If a company or football club has been served a winding up petition then it usually means that all previous attempts at settling the debt have been unsuccessful. As such the creditor uses the "nuclear option" whereby they say that the club has to be wound up as it simply cannot pay its debts. An application, or petition, is made to the High Court (this is the winding up petition ) to ask the court to wind the company up.
A hearing is arranged in the High Court or Court of Session in Scotland, for the Court to consider whether it should put the company into compulsory liquidation. The time between the petition being sent to the company (served) and the hearing can vary from 20- 75 days.
In the football world it is usually HMRC who serve the petitions as it is the main creditor. What is more with the level of players wages the total PAYE liability of the club is usually very high. Any delay in the payments of these amounts over the HMRC does give the club a cashflow boost.
An application is made to the high court to ask the court to wind the company up. The important point about a winding up petition is that it has to be advertised more than 7 days before the winding up hearing. This means the process is now in the public eye as well as a very public indication that the club has not paid some of its debts. This of course makes everyone worry about the future of the club. Will the players be paid? Will the club continue to play? Will it be deducted points?
For most businesses once a winding up petition has been advertised the business is in effect paralysed as the bank will freeze the account in order to avoid any "disposition of assets". Football clubs are not run purely for profit but also for pleasure by their (usually) wealthy owners. As such, the freezing of the bank account of the club does not usually mean that the club has to shut immediately. Money is often forthcoming from other sources connected to the owners. Of course, it is also not unusual for the monies outstanding to be paid personally by the owners to avoid administration. The personal circumstances of the owners are often complex and there are other companies that are involved in the actual running of the club. As such the effect of a winding up petition does not necessarily mean the end of the football club.
But the petition pressure and director being worried about wrongful trading can lead to a situation whereby insolvency proceedings are taken by the directors. This usually involved placing the company into administration. The company must then enter a CVA to exit administration usually with a new owner or new funder so it can regain its licence to play in the Football League, Premier League or the Scottish equivalents. The club will be deducted at least 10 points.
If the CVA is rejected, as happened before in the case of Leeds United when the administrator sells to a new buyer, then a further points deduction is made - often 15 points. This led to two relegations for Leeds.
Interestingly the CVA must pay the football creditors (players and leagues) 100p in £1 BEFORE any creditors like HMRC! Otherwise the CVA is not valid and further points can be deducted or the licence to play in the relevant league withdrawn the ultimate sanction.
This so called football creditors rule is being challenged by HMRC in the Courts at the time of writing.
At the recent Owners’ and Executives’ Conference and AGM, a number of new rules were decided regarding the insolvency process and football clubs.
The League’s Insolvency Policy has been changed to include the following:
- Football clubs are no longer required to enter a company voluntary arrangement (CVA)
- 12 points deduction for a club going into administration (up from 10 points)
- Continuing to support the Football Creditors Rule whereby football debt is paid before any other creditor (like HMRC).
- Administrators must have 21 days at least to market a football club that’s in administration, and meet the club’s supporters’ trust to allow them to put forward a bid.
- Buyers of football clubs (in administration) must pay back creditors a minimum of 35p in the pound over three years (or 25p if transferred by shares). If this isn’t followed, there will be a 15 point deduction the next season.
- If an individual buys a club with 10% shareholding or more, he/she must inform the Football League.
The League wants to focus on strengthening their insolvency policy to make it fair to employees, supporters and creditors.
A possible downside to the 21 days rule could be the club is on the market for a considerable amount of time. This could cause the business to lose value over time if suppliers and customers lose faith.