Q&A: What happens when a club enters administration?

Administration. It’s one word, 14 letters and a state of insolvency that leaves a football club and it fans fearing that oblivion looms on the horizon.

Derby County are English football’s latest cautionary tale, the two-time former First Division champions plunged into uncertainty and, slapped with a 12-point penalty, rock bottom of the Championship with little hope in sight.

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So what does it really mean when a club enters administration? Is there a fire sale, with all of the talent in the building destined for pastures new? Which creditors get paid first? And how does a club get out of the situation?

Paul Appleton, of Begbies Traynor, is an experienced insolvency practitioner and has been an administrator at Bolton Wanderers, Portsmouth and Coventry City.

In conversation with The Athletic, he explains the ins and out of administration.

What is the easiest way to explain what going into administration means?

Very simply, administration is a tool to do one of three things. The first is to rescue the company as a going concern.

In football, you are trying to save the company that owns the club. In most administrations outside of football, you cannot do this because the debts are just too high, so you move on to the second purpose of administration, which is to generate a better return for creditors than they would get in a liquidation. For example, you might realise £100 more for an asset in an administration than in a liquidation because administration is perceived to be a rescue. Liquidation, on the other hand, is the grim reaper.

But if you cannot achieve either of those two aims, you simply move onto the third purpose of administration, which is to realise money for the secured and preferential creditors.

And they are?

A secured creditor would be somebody like a bank that has a mortgage over the ground. Preferential creditors would be your staff. All employees would have to receive up to £800 worth of any wages they were owed, plus any holiday pay they have accrued.

But, as a result of the need to pay for the pandemic, the government introduced a key piece of legislation last year, which reintroduced something that HM Revenue and Customs has not had for 20 years: preferential status in insolvencies.

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That means if you, as a company, owe the taxman PAYE, National Insurance for your employees or VAT, it is now secondary preferential debt and it sits just behind staff debt in the pyramid.

But in football, there is another group with preferential status: players, coaches, other clubs and leagues. They are referred to as football creditors.

According to EFL rules, they must be paid in full. For example, if the club owes another club a transfer fee instalment, that club is a football creditor.

And all these preferential creditors must be treated equally: you cannot say to one group I’m going to pay you 50p in the pound but then pay another group in full.

Would it be correct to assume that football administrations are different to administrations of factories or restaurants because more people care about football clubs than normal companies?

Completely. The big thing about football is it’s all about the community and the club can survive even if you cannot save the company. That is what happened at Bolton.

It is important to distinguish between the club and the limited company. The latter owns the business but it can fail without killing the business. This often happens with football.

I am a fan myself and we all believe our clubs belong to us, and are not really owned by the people with the keys. With football administrations, you are aiming for purpose number one because that ensures the club goes on, but you don’t have to be able to save the company to save the club.

OK, when an administrator takes control of a football club, what tools do they have to save the business?

Clubs have three main assets. The first are the players and working out how much they are worth usually depends on who you ask, what day of the week it is and which agent is involved.

The second is the ground and any other property — but there are nearly always restrictions as to what buyers can do with that property. The third asset is the golden share in the league and how transferable that share is depends on what agreement you come to with the league.

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We often hear about CVAs (Company Voluntary Arrangements) when clubs go into administration. They are deals the administrator strikes with the club’s creditors, which result in those creditors accepting a percentage of what they are owed. That is how the football authorities like these things to be resolved, right?

CVAs are probably the best way of doing it but it’s not the only way. For example, Coventry City exited without a CVA because HMRC voted it down. They did not have preferential status at that time and always voted against CVAs as a protest against the Football Creditors Rule.

Bolton did not exit via a CVA, either. The original company was liquidated and the club’s assets were transferred to a new company.

Bolton was an exceptionally difficult deal and it took heavy negotiations with the EFL to keep the sanction down to 12 points. It was the most difficult restructuring deal of my 35 years in the insolvency business but Football Ventures, the new owners, got the deal done and are now doing a phenomenal job.

Going into administration brings a 12-point penalty from the English Football League but it isn’t always applied immediately. Why?

Under EFL rules, you get an automatic 12-point penalty when you enter administration but when it is actually imposed depends on when the administration happens. If it happens before the fourth Thursday in March, it is imposed that season. But it if happens after the fourth Thursday in March and you would have been relegated with or without the 12-point penalty, it is imposed the following season.

That is what happened at Bolton. I was appointed in May, which had its advantages because the season was over, but it meant we started the following season on -12 points and with about 25 kids in the squad!

Going back to the Derby case, from an insolvency point of view, what exactly has the club done this week?

On Friday, they filed a notice of intention to appoint an administrator and that creates a moratorium — it stops any creditor from taking action against them. There have been a lot of numbers bandied about in the press about the level of indebtedness and I don’t know the ins and outs, but this moratorium is served on the secured creditor (in Derby’s case, US investment firm MSD). They have two days to consider if they want to appoint their own administrator and if they don’t, the proposed administrators are appointed within five days.

The key discussions this week between the administrators, the club’s owner and the secured creditor will have been over who is going to fund the club while it’s in administration.

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It is hard to see how there will be enough money coming through the turnstiles, merchandise sales and sponsorship deals to fund the club, and any central funds from the EFL or Premier League, who provide solidarity funds, are withheld if there are any football creditors.

The likelihood is that the club will not be generating anywhere near enough money to meet the club’s ongoing liabilities. So the administrators will be looking at what they can do, for example, in terms of selling players but some may have clauses in their contracts that say they can walk away for nothing.

The administrators will also look at the manager’s wages and his assistants. It is unlikely to be a small amount — can they afford to keep them? What can we do with the academy?

In their statement on Wednesday, the administrators said their immediate objectives were fulfilling the fixtures this season and finding a buyer to safeguard the club and its employees. Just how hard will the first half of that challenge be?

Fulfilling the fixtures will be the priority but there are so many things you have to do to put matches on. For example, you have to talk to the local Safety Advisory Group, you have to make sure there’s a crowd doctor, a St John’s Ambulance, stewards, fire safety officers, ticketing staff.

That’s all got to be put in place and it’s all got to be paid for — and they will all want paying in advance. And if you’re running a club in administration, you have to have enough money to pay the wages and tax bill.

Administrators are not allowed to run up any new debts. There is something else to be aware of: if the administrators haven’t made the staff redundant within 14 days of taking over, they automatically adopt their contracts, which means they become liable for their wages, holiday pay and so on, and you have to pay that first as an expense of the administration.

And then there is the second challenge: selling the club. Where do you even start?

Derby are like Coventry and Bolton, the last two big football administrations I did, in that they are a big, traditional club. I remember being at the Baseball Ground as an away fan when they won the league in 1972. They have a big fanbase and community.

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On the face of it, they are very attractive but how much are you going to pay for them in administration? Because, as mentioned, there are creditors you have to pay before you even get started: the football creditors, the staff, HMRC.

Then, you have the ground. Remember the trouble Coventry had because they didn’t own their stadium. They still don’t. Derby will have to pay off the secured creditor.

Then you have the unsecured creditors and the EFL insists you pay them a minimum of 25p in the pound or face further sanctions. Altogether, that’s tens of millions.

That’s a lot of money…

But then you have to pass the EFL’s fit and proper test, which means you have to show them proof you can fund the club for the next three seasons.

What does it cost to run Derby annually? £15-20 million, at least — and anyone buying the club will know they need to invest in the team.

If you think about it, you’re looking at tens of millions of pounds just to pay off creditors and tens of millions of pounds to run the club. That’s an enormous amount of money. There is also the likelihood they are going to be relegated this season, especially if they are hit with the second penalty for the historic profitability and sustainability charges.

OK, it is a hell of a lot easier to fund a club in League One than the Championship but you don’t get the same revenue. You must have very deep pockets.

But why would anyone buy a club in this deep of a hole?

My first question to anyone who says they want to buy a club is: are you mad?

For most buyers, it is a vanity or ego thing. Or it is a situation like Chelsea or Manchester City, where the money was no object to the buyers. But you do not go into football ownership to make money.

If I was a betting man, which I’m not, I would suggest that 80 to 90 per cent of the EFL’s 72 clubs are insolvent.

Given the numbers involved, how can any fans group hope to buy a club?

With great difficulty, which is why it hasn’t been done very often — it is very hard. Portsmouth did it and it was amazing. It was wonderful to watch them do it and they’ve been pretty successful.

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But you have to offer the Supporters Trust the opportunity to make a bid, so there will be talks between the administrators and the trust at Derby very soon.

We sometimes hear about “pre-pack administrations”, where owners put the club in administration with the intention of keeping it. Can you do that while funding the team and staying within the financial fair play rules?

That’s a difficult one to answer because it depends on the specifics but if we look at Derby as an example, we know the owner has put a lot of money into the club and that money is unsecured. Does he want some of that back or is he willing to walk away from it all to enable the club to be saved?

Most Derby fans are just hoping the club can get to January now, so they can sell some players in the next transfer window. That is going to be crucial, isn’t it?

Yes, transfer fees are often the main way of generating some revenue during an administration but, as I mentioned, sometimes there will be clauses in the contracts that means they are just cancelled and the player can leave for free.

It’s not quite the same situation but I remember when I was at Bolton, we sold a young player called Luca Connell to Celtic. Because they’re Scottish and in a different jurisdiction, they could have just ignored the English contract and made him an offer, without a fee. We had an argument about it but Celtic were brilliant and very fair.

As a final thought, then, just how do you place a value on a club in Derby’s position?

What is a company worth if it has £100 of assets but £1 million in liabilities? You might love what the company does but it can’t be worth any more than £1.

To someone who loves Derby, who has the club in their veins, that might be different. But it’s not easy. What can I say?!

(Top photo: Jon Hobley/MI News/NurPhoto via Getty Images)

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