rangers||2001|
|Halifax Town||2002, 2008|
|Bradford City||2002, 2004|
|Port Vale||2002, 2012|
|Darlington||2003, 2009, 2012|
|Rotherham United||2006, 2008|
|Rushden and Diamonds||2011|
Across the border in Scotland, the liquidation rate is a little higher with two of 13 administrations resulting in clubs being wound up (Airdrieonians in 2002 and Gretna in 2008).
Certainly, in the UK, for all the talk of financial mismanagement and clubs spending beyond their means, going bust is still a rather rare phenomenon. Therefore, calling in the administrators is far from a death sentence; but this may not always be the case in future. For several years there have been growing cash flow concerns with 8% of Football League clubs reporting they were struggling with their finances in 2019.
Which Club Will Be the Next to Go Bust?
The wages to turnover ratio is widely regarded as a key financial indicator for football clubs. There is, broadly speaking, a consensus on what constitutes a sustainable ratio with this figure being anything under 70%. So, the below figures, provided by Deloitte in 2020, provide rather troubling reading. (The full document is well worth reading.)
EFL Wages to Turnover Ratios
|Season||Championship||League One||League Two|
Given that these are merely averages, there is perhaps something of a storm brewing, particularly in the Championship and League One. Aware of the dangers of out-of-control spending, the Football League imposed squad salary caps on all League One and League Two sides after clubs voted for such measures. It is hoped that the new rules would help improve long-term sustainability.
Premier League clubs are seemingly sitting pretty at 61% wages to turnover (2018-19) but the coronavirus crisis revealed how precious some clubs’ finances were dangerously reliant on broadcasting revenue. Time will tell who the next team to go bust will be, but it is most definitely a matter of when rather than if.