I wonder, however, if a restructure will be forced upon the league, if not this year, then perhaps next.
The Coronavirus (COVID-19) pandemic has caused great strain on many sectors of the Scottish economy and, indeed, most economies in the world. Clearly Scottish football will suffer severely having no income from matches, issues with obligations to television broadcasters, significant wage bills, etc. Whilst the UK and Scottish governments have made great efforts to support businesses through the crisis, I suspect this barely scratches the surface for some clubs.
Of course, Scottish clubs are no strangers to financial difficulties and several of them have previously gone into administration. Thanks to the well-publicised administration of Glasgow Rangers, many football fans quickly became familiar with insolvency related terminology, including administrations, company voluntary arrangements (CVAs) and liquidations.
In the instance you are not an insolvency professional, administration is often used to protect a club from its creditors whilst allowing a proposal to be made to creditors to voluntarily agree an arrangement to address the club’s financial issues (The CVA Proposal). If the CVA proposal is accepted, the club continues as the same entity and remains a member of the league, albeit penalties will be issued by the league. These penalties usually result in relegation to the division below.
The Rangers’ CVA proposal was not accepted and the club went into liquidation and was bought from the administrator by a new entity. This resulted in loss of league membership and ultimately relegation to the 4th tier of the league, under arrangements made to allow Rangers to re-enter the league. I am not sure how likely it would be that the league could provide this arrangement to a smaller club. You can therefore see, that achieving an agreement for a CVA will be extremely important for a club’s survival.
So, what does a CVA agreement look like?
Well, the first thing is, the club needs to pay all ‘football debts’ in full. This is a condition of league membership.
Secured creditors (often bank or other funder’s debt secured on property, or other asset-based lending) and preferential creditors (ordinarily staff arrears of wages up to certain limits) cannot be compromised and therefore must be paid in full.
Where a CVA can be beneficial is in the ability to compromise the remaining ordinary or unsecured debts. This would include unsecured loans, HMRC debts and trade creditors. The level of reduction of these debts can be significant as the CVA proposal can be tailored to meet the club’s ability to generate funds to contribute to historic debt.
Often the biggest debt in this category is HMRC. VAT is charged on most club revenue and with significant payroll obligations comes a significant PAYE bill.
Changes to status of HMRC tax debt
With effect from 1 December 2020, HMRC will receive preferential status for all tax debt. This means these debts get paid ahead of other unsecured debts as well as some secured debts and crucially, as a preferential debt, it cannot be compromised. As a result, clubs will need to pay HMRC in full.
There is no doubt that this will have a significant impact on the rescue and recovery culture in the UK and I expect we will see a lot of CVA proposals being made prior to 1 December.
For football clubs, where the bulk of debts will relate to ‘football debts’ and HMRC, the options for restructuring are likely to have a limited benefit.
Directors of clubs may well be assessing whether their clubs can survive and if they have doubt, the decision has to be whether to consider the appointment of an administrator in time to allow a CVA to be agreed before 1st December, or risk delaying and ultimately risking the very existence of the club.
I am sure supporters of newly-relegated clubs feel hard done by at present, but salt will be rubbed into their wounds if clubs who avoided relegation suffer points deductions next season due to insolvency.
Boards who choose to delay may ultimately find they are unable to complete the season. Only time will tell as to how many clubs are able to start the 21/22 season.
