With the football transfer window having closed on another round of multimillion-pound transfers, the perception continues that football is a sport awash with cash. However, as football plays on behind closed doors, one need not look too far beneath the surface to uncover clubs across the country struggling to cope with the financial impact of COVID-19.
While the Premier League offers a certain cushioning from broadcast revenues, many clubs, particularly those in lower leagues, rely heavily on match-day income in the form of gate receipts, merchandising sales and corporate hospitality. It now looks increasingly likely that the entire 2020/21 season will be played behind closed doors, or at the very best, with heavily reduced stadia capacities. Given the inevitable impact on club finances, it will be critical for club directors in discharging their legal duties to regularly monitor the financial position of their club, to understand how to act and to carefully consider the options available to them.
When considering the club’s finances, uppermost in directors’ minds will be the risk of wrongful trading.
Once the directors know, or should know, that a club is or is likely to become insolvent, they will need to focus on the interests of the club’s creditors and minimising potential losses. In certain circumstances, failure to do so can lead to personal liability being imposed upon the directors for losses to the club or its creditors resulting from continued trading when the directors knew, or ought to have concluded at some point before the commencement of liquidation or administration, that there was no reasonable prospect that the club would avoid going into insolvent liquidation or insolvent administration.
Even in normal circumstances, it is often challenging for directors to determine precisely when they must switch their focus to the interests of creditors, and whether there is a reasonable prospect of avoiding an insolvent liquidation or insolvent administration. With the rapidly evolving nature of the COVID-19 crisis and the uncertainty as to when fans will be allowed back into stadia and at what level of capacity, this task is made even more difficult. The Corporate Insolvency and Governance Act 2020 did temporarily remove the threat of personal liability arising from wrongful trading for directors; however, that was a temporary measure that ended 30 September 2020.
Current government policy seems designed to inject liquidity into the economy, through various financial support schemes (e.g., the Coronavirus Business Interruption Scheme, the COVID Corporate Financing Facility and the Coronavirus Job Retention Scheme). But directors should be mindful of the implications of taking on additional credit and the additional burden and pressure it will place on the club’s balance sheet.
Dealing With Creditors
The directors will also need to consider the position with regard to financial covenants in their loan agreements and the consequence of a breach leading to an event of default. Often loan agreements will contain a minimum EBITDA and a minimum liquidity covenant. These will typically be tested quarterly. A breach of those covenants will give rise to an event of default which can have significant consequences for the club. The bank may decide to increase the interest rate under the facility to reflect the additional risk of continuing the facility. It might also freeze the facility by preventing further drawings or place the facility on demand which could impact the auditors’ “going concern” sign-off for the club’s accounts. An event of default in a loan agreement might also trigger cross-default provisions in the club’s other agreements. Directors should therefore review the headroom in their financial covenants and talk to the club’s lenders at the earliest opportunity to discuss a renegotiation of those financial covenants or a temporary suspension if the directors conclude that there is a risk of a breach. Directors should also consider whether to fully draw any undrawn commitments in their facilities.
As well as a club’s lenders, directors should also consider other key creditors such as HMRC and landlords. Creditors such as HMRC and landlords are demonstrating a willingness to grant “breathing space” to businesses facing a liquidity squeeze due to the current crisis, but it is important to enter into discussions as early as possible, to be open with them and to present a clear plan as to how the business intends to weather the storm.
If support is not forthcoming, directors may need to consider one of the insolvency processes outlined below.
Loan agreements containing financial covenants will often have provisions allowing an equity injection to cure what would otherwise be a breach of a financial covenant. However, when deliberating an equity injection, clubs will need to consider the regulations relating to financial fair play in the applicable Premier League Rules, English Football League Rules and/or the UEFA – Club Licensing and Financial Fair Play Regulations 2018. Each of these rules provides for varying restrictions on the aggregate amount of losses permitted to a club over a prescribed period of time. Under those rules, clubs must demonstrate that they have satisfactory shareholder funding to cover the losses in the event they reach a certain threshold. Both the Premier League Rules and English Football League Rules prescribe how the shareholder funding should be structured to qualify to cover the losses of the relevant club. Penalties for noncompliance include, among other things and as applicable, exclusion from UEFA competitions, suspension from playing league matches and points deductions.
Insolvency Processes and Their Consequences for a Football Club
If discussions with creditors fail to achieve a viable way forward, then the directors may conclude that there is no realistic prospect of the club recovering in its current form once the crisis is over. They will then have to consider the range of insolvency procedures available to see if the club can be rescued. These will range from placing the club into administration, negotiating a company voluntary arrangement (CVA) with its creditors, or entering into a scheme of arrangement or restructuring plan. Ultimately, if none of these rescue options succeeds, the directors will need to consider a winding up or liquidation with a view to minimising the loss for creditors.
The challenge, though, for a football club is that if it proceeds with any of these options (each an insolvency event), the Premier League may impose a nine-point deduction (or 12 points if in the English Football League), suspend the club's licence to play and/or suspend a club from acquiring players. In addition, while the suspension is in effect, the Premier League may use the club's share of the Premier League's media revenue (comprising UK and overseas broadcasting monies, commercial contract monies and radio contract monies) to pay the club's football creditors. Each of these sanctions would, of course, exacerbate the problem.
A club may, however, appeal against a points deduction on the ground that the insolvency event was caused by and resulted directly from circumstances, other than normal business risks, over which it could not reasonably be expected to have had control (force majeure) and its officials had used all due diligence to avoid such circumstances. No such force majeure ground for appeal, however, exists in relation to the other sanctions available to the Premier League.
In Wigan Athletic’s recent appeal against a 12-point deduction following its administration, Wigan argued that the club fell into administration as a result of the impact of COVID-19 which it argued was a force majeure event. The English Football League, however, dismissed the appeal on the grounds that the owner “made a commercial decision to choose to go back on promises of continued support and stopped putting money into the Club. That cannot be regarded as a Force Majeure Event.” It is clear that this was a decision heavily based on the facts and it still leaves open the possibility of arguing force majeure on the grounds of COVID-19. However, the burden of proof would be on the club to demonstrate that the relevant insolvency event arose solely as a result of a force majeure; in other words, that COVID-19 was the sole reason for financial difficulties, rather than other factors such as lack of investment or poor running of the club.
When considering insolvency processes, the club must also take into account the football creditors’ rule which effectively prioritises payments to certain football-related creditors ahead of other creditors by requiring these football creditors be paid before any suspension of the club’s playing licence is lifted. The football creditors consist of (without limitation) the Football Association and any of its member clubs, the Premier League, the English Football League and other professional football leagues in the UK, any employee or former employee of the relevant football club and any pension scheme related to the relevant club.
Given that the football creditors rule effectively circumvents longstanding principles with regard to the order of priority of creditors in an insolvency, the legality of the football creditors rule has been challenged in the courts on a number of occasions. In 2004, it was challenged in Inland Revenue Commissioners v The Wimbledon Football Club Ltd. However, the court found that "full payment to football creditors (out of third party funds) ahead of preferential creditors did not infringe the provisions of [the Insolvency Act]".
In 2011 HMRC brought another challenge to the football creditors rule in the High Court, this time on the basis that it breached fundamental principles of insolvency law, including the pari passu rule that all unsecured creditors should be paid on a proportionate basis. However, the court again rejected the challenge as it found that the rule was not a deliberate evasion of insolvency law.
If you would like to discuss any of the matters raised in this article, please reach out to Marc Isaacs, Lee Cullinane or your usual McGuireWoods contact.
McGuireWoods is recognized as a top law firm for sports finance and was named a “Sports Practice Group of the Year” by Law360. For over 30 years, McGuireWoods has played key roles in the finance activities of its banking and professional sports organization clients. As the industry has become a complex, multinational business spanning a wide range of new and emerging platforms, McGuireWoods has been there every step of the way. Our lawyers take a multidisciplinary approach to the practice, as our sports team comprises lawyers from many different practice groups within the firm, which gives McGuireWoods a broad perspective in the industry.
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