Football is good entertainment but bad business

There are certain trends in modern football that we have been accustomed to, with administration being the latest.  Questions about football club finances are being raised after Port Vale, Portsmouth and Rangers have all gone into administration during the past four weeks.

Rangers have an unpaid tax bill of over £9m, whilst Portsmouth went into administration for the second time in two seasons over an unpaid tax bill of £1.6bn.  Whilst in administration, these clubs can be perceived to be in a safe haven; their debts are frozen and are temporarily protected from creditors looking to recoup their funds from the club.  Business advisory firm PKF have been appointed by Portsmouth as the administrators to run the club, making them responsible for preserving the value of the business and reaching a compromise with creditors.  As expected, this is a process that is never straightforward.

One of the main reasons why payment to creditors becomes a heated affair is due to the football creditors’ rule of the English league governing body, which states that all players and clubs that are owed money by the insolvent club are to be paid in full.  The implementation of this rule creates a hostile feeling by ‘ordinary’ creditors towards the football community.  Tax authorities, local businesses and other non-football bodies are only paid a fraction of their bills whilst football clubs are reimbursed in full.

HMRC have spoken out against this rule, labelling it as unfair and unlawful.  However, the Premier league and football league have defended the rule, arguing that it is important in preventing a domino effect that would see multiple clubs enter administration.  Whilst this argument holds, other creditors have their own debts to pay and will struggle to do so they are crossing assets owed to them by administered outfits off their own balance sheet.  The domino effect is simply being taken out of football and installed into other industries.

After the fire sale of their assets during their first spell in administration, Portsmouth does not have many assets left to rely on to improve their liquidity. This left Portsmouth facing the risk of being the first English club to go out of business since Aldershot in 1992, but the Football League has stepped in and given the championship club a £200,000 cash injection.  Although it is on a much smaller scale, the football industry is beginning to mirror the Northern Rock crisis in 2008.

HMRC used to let football clubs off the hook for this sort of behaviour because of their importance to local communities, but now that some clubs do not have the funds to pay back their communities they may be doing more harm than good. Football governing bodies need to work towards making football clubs stop adopting risky business models and teach them to be less reckless spenders.