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Football finance | How the EFL can build a bridge to post-Covid sustainability and profitability

(Photo by Catherine Ivill/Getty Images).

  • White paper advocates use of Company Voluntary Arrangements for clubs on the brink of insolvency
  • EFL would be encouraged to waive points reductions for clubs that pursue restructuring plans
  • Leagues could offer cash incentives to teams that take appropriate measures

English football should look to build ‘a bridge to a sustainable future’ if smaller clubs are to survive and thrive in a post-Covid world, according to legal experts Nic Couchman, head of sport at law firm Charles Russell Speechlys and insolvency specialist colleague Roger Elford.

Covid-19 has ripped the heart out of the English football economy leaving many smaller clubs on the brink of collapse.

While the hit has been felt from the top of the Premier League to the foot of the English Football League (EFL), those at the top of the pyramid have, to an extent, been cushioned by revenue from massive TV rights deals. That money will continue to flow so long as games can be played, fans or no fans.

Nic Couchman

That’s not the case in the EFL where the majority of clubs are dependent on gate receipts to stay afloat. Even before Covid struck, many small clubs were finding it tougher than ever to keep their noses above water and the fear is that having gate revenues, their major source of income, cut off because of the ban on fans attending games, will send others over the edge.

While Premier League clubs agreed a £50m bail-out for the EFL some weeks ago, the sum was far less that the £250m the league and its chairman Rick Parry were looking for.

But according to Couchman and Elford, any bail-out, while welcome, would very likely bring only temporary relief, applying a sticking plaster to endemic economic problems which have plagued clubs down the years and which have seen a number go to the wall.

As a parallel initiative they have outlined a plan, built around a solid legal and operational framework, designed to create breathing space for clubs, allowing them to survive, restructure, rebuild and restart in a healthier condition for the 2020-21 season.

At its core are new legal protections introduced in the UK earlier this year in response to Covid. The authors say that with support from other stakeholders including the tax authorities and the league itself whose rules are currently set up to punish clubs which go into administration, these would allow clubs to enter Company Voluntary Agreements (CVA) which would buy them time to restructure their businesses to make them more commercially effective and attractive to potential investors and lenders.

A CVA allows businesses to keep trading while repaying an agreed sum to creditors. Assuming the CVA is approved by the required majority of creditors (at least 75 per cent), when the agreed sum is paid, the remainder of a debt is written off.

Roger Elford

The plan is contained in a White Paper which acknowledges the value of clubs to their local communities as a key reason for special measures to protect them from insolvency and potential collapse ahead of their relaunch, perhaps into a newly-styled competition structure designed to be financially sustainable. The White Paper does not deal with potential new competition formats.

The Bridge to a Sustainable Future is based on the creation of bespoke Company Voluntary Arrangements and attendant insolvency support to protect clubs from creditors. Key to this is providing some protection for directors who (in the context of managing a club which is insolvent or on the brink of insolvency) can be held responsible for their actions leading up to insolvency. For many this might impact on their directorships of other businesses.

Similarly, current league rules are designed to punish insolvency, creating pressure on directors to look for debt funding to make ends meet. These agreements may provide a short-term fix but can be onerous and damage a club’s economic sustainability in the medium to long term. The plan therefore calls for some relaxation of league regulations to reduce these pressures.

Changes to UK insolvency law in June, spurred by the impact of Covid-19 on businesses in general, brought in measures including the possibility of an extended moratorium to hold off creditors. The White Paper says, “the creative, collective deployment of these legal procedures, coupled with wholesale stakeholder engagement and a re-framing of EFL rules, could provide substantive protection for clubs, their staff, directors and creditors, whilst providing the platform from which to achieve short term funding and, in parallel, build towards a new model and a sustainable future for the clubs in the EFL.”

The use of bespoke Company Voluntary Arrangements by those clubs that are on the brink of insolvency would allow them to restructure their affairs without the need, in most cases, for the club to enter administration.

The authors stress that the financial situation of every club is different, and the paper therefore provides a menu of options rather than a one size fits all solution, but calls on football’s stakeholders to focus on the common issues and throw their weight behind the scheme and provide incentives to clubs and their creditors to restructure.

The key principles of the proposal are:

  • Cash incentives (from both the EFL and the Premier League) for those clubs that take appropriate measures to restructure.
  • Waivers of point reductions and other penalties for clubs that pursue prudent restructuring plans, with blanket acceptance by the EFL that the restructuring was prompted by Covid-19 and therefore a force majeure event for the purposes of Regulation 12 of the EFL Regulations.
  • Possible suspension, variation or disapplication (whether temporary or permanently) of the application of the football creditor rule should it be necessary for clubs to compromise the claims of football creditors (or any of them) as part of their restructuring. The football creditor rule has always divided key stakeholders, including HMRC and its application in the current climate will have to be considered carefully.
  • HMRC’s (tax authority) support for the process to be procured in advance, based on a set of pre-agreed terms as to how a club’s existing liabilities to HMRC will be managed/compromised or restructured, as well as how they will be managed going forward.
  • A template CVA or scheme proposal that clubs could consider adopting or tailoring.
  • Restructured (and other financially viable) teams to be eligible to participate in the EFL, under its new rules and regulations.
  • Relief and/or waivers for owners and directors who are involved in clubs requiring restructuring due to Covid-19, in order that their involvement in the restructuring is not a “Disqualifying Condition” for the purposes of Appendix 3 of the EFL Regulations.
  • Use of Corporate Insolvency and Governance Act moratorium procedures, where appropriate, for example for clubs that require immediate respite from hostile creditor action.

Co-author Nic Couchman explained that the plan has been designed to provide a ‘gateway solution’ to a sustainable future for those clubs which can benefit from the assistance it offers. It is not, he emphasises, intended to be a mandatory requirement for all clubs.

“Every club is in a unique financial situation and there would be no need for clubs which are in fact financially stable to participate in all of the measures. The aim is to help clubs get or stay financially fit to take part in EFL competitions in the future,” he said.

“That means that the clubs will have to use the time and relief from creditors to reorganise their commercial operations to mitigate losses, reduce costs and generate replacement revenue streams by exploiting their individual and collective assets and to innovate in terms of fan engagement.

“If they are properly constructed and implemented, we believe these measures will create a more robust, protected and secure structure to attract both short- and longer-term loans, grants, and potentially private equity funding. It would also provide vital breathing space for future reforms to be properly considered and designed, given the many and complex football, financial and wider social and economic impact issues involved.

“This solution requires a collective effort on the part of the EFL and clubs but also major stakeholders including HMRC, players, landlords and other creditors. It is designed to re-balance the Football League and while it will necessarily result in short term pain for many, we believe it is necessary to create sustainability and future profitability.

“While the plan was conceived to benefit English clubs and is based on the specifics of UK insolvency law, the broad principles could be applied to other sports where smaller clubs operating without their major revenue stream are suffering in the same way,” he said.

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