Now the World Cup dream is over English football must confront an insolvency nightmare

As the number of total insolvencies increases in the UK, it may also be said that there are fears many professional football clubs are hurtling towards administration and further financial difficulties. The recent news regarding Aston Villa that the club may even enter administration, if a buyer or investor cannot be found in the very near future, only adds fuel to the fire. Today, as spending in football reaches its highest recorded amount, we are taking a look back at the football teams suffering cash flow issues and the future concerns for the sport.

Administration in football

Football administration can be traced all the way back to '84, when Charlton Athletic entered the insolvency procedure. Over the years, many football clubs have faced financial issues. Even the English Premier League cannot escape, with Portsmouth the first ever team in the league to face administration. In some cases, many teams have faced the threat more than once. However, football is different to other industries facing the early signs of insolvency. Closure is negligible, and only the minority of teams has failed to recover.

In simple terms, football clubs enter administration as they are spending more than they can afford. In 2017, Paris Saint-Germain broke the record for transfer fees, spending £198 million on Barcelona forward, Neymar - it's easy to see where many of the financial issues lie. Many football clubs budget for an income they do not achieve. For instance, the assumption the stadium will reach capacity during the season, or they will achieve promotion to the premier league. When the returns are lower than expected, it can often be difficult to rectify as a large sum is dedicated to the player's - and other team members - wages. In 'league insolvencies', it's also important to remember the Football Creditors Rule - meaning all football creditors (players etc.) are paid at the expense of unsecured creditors, usually HMRC and small businesses.

Football today

In 2017, a report by financial analysts, Vysyble, suggested many Premier League clubs could be hurtling towards bankruptcy. The report claimed that over the course of eight years, Premier League clubs lost an average of £2 billion. Today, Britain's football clubs are spending more than they are making, losing a record £876,700 per day. Of the worst performing, Chelsea and Manchester City accounted for more than half of the total losses across eight years. With those statistics in mind, we are looking at the most notable cases of football administration and the subsequent penalties.

Chester City

Chester City is one such example that resulted in complete dissolution of the club. The football club joined the Football League in 1931, playing in varying leagues until they won the Conference National in 2004. However, in 2001, the club was already in grave danger of entering liquidation, continuing to suffer resignations, culminating in their poor start in the 08-09 season. The previous departures, loss of fan support and struggles in the league table saw the club enter administration after the team suffered a 2-1 defeat on the final day of the season.

In the summer of 2009, the club was placed into administration with debts totalling £7 million, incurring a 10 point penalty. However, this penalty increased to 25 when HMRC overturned a CVA. During the procedure, there were talks of several buyers coming forward, but all fell through. Similarly, the team had to call off many fixtures as they were unable to fulfil their position - many players refused to board buses to away games due to unpaid wages - leaving the Football Conference no choice but to suspend the team. The suspension was, essentially, an opportunity for the club to put its finances in order and respond to the charges of breaking Conference rules due to abandoning games. However, the club was later expelled from the league as the members of the league board were not convinced they would fulfil their fixtures. This then led to the High Court formally winding up the club.

Aston Villa F.C.

Aston Villa is a recent example of a club facing major financial issues - attributed their relegation from the Premier League in the 2015-16 season. The club reported losses of £29.6 million during this period, with drops in their revenue streams including £9.1 million from sponsorship deals and £17 million from broadcasting income. The May 2017 accounts report retained losses of £232 million, meaning a balance sheet deficit of £147 million, leaving the team balance sheet insolvent. Unfortunately, the club was hoping for a promotion to the Premier League, which would have increased income by £170 million. However, as this was not to be, the club had to race to reach an agreement with HMRC regarding their tax arrears of £4 million. Currently, the team has come to an arrangement with HMRC, but the future of the club remains to be seen with continued losses.

Rangers F.C.

Rangers F.C is a team that has previously entered liquidation, yet subsequently returned to the top tier of Scottish football in later years. Their problems started in 2011, when the controversial owner, Craig Whyte, filed a notice of intent to appoint administrators. The very next day, The Rangers Football Club PLC entered the insolvency procedure over the non-payment of £9 million in PAYE and VAT tax arrears due to HMRC. The total amount of debts - expected to reach £134 million - was largely dependent on the results of a disputed tax bill to an Employee Benefit Trust scheme. While, initially, the courts ruled in favour of the club, HMRC appeals to the Court of Session that Rangers should have paid tax and national insurance on those payments. The Crown Office then asked Strathclyde Police to investigate the financial management of the team during the time Whyte held his position. It was later determined that the Employee Benefit Trust was simply a means of tax avoidance, with all PAYE under this scheme properly due to HMRC.

Later, the rejection of the proposed CVA placed the club into formal liquidation. However, a new company completed the purchase of the business and assets of the football club within hours of the rejection. Today, the ramifications are still being felt with HMRC to issue a follower notices requiring other scheme users to pay back the tax arrears on a specified deadline.

Leeds United

While Leeds has long been one of the more successful and recorded teams in the UK, 2001-2007 proved tough for the club. From 2001, Leeds had taken out large loans, with a high wage bill contributing to the financial issues. Following relegation to the Championship in the 2003-04 season, the club went on to sell most of the remaining players or released them on free transfers. Financial struggles came to a head in May 2007, and Leeds United entered administration - suffering a 10 point deduction that officially relegated the club to the third tier of English football. The club proposed a CVA, with HMRC lodging a legal challenge to the proposal. Following this, the company was then put up for sale, and a bid was accepted. However, a 15 point deduction was imposed on the club for failing to exit administration with a CVA. HMRC later dropped any further legal action, and the club managed to secure a play-off position despite the points deduction. Within two years, the club then went onto have their best start to a season in history and, currently, play in the Championship.

Portsmouth F.C.

Portsmouth, currently playing in League One, have faced many financial issues in the past - particularly the 2009-10 season. During this period, it became clear the team was struggling, having approximately £135 million of debt. To protect the club from liquidation, the owner placed the club into administration, appointing administrators and incurring a 9 point penalty. Due to this, the team were relegated to the Championship. The company then proposed a CVA, with an 81.3% majority. HMRC chose to reject the proposal and launched an appeal against the CVA on the last day it could be formally agreed. The case was heard between the 3rd and 5th August 2010, with the ruling in favour of Portsmouth. The HMRC appeal was turned down on all five counts, further choosing not to appeal the verdict. The club then formally entered a CVA, bringing the club out of administration.

The future for football

Last year's transfer figures have only raised more concerns over the financial sustainability of the current football model. With a huge leap in transfer fees spent, the money is set to filter around Europe and see the valuations of players inflate. The real crunch, however, is predicted to be when TV rights dry up, with the likes of BT and Sky unable to commit to such high payments for the coverage. Some have suggested we may be heading for a Super League, with salary caps and big TV events. Ultimately, something has to change as the current spending in football could spell the end of smaller domestic clubs and, subsequently, football leagues.

Eamonn Wall is Managing Director, Business Rescue Expert