CIBS Centre for the International Business of Sport The CIBS Working Paper Series – no.4 THE CIRCUMSTANCES IN WHICH ENGLISH FOOTBALL CLUBS BECOME INSOLVENT John Beech Coventry University Simon Horsman Coventry University Jamie Magraw Independent Management Consultant Former Director of Finance of the Football Association © 2008 Series editor – John Beech The CIBS Working Paper Series – no.4 The circumstances in which English football clubs become insolvent Centre for the International Business of Sport (CIBS) CIBS aims to deliver high quality applied research, training, consultancy and networking outputs across a range of sports and in a number of different disciplines. The activities of CIBS include • • • • • undertaking applied sport research providing a range of consultancy activities to the sport industry offering the services of retained sport academics delivering generic and bespoke sport training programmes creating opportunities for networking and collaborative exchange in sport • working with prospective, actual and previous clients in sport to identify ways in which CIBS can assist them with specific projects The Centre for the International Business of Sport Coventry University Business School Coventry University 5 Priory Street Coventry CV1 5FB United Kingdom Website: http://www.coventry.ac.uk/researchnet/d/691 Email enquiries: Simon.Chadwick@coventry.ac.uk Beech, Horsman and Magraw (2008) -2- The CIBS Working Paper Series – no.4 The circumstances in which English football clubs become insolvent INTRODUCTION In 1863, when the (English) Football Association was founded, individuals who fell bankrupt were still sent to a debtors’ prison, a situation which continued until they were finally closed in 1867. The ambient social attitude then was that insolvency was a matter not merely of shame, but of criminal conduct. By the first decade of the twenty-first century, approximately 140 years later, attitudes had changed dramatically. While few English football clubs had become insolvent in the professional era, beginning in 1885, the move into commercialisation and the post-commercialised era resulted in insolvency becoming, while not quite the norm, at least a far from unusual situation. A brief ‘pre-research’ scoping exercise identified very few clubs who had faced insolvency during the major part of the professionalised era. These few examples of insolvency or near-insolvency include, in England: Accrington Stanley (resigned from the League 1962); Gateshead (not re-elected 1960; disbanded 1973); Bradford Park Avenue (not re-elected 1970; disbanded 1974); Portsmouth (1976; rescued by ‘SOS Pompey’); Charlton (1984; club, but not stadium, acquired by fans); and in Scotland: Third Lanark (1967; declared bankrupt and liquidated following a Board of Trade enquiry). In the commercialised era, however, insolvency began to feature all too commonly. The pre-research exercise has been reported as Beech (2007). This Working Paper reports on further progress to date on a major research project to investigate this perhaps surprising development. THE LITERATURE CONTEXT It was not until Argenti (1976) that a thorough analytical study of business failure was made. He highlighted the importance of distinguishing between the causes of failure and the symptoms of failure. This present research project acknowledges that its focus is on the symptoms of failure, and that any causal relationship between symptom and cause will be, at best, tentative. The project also draws to some extent on the approach supported by Anheier and Moulton, who argue that there are distinct approaches to the study of failure: organisational, political, cognitive, and structural (Anheier and Moulton, 1999a and b). This work in the football sector, Beech, Horsman and Magraw (2008) -1- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent however, suggests that in this particular sector the approaches are less distinct, and are in fact inter-related. Anheier and Moulton further suggest that there are four aspects of failure to be explored: concept, cause, process, and implications. Because it involves a specific legal process, bankruptcy, which in the context of this study includes the liquidation of incorporated bodies, is the most studied form of failure and many studies have explored organisations in this category. Related terms are ‘insolvency’, which is best thought of as bankruptcy without the legal process that pushes an organisation over the edge, and ‘financial distress’, but these states are not sufficiently clearcut to be easily researched; indeed such states are normally concealed as far as possible. Because we are conducting a qualitative study and are particularly interested in behaviour at the margins, we are going to use these words precisely and as follows: • Bankrupt/in liquidation – the situation where by due legal process control of an organisation has passed from its directors to an outside independent party, normally known as an administrator or receiver, who acts in the interests of the creditors. Insolvent – unable to meet your obligations as they fall due. The most high-profile recent UK insolvency was the Channel Tunnel. The creditor banks were owed billions of pounds but it suited them to influence the directors rather than to appoint a receiver and, indirectly, to receive ownership of a hole in the ground. Financially distressed/illiquid – short of money. are not precise terms. By its nature these • • • Liquid – with surplus cash, for example after a small club sells a star player or has an unexpected cup run. Authors have tended to try and associate the bankruptcy with the study of a particular business facet, such as cash-based fund flows (Aziz, Emanuel and Lawson, 1988), agency and prospect theory (D’Aveni, 1989a and b), governance structures (Daily and Dalton, 1994), inter-organisational linkages and financial leverage (Sheppard, 1994) and a variety of factors (Daily, 1994). The prediction of bankruptcy through the use of financial data has prompted considerable research. Altman developed a model which offered a reasonable degree of success in predicting bankruptcy two to three years ahead of the event (Altman, 1968). This model was refined and adapted for use in the United Kingdom by Taffler and Tisshaw. Among the examples which they said would have been predictable with their model was the 1973 collapse of Court Line (Taffler and Tisshaw, 1977). Altman further developed his predictive model (Altman, Haldeman and Narayan, 1977), and it has been further developed more recently by Zopounidis and Dimitras (1998). Beech, Horsman and Magraw (2008) -2- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Morris casts doubts, however, on the accuracy of such models, because of the high rate of misclassification error, their self-fulfilling nature, and the fact that many bankruptcies are due to ‘unforeseeable’ circumstances (Morris, 1998). The particular nature of sport as business – exemplified in the Commission of the European Communities’ White Paper on Sport (2007), which argues that there is a ‘specificity’ to sport – suggests that general theoretical frameworks may be problematic in their application to sport as business. The argument that individual sectors need individual ‘recipes’ has been well rehearsed by Spender (1989; 1998), and an objective of this project is to produce an individual analysis of insolvency – individual in that it is recognised from the outset that it is highly unlikely that it will be generalisable beyond the sports industry. Within the football sector, interest in the performance nexus – on the pitch and in financial terms – grew as the post-commercialised phase of business evolution emerged following the formation of the Premier League and the first BSkyB broadcasting rights contract (Beech, 2004). Within a decade there was an extensive literature – see, for example, Conn (1997), Szymanski and Kuypers (1999), Hamil et al. (1999), Morrow (1999) and Hamil et al. (2000) – but the emphasis in writings was on the general, on success or on lack of success. Two more recent examples from the literature do focus on failure: Buraimo et al. (2006) and Emery and Weed (2006). They are of particular interest in that they adopt strongly different approaches. While Buraimo et al. concentrate on the analysis of aggregated financial data with relatively little consideration of individual clubs, and are thus entirely quantitative, Emery and Weed begin from this perspective but then focus on a single case study (of Lincoln City), considering both the financial failure and the subsequent recovery. While both these contrasting approaches are attractive and insightful, it is clear that a methodology covering both aggregated and individual data, and quantitative and qualitative data, is likely to give the richest analysis. OUTLINE OF THE INTENDED METHODOLOGY A three-phase methodology has been developed. phases envisaged were: 1. In brief, the three An exploratory phase to define the scope of the project. This included identifying the temporal scope – the date from which the study should begin – and the spatial scope – in particular, whether to look at football in Britain or just in England. Once the temporal scope had been identified, a timeline of relevant external events was to be developed. A phase of data gathering and analysis covering the selected phase. Beech, Horsman and Magraw (2008) -3- 2. The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Data gathering consisted of identifying all instances of insolvency during the chosen period, building mini-case studies of each instance, identifying the factors which proved relevant in each case, mapping the data gathered together with any further data identified as being needed to meet the needs of the investigation, and mapping this data into a database. The structure of the database would be such that it could be sorted in ways that would lead to the identification of archetypes1 of clubs that became insolvent. 3. In a third phase, each archetype would lead to specific clubs to be identified for deeper investigation involving interviews with key players in individual insolvencies. PHASE ONE As the detailed scoping exercise began, a number of issues arose which needed to be addressed. Prime among these was the issue of the reliability of secondary and tertiary data. In particular it emerged that the normal research method of triangulation to confirm the accuracy of data was problematic as secondary and tertiary data sources on the internet were tending to be the same in terms of the original (and usually uncited) source. The most obvious starting point was the well known series of annual Deloitte Touche Reports. While these Reports provided a useful check-list of clubs becoming insolvent, they only cover English League clubs and would have pre-defined the time range. It was therefore decided to build from scratch a list of clubs with dates at which they went into Administration. In order to do this, the BBC News website was selected as a source to trawl using the search function. This posed problems in that the earliest available pages were from 1999. A comprehensive trawl was therefore made of these websites: Wikipedia The Political Economy of Sport - Clubs Clubs In Crisis For promotions and relegations, Football Club History Database Where appropriate, individual Supporters’ Trust websites 1 The term ‘archetype’ has been chosen over ‘ideal model’ or ‘exemplar’ in order to avoid a positive conotation. Beech, Horsman and Magraw (2008) -4- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent with data being logged onto an Excel spreadsheet under the following headings: When the club went into Administration Which tier the club was in at the time The club’s recent previous (at least three years’) performance Size of the club’s debts The club’s creditors The business model in use by the club The club’s catchment area / local competition The club’s owner / directors Any criminal activity (alleged/proven) by the club’s owner / directors Stadium factors (ownership; development; move; rental) The club’s rescuer (or not) Data was thus partly quantitative and partly qualitative. The use of coding allowed the spreadsheet to be sorted by qualitative data as well as quantitative data. The basis for logging a club’s insolvency is not as clear-cut as might be imagined, and the basis for logging is discussed in the Appendix. Scope Once data had been gathered under the first four headings, three decisions were made regarding the scope of the project: 1. It was decided to restrict further research to clubs which play within the English League system 2. As some clubs seem to have gone into ‘free-fall’ once they have been relegated from Tier 4 (the current League Division 2), it was decided to cover all Tiers of English football. Although this means including a small number of Tier 5 and Tier 6 clubs, relatively few clubs below this level were found as being reported in Administration. While it is possible that low-tier clubs do fall into Administration but are not widely reported as doing so, it seems more likely that at the lower levels there are lower levels of budget, lower levels of debt and lower levels of uncertainty, resulting in higher levels of stability, increased ease of financial control and the increased probability of finding a benefactor, who would, in effect, underwrite the club’s losses. 3. 1986 was selected as the starting point for the study as before that date there were relatively few cases of insolvency, as reported Beech, Horsman and Magraw (2008) -5- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent above. In addition, 1986 saw a significant change in the law on insolvency. Timeline The following key events were identified as constituting a timeline against which data should be evaluated: 1986 1992 1997 27 Mar 2002 2002 15 Sep 2003 25 Sep 2003 1 Apr 2004 16 Apr 2005 Insolvency Act (introduced the notion of ‘wrongful trading’) Premiership formed as Tier 1, with major broadcasting rights contract awarded to BSkyB Premiership introduce ‘parachute payments’ for clubs relegated to Tier 2 ITV Digital, then owners broadcasting rights, collapsed of Football League Enterprise Act passed but not immediately brought into use Crown loses ‘preferential creditor’ status Football League introduces ‘parachute payments’ for clubs relegated from Tiers 2 and 3 Insolvency provisions of Enterprise Act 2002 come into force Internal Revenue (IR) and Customs & Excise (C&E) merge to form Her Majesty’s Revenue and Customs (HMRC) Premier League offers Football League ‘solidarity package’ to ensure a fairer distribution of revenues across the professional English game 22 Jul 2007 INITIAL FINDINGS In the light of the difficulty of obtaining data on cases of insolvency as far back as 1986, the datasets are not yet fully complete in their detail, although the authors are confident that the list of insolvencies is complete. However, as Figure 1 shows, it is the older incidents that are much less common, and there is sufficient data to present initial findings. To date (June 2008), in the period beginning in 1986 a total of 56 clubs in the English leagues have been identified as becoming insolvent. Three of these are Welsh clubs which play in English leagues – Newport County, Swansea City and Wrexham. Beech, Horsman and Magraw (2008) -6- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Allowing for clubs becoming insolvent more than once and clubs regressing into deeper states of insolvency (see Appendix), a total of 68 incidents of insolvency have been identified. 12 10 8 6 4 2 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Figure 1 Incidence of insolvency by calendar year since 1986 At the time of entering insolvency the clubs were distributed across the league tiers as follows: Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Tier 6 Tier 7 Lower than Tier 8 0 clubs 13 clubs 16 clubs 19 clubs 10 clubs 6 clubs 0 clubs 1 club In the case of two further clubs, the year only of the insolvency has been identified, meaning that, because of promotion or relegation, the tier at the time of the insolvency has not yet been identified; in one case it must be either Tier 3 or Tier 4; in the other, it is either Tier 4 or Tier 5. Although no Tier 1 club has become insolvent, a pattern of a club being relegated from the top Tier and very shortly becoming insolvent can be identified with such frequency that we feel confident in labelling it as one of our archetypes. Such clubs are shown in Table 1. The peak of insolvencies in 2002 would seem to lend credence to the received wisdom that the collapse of ITV Digital was the major causal factor of these clubs’ insolvency, as does the fact that all three clubs relegated from the Premier League in 2002 found themselves insolvent very shortly. This collapse occurred towards the end of the 2001/02 season (27 March 2002) and the data was re-plotted on a season by season basis to see if this produced a significantly different peak at this apparently crucial time. The results are shown in Figure 2. Beech, Horsman and Magraw (2008) -7- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Club Middlesbrough Crystal Palace QPR Bradford City Leicester City Ipswich Town Wimbledon FC Derby County Leeds United Relegated 1982 1998 1996 2001 2002 2002 2000 2002 2004 Administration in season start 1985 1998 2000 2001 2002 2002 2002 2003 2006 Debts £2m £9m £13m £33m £40m £35m £20m £33m £35m Table 1 12 Tier 1 clubs which subsequently became insolvent 10 8 6 4 2 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Season start year Figure 2 Incidence of insolvency by season since 1986/87 This re-plotting of the data would suggest that, while the collapse of ITV Digital was a significant factor in causing clubs to become insolvent, it acted as a catalyst in a number of cases rather than being the primary cause – the incidence of insolvency was already on the rise. Plotting the data this way would also suggest that the incidence of insolvency is currently on the rise. Any relegation seems to be a common circumstance for insolvency. In 30% of instances the club had been relegated in the previous 12 months, 36% in the previous 24 months and 48.5% in the previous 36 months. This provides good evidence for the need for ‘parachute payments’ and arguably that these payments are insufficient. The counter-argument is of course that clubs need to consider risk assessment more thoroughly and plan ahead for a possible relegation. Beech, Horsman and Magraw (2008) -8- The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent When a club is under pressure through actual relegation, it clearly leads to reduced gates and revenue streams from ticket sales, and reduced income from sponsorship and merchandising. Clubs need to manage their costs very carefully in such circumstances. There is clear evidence that outflows in respect of taxes and National Insurance payments are not always given the priority that they should be given. Of those cases where at least one debtor has been identified 87.5% involved one of the government tax agencies – either the Internal revenue and/or HM Customs and Excise prior to April 2005, or HM Revenue & Customs subsequently. 57% of these cases of insolvency have occurred since September 2003 when the government agencies lost their ‘preferred creditor’ status, compared to 43% in the period from 1986 to September 2003. This represents a change from 0.065 per month to 0.143 per month. This may be overstating the case as earlier data is less complete so far, but it would appear that HM Customs and Excise are now more likely to press for insolvency than their predecessors, who had a legal priority in the recovery of debts The timing of going into insolvency shows a very clear variation through the football season (see Figure 3). Once the season starts in September, there is a small pre-Christmas peak in November. Into the New Year there is a steady rise until a higher peak in May, which tails rapidly off to the least common month for insolvency, August. 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 Fig. 3 Insolvencies by (rolling three-month average) -9- calendar month Beech, Horsman and Magraw (2008) The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent The form of insolvency chosen (or forced onto the club) shows interesting variation. Liquidation is thankfully uncommon, occurring in only 11% of cases. These are shown in Table 2. All have since reformed, usually under new ownership and with new investment, and with varying degrees of success. While Middlesbrough rapidly recovered, Hornchurch, Maidstone United and Scarborough lost any continuity with a reformed club. Aldershot have very tortuously recovered over a fifteen-year period. Middlesbrough Aldershot Maidstone United Hornchurch Lancaster City Scarborough Table 2 Tier 2 Tier 4 Tier 4 Tier 6 Tier 6 Tier 5 1986 1992 1992 2004 2006 2007 2 Clubs liquidated Only three clubs are noted as having been placed into Administrative Receivership – Birmingham City in 1992, Luton Town in July 2003 and Derby County in October 2003. All have subsequently ‘re-emerged’, although Luton Town was again placed in Administration in November 2007. If there is a ‘normal’ pattern to insolvency, it is to be placed in Administration, to then progress to a Company Voluntary Arrangement (CVA), which should under legal provision be completed to the creditors’ satisfaction within five years. The Football Association now requires clubs to proceed to a CVA. Failure to do so results in a further 15 points deduction in addition to 10 points deduction for going into administration. The majority of clubs have come out of Administration within a year, but the period of CVAs has varied considerably. Swindon Town spent a period of 74 months in Administration and then struggling to comply with the terms of their CVA. Full analysis of the variables identified on p.5 is not yet complete. However one of these, which looks like being another archetype, is worth reporting on at this stage, that is, incidences of alleged/proven criminal or irregular financial/management activity by directors and/or owners. This behaviour is by no means confined to the world of football of course, with the Robert Maxwell and Conrad Black ‘empires’ being two high-profile examples. At the time of writing the English football examples include: 2 While the other clubs listed went into liquidation very rapidly, the liquidation of Scarborough followed the club being placed in Administration some five years previously. Beech, Horsman and Magraw (2008) - 10 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Boston United Ex-Chairman guilty of "conspiring to cheat the public revenue between 1997 and 2002". Also charged with breaking FA rules; club docked 4 points Cambridge United Club forced to sell stadium to a company owned by one of the directors Darlington Derby County Doncaster Rovers Hull City Ex-Chairman charged with personal financial offences Ongoing fraud cases against previous directors Arson of the club’s stadium by the owner Six arrested in connection with an investigation into the financial affairs of club Luton Town Swindon Town Wrexham FA charges re payments to agents Ongoing legal dispute with former investor Chairman attempted to get them evicted from their stadium so that he could sell it for development purposes. Administrators managed to force return of ground to club. York City Chairman had moved ownership of stadium into a holding company. Club ownership regained Jan 2005 Although the issues listed vary in degree of seriousness and not all are proven, the fact that ten of the 56 insolvent clubs (17.9%) are listed does suggest that such issues are disproportionately correlated with insolvency. More research is needed to gain a clearer picture. Similarly the variable of ‘stadium factors’ is leading to further in-depth research. For 24 clubs (42.9%), their stadium was in some respect an issue surrounding their insolvency. As shown above in Table 1, clubs which have been relegated from Tier 1 and carrying debts in excess of £30m are vulnerable to insolvency. If the ex-Premier League clubs are excluded, typical debt levels of clubs going into insolvency are: Tier Tier Tier Tier Tier 2 3 4 5 6 £10m £3m £1m £1m £1m Clubs with current debts significantly above these levels, debts which therefore might be considered as ‘inappropriate’ (‘inappropriate’ in the sense that the debt level might be considered as unsustainable in the longer term on the basis of current revenues and costs), are clearly to be considered as being vulnerable to insolvency. From the (inexhaustive) background research carried out, this would include those given in Table 3. Beech, Horsman and Magraw (2008) - 11 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent With the exception of Sheffield Wednesday, debts have since been restructured, but, unless the debts have actually been written off, the liability remains. Club Cardiff City Coventry City Derby County Leeds United Leicester City Sheffield Wednesday Southampton Table 3 Tier for 2008/09 2 2 2 3 3 2 2 Reported debt level £30m £33m £44m £35m £35m £27m £20m Year of Report 2005 2007 2006 2007 2003 2008 2006 Some clubs with ‘inappropriate debts’ In several cases the club appears to be dependent on a single benefactor ‘bankrolling’ it. The risk associated with this as a business model are only too evident when one considers the case of Gretna, liquidated in 2008 while in the Scottish Premier League. Some (English) Premier League clubs must be considered as at least potentially at risk for the same reason – Chelsea, for example, which is handsomely ‘bankrolled’ by Roman Abramovitch. In February 2008 their annual loss was reported as £74,800,000, down only 7% on the previous season3. The same report, on the BBC News website (BBC News, 2008), revealed that Abramovitch had invested in excess of £500m in the club since purchasing it in July 2003. Chief Executive Peter Kenyon, commenting on Chelsea’s high level of revenues, was quoted as saying “The numbers speak for themselves. All of our metrics are very positive.” It can only be assumed that neither profit nor return on capital employed were included in those metrics. A very generalised picture of the slide into insolvency can be identified: • • • A trend of poor performance on the pitch leads to relegation and reduced revenues. Costs are not cut back, in particular players’ wages, and are wrongly prioritised. If the club owns its stadium, as the most valuable asset this becomes an issue. If the club does not own its stadium, it raises different issues – borrowing becomes extremely difficult, but creditors may hold off as there is no major asset to strip. 3 Losses for 2004/05 had been as high as £140,000,000 (BBC News, 2006) Beech, Horsman and Magraw (2008) - 12 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent • Management faces a dilemma of whether to spend in the hope of improved performance on the pitch and hence promotion with its attendant financial gains, or whether to release its better players in order to reduce costs. Bad management is widespread, with a worrying number of instances of unethical and even criminal management. the the and and • The second phase of the research project will be completed by analysis of variables not yet studied, continuing gathering of data, vectoring in of hard financial data drawn from Companies House, finally the identification of archetypes in order to proceed to Phase 3 the in-depth interviews. PHASE 3 Several problems in completing the final phase of the research have been identified and attempts made to overcome them through the research design. This section outlines the problems and the steps taken in designing the research methodology in a way which should minimize their impact. Access It has been argued that “negotiating access to organizations for the purposes of research is a game of chance, not skill” (Buchanan, Boddy and McCalman, 1988, p.56). While an element of chance is not disputed, it can reduced by the skill shown in contacting potential interviewees through networking, and the third author undoubtedly has contacts directly or through one link to many suitable interviewees. Reluctance to talk about failure Again, there may be a reluctance by potential interviewees when the topic for discussion is posed as ‘failure’, but it is assumed that there will be less reluctance when the topic is posed as a discussion on ‘battling to save the club’. Information aversiveness and Accuracy of memory The former is perhaps a symptom of management in the football sector, the latter a general difficulty faced when researching events in the recent past. Furthermore (and here the world of banking, where one can compare the rescues of Johnson Matthey, Northern Rock, Bear Sterns and Bradford and Bingley) there are gains to speed, secrecy and a certain ruthlessness. The fact that these gains accrue to all parties makes it hard to argue in favour of the openness and earnestness with which Northern Rock was treated. The researchers will, in each case, have a set of data from contemporary sources with which to challenge memories if they seem to be drifting astray. Beech, Horsman and Magraw (2008) - 13 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Persistence bias and Cognitive dissonance These two factors, the former leading too the latter, are anticipated. Again, the contemporary record of events, albeit incomplete, provides a benchmark against which the views expressed in interviews can assessed. Gagging clauses Because some of the interviewees may be ex-owners or ex-directors, it may mean that they are restrained by gagging clauses in the settlement contracts with which they left the clubs. However, through networking, the researchers are confident that they will be able to find enough participants who will be willing and able to be interviewed. Though not co-extensive with gagging, dealing with a company in trouble is a black art which can be extraordinarily lucrative for the receiver, who has no interest in de-mystifying the process for the common good or in raising his/her profile. CONCLUSIONS As noted above, the European Commission recognises in principle that sport as business has a specificity, which may require a special legal status with respect to issues such as competition law and employment law. This should not be seen as an excuse to abandon sound business practices in the football sector. In the five seasons from 2001/02 to 2005/06 the 92 clubs in the top four tiers of English football made an aggregated loss of £1,014,000,000 (developed from Hamil, 2007). It may still be a beautiful game, but clearly is an ugly business. Already at this stage in the research project, it has become clear that, in this contemporary context, insolvency has become almost a ‘legitimate’ tactic in a football club’s business strategy. This is supported by the sheer number of cases of it, especially in Tiers 2, 3 and 4. The moves by both the Premier League and the Football League to penalise clubs for going into Administration or failing to negotiate a CVA can be interpreted as a move to de-legitimise this tactic. The high incidence level also suggests that becoming insolvent might be an emergent tactic rather than an intended tactic (Mintzberg, 1991) and the identification of the sector-specific factors associated with becoming insolvent is a very worthwhile exercise, with obvious practical applications. BIBLIOGRAPHY Altman, E. I. (1968), 'Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy', Journal of Finance, vol. 23, no. 4, pp. 589-609. Beech, Horsman and Magraw (2008) - 14 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Altman, E. I., Haldeman, R. G. and Narayan, P. (1977), 'Zeta Analysis: A new model to identify bankruptcy risk of corporations', Journal of Banking and Finance, vol. 1, 54. Anheier, H. K. and Moulton, L. (1999a), 'Organizational Failures, Breakdowns, and pp. 29- Bankruptcies: An Introduction', in When Things Go Wrong - Organizational Failures and Breakdowns, ed. H. K. Anheier, Sage, Thousand Oaks, pp. 3-16. Anheier, H. K. and Moulton, L. Thousand Islands, pp. 273-290. Argenti, J. London. Aziz, A., Emanuel, D. C. and Lawson, G. H. pp. 419-37. BBC News (2006), Chelsea reduce losses to £80.2m, BBC, Available: (Last (1988), 'Bankruptcy Prediction - An (1976), Corporate Collapse - the causes and symptoms, McGraw-Hill, (1999b), 'Studying Organizational Failures', in When Things Go Wrong - Organizational Failures and Breakdowns, ed. H. K. 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J. and Tisshaw, H. pp. 50-54. Zopounidis, C. and Dimitras, A. I. (1998), Multicriteria Decision Aid Methods for the (1977), 'Going, going, gone', Accountancy, no. March, Prediction of Business Failure, Kluwer Academic Publishers, Dordrecht. Beech, Horsman and Magraw (2008) - 16 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent APPENDIX TERMINOLOGY OF INSOLVENCY AND DEFINITION OF INSOLVENT CLUBS The term ‘insolvent’ is used when an individual or a company finds itself in financial difficulty. This is likely to arise in one of three situations: • • • A developing situation, in which costs regularly exceed revenue and there are no longer sufficient assets to cover the difference; A point-in-time situation, when repayment of a loan is due and there are not sufficient funds available to make the necessary repayment; An asset or the assurance of support on which the person has been relying collapses in value, putting in jeopardy the willingness of others to sustain loans which in the normal course of event would have rolled on indefinitely. As creditors become anxious, a club, or indeed any company, may choose to follow one of three courses: 1. Ignore the situation and press on regardless; 2. Place itself in some form of voluntary administration – selling its assets to pay off its debts, and possibly ceasing to trade; 3. Seek protection from the courts by going into Administration. It is very rare for a club to place itself into voluntary liquidation. There is evidence that ignoring the situation is widespread in the football industry, but the focus of this research project is those clubs who choose the third option and seek court protection. Until 2003 there were two types of action that a court could take: • The appointment of an Administrator tasked with taking over the running of the club or business with a view to placing it on a firmer financial footing and ultimately rescuing it. In this situation, the company may not be wound up without the court’s permission. The state of Administration thus offers both hope and protection to the insolvent club. The appointment of an Administrator may be initiated by either the club or one or more of its creditors. • The appointment of an Administrative Receiver tasked primarily with the maximisation of debt recovery. Debtors could seek the court appointment of an Administrative Receiver if they no longer felt that their debts were going to be serviced to their satisfaction. Since 2003 the appointment of an Administrative Receiver is no longer possible. In theory a club may simply come out of Administration if the Administrator manages so well that all debts are paid off in full. which are typical today: This rarely happens. There are two outcomes Beech, Horsman and Magraw (2008) - 17 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent • The Administrator finds a purchaser for the club. The purchaser must reach Where there are This agreement with the creditors, which usually means paying off an agreed percentage of debts in order to satisfy the creditors in full. multiple creditors, this may result in lengthy and complex negotiation. process has also incurred suspicion if it took the form of ‘phoenixing’, whereby some or all of the former controllers of the firm create a new company that buys the business back from the administrators. this pattern is not uncommon. As this is what Her Majesty’s Government did in respect of Rolls Royce in the 1970’s, it’s not surprising that it The post-BMW Rover company, which actually took the name “Phoenix”, is the most high-profile example from recent years. A measure of the complexity of these kind of affairs comes from the fact that as at November 2007, as reported by the BBC, “After two-and a-half years of digging the current cost (of the investigation into Phoenix and its subsequent collapse) is put at around £10.6m - and that figure is rising by £80,000 a week” (BBC Politics Show, 2007). • The Administrator negotiates a Company Voluntary Arrangement (CVA) between the club and its creditors, an agreement which must be approved by the court. A CVA will include a timetable for the repayment of debts, in part or full, and will allow the club to continue trading. The day-to-day running of the club is passed back from the Administrator to the club directors. maximum period of five years. The Football Association now requires the establishment of a CVA as the progression out of Administration. Preferred creditors Under FA Rules, ‘football creditors’ have technically enjoyed the status of ‘preferred creditor’. This means that, for example, if another club is owed money for the purchase of a player, that club has a higher claim on the insolvent club than for example, a supplier of meat pies. Until 2003 however, the Crown enjoyed the legal status of ‘preferred creditor’, meaning that it had a higher legal claim on a club’s assets than ‘football creditors’. With the loss of that legal status, the Crown, typically as HM Revenue & Customs, the agency formed by the merger of HM Customs & Excise and the Inland Revenue, now has a lower claim on assets than ‘football creditors’ because of FA Rules. Creditors In broad terms our studies show that the hierarchy of creditors seeking money from an insolvent club are, in decreasing order of the size of debts: HM Revenue & Customs Banks and corporate investors Football creditors Suppliers A CVA is normally for a Beech, Horsman and Magraw (2008) - 18 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent ‘Near misses’ Clubs, or any company, may file a 10 day ‘notice of intent’ to apply to a court to go into Administration. This may be a tactical move to pressure a putative new owner to make a quick and positive decision – once a club enters Administration it suffers an automatic deduction of 10 points in its league table. In the case of Coventry City, for example, in December 2007 the club filed such a ‘notice of intent’ while negotiating with a potential new owner. On the day on which the notice expired a takeover was agreed and Administration avoided by a matter of hours. Such ‘near misses’ have not been logged as incidents of insolvency in the database, though we are going to look at one or two such examples to see if they shed light on the factors we are studying. Logging of incidents of insolvency For the purposes of this research a hierarchy of ‘wealth health’ is assumed for clubs: Solvent clubs Clubs operating under a CVA Clubs in Administration Clubs in Administrative Receivership Liquidated clubs Each step down this hierarchy is considered an incident and logged in the data table. This would typically be a club moving from solvency into Administration. In a few instances the same club may be recorded as a second incident, e.g. if a club moves back from a CVA into Administration, or from Administration into Administrative Receivership. Beech, Horsman and Magraw (2008) - 19 - The CIBS Working Paper Series – – no.4 The circumstances in which English football clubs become insolvent Contact author: John.Beech@coventry.ac.uk Dr John Beech is the Head of Sport and Tourism at Coventry University and researches in both the Centre for the International Business of Sport (CIBS) and the Applied Research Centre for Sustainable Regeneration (SURGE). He was formerly the Subject Head of Leisure, Sport and Tourism and the Head of the Strategy and Applied Management Department. His sports research interests include the use of websites as marketing platforms, the international labour movement of players and deviancy among clubs and players, with the main focus of his work being English football clubs. He has also researched in the area of cricket tourism. His textbooks, co-edited with Simon Chadwick, include The Business of Sport Management (2004), The Business of Tourism Management (2006), and The Marketing of Sport (2007), all published by Pearson Education. Simon Horsman is a Senior Lecturer in Accounting, Strategy and Business at Coventry University, where he brings a holistic approach to business. His interests include personal finance, accounting, entrepreneurship, organisational development and organisational politics, strategy and information systems (both old and new) as well as the teaching process itself. His current interests include accounting history and ethics, the sociology and power relations of the accounting profession and the complexities of organisation failure. Jamie Magraw joined the FA in 2000 to determine whether the FA could improve financial standards within the game. This resulted in the FA Financial Advisory Unit (FAU) being established in March 2000. To date the FAU, comprising a staff of 5, has visited over 300 Clubs. In August 2002 he became the Finance Director of the FA. He left the FA in September 2003 to establish a number of companies. For more information on Coventry University’s Centre for the International Business of Sport please visit our website at http://www.coventry.ac.uk/researchnet/d/691 Beech, Horsman and Magraw (2008) - 20 -