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Administration for football clubs should ultimately lead to automatic relegation, expert says

Football clubs should face automatic relegation if they engage in repeated overspending, a sports law expert has said in the aftermath of two UK clubs entering administration.17 Feb 2012

Trevor Watkins of Pinsent Masons, the law firm behind, said the current system is not robust enough to prevent further football clubs from entering into administration. He believes more stringent ownership controls, financial monitoring and heavier sanctions are needed to improve the overall state of the game and reduce the risk of similar situations occurring again.

Earlier today Portsmouth Football Club entered administration for the second time in two years over unpaid tax debts owed to HM Revenue & Customs (HMRC). On Tuesday Rangers Football Club also entered administration after HMRC pursued it for unpaid taxes.

Both clubs have been deducted 10 points from the totals they have accumulated in their respective league competitions this season, in line with the penalties currently in place in the Scottish Premier League and the Championship for clubs entering administration. However, Watkins said that those sanctions and the regulations surrounding approval of ownership have proved to be insufficient to prevent more than 25 winding up petitions being presented by HMRC in the last 2 years.

"We have seen case after case of football clubs experiencing financial difficulty but for a long time now clubs have been easily acquired and subsequently resisted severe restrictions to deter them from spending vast percentages of turnover on player wages," said Watkins. "FIFA's Financial Fair Play rules will hopefully tighten clubs' spending to reflect only what they generate in revenue but the real question is whether or not clubs are going to act with long-term stability in mind."

"Whilst many do, others take risks, affording them advantages over those who act with prudence. Until the penalties for financial mismanagement are greater I doubt whether most clubs will. Real sanctions should include automatic relegation for repeated financial misdemeanour," Watkins said.

World football governing body FIFA has introduced new 'financial fair play' rules that assess a club's efforts to 'break even' financially over three seasons, including the one currently being contested. From 2013-14 UEFA will be able to ban clubs from playing in pan-European competitions the following season.

Watkins said that whilst the UEFA rules were important, domestic football authorities in England and Scotland should impose strict penalties of their own to clubs that overspend and consider having the ability to step in and run clubs who let their affairs get out of hand.

"The time has come for the talking to stop. We have had endless Government reviews and debates about football sorting out its finances but now we need clarity, direction and leadership from the authorities to sort the problem out. Portsmouth in particular is a sorry example of what has gone wrong with football," he said.

"With the Football League stating that they had been misled by the current owner of Portsmouth, arguably we need much stronger checks and balances before new owners come into clubs and a rigorous programme of monitoring and enforcement of financial controls," he said. "Football clubs in general have spent money on player wages that they could not afford in chasing success on the pitch. Many owners are prudent and to a large extent controls being imposed will enable the clubs to say 'no' more easily to the inexorable rise in player wages."

Watkins said that the appointed administrators in the Rangers and Portsmouth cases would evaluate the assets of each club in order to assess whether any bids from prospective new owners provided creditors with value for money.

Companies in administration face liquidation if a buyer cannot be found; in football any deal also needs to be approved by a majority of shareholders and at least 75% of 'unsecured creditors'. The debt owed to 'secured creditors' – those that own a legal right to assets of a company – are required to be paid back the money they are owed before unsecured creditors share the remainder of the money the buyer has put forward between them.

HMRC, as an unsecured creditor, is unlikely to back any deal that means it is unable to recoup a significant portion of the money it is owed, Watkins said. However, in the case of Rangers Watkins does not believe that the result will be the liquidation of the club or that the club would be required to start again at the bottom of the football pyramid.

"The last thing the Scottish Premier League needs is a competition without Rangers in it. The dynamics are different in Scotland as opposed to England because of the economic benefits Rangers bring. Broadcasting, sponsorship and other commercial deals would be significantly devalued without Rangers involved at the top level. I expect a deal will be done to pay Rangers' creditors much less than they are owed; if this is done without the necessary votes being passed, the likelihood is that the club will still survive although with potentially a stiffer points penalty in the league," Watkins said.

"There is a precedent for this in England where the Football League imposed an extra points penalty on Bournemouth and Rotherham after the clubs failed to exit administration using the necessary company voluntary agreement (CVA) with creditors. But perhaps the most prominent example is Leeds United. The Football League ordered Leeds to start the 2007-08 season on minus 15 points after it had failed to form a CVA with creditors. Leeds challenged the penalty but the challenge was dismissed. Of course the big loser, if such a case arises with Rangers, will be HMRC," Watkins said.

Watkins also called on prospective owners of clubs to face heavier scrutiny from football bodies before they can take control of teams.

"In the US, for example, individuals have to jump through hoops before they can own a US sporting franchise. If something does not quite stack up about a football club owner the authorities should continue to ask questions to ensure they are absolutely satisfied about their suitability because the consequences affect the value of the game through its commercial partnerships with sponsors and broadcasters," he said. "The current 'fit and proper' person test that prospective owners of clubs must pass is clearly not tough enough and arguably supports the case for a separate body to deal with changes in ownership. In Portsmouth’s case we had an individual linked to a bank that had been refused a UK licence to operate given the opportunity to buy that club, raising issues about the vetting of the purchaser."

The Government has previously threatened the football authorities with regulating finance in the game itself unless the bodies themselves addressed problems with debt levels at clubs.