Football Clubs (Insolvency)

Debate between Jim Cunningham and Jenny Willott

Tuesday 18th March 2014 Westminster Hall

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jenny Willott)]

I thank the hon. Member for Folkestone and Hythe (Damian Collins) for calling for this debate. He has shown his commitment to football issues over several years—issues that many hon. Members feel strongly about.

Football is a fundamental aspect of British life. I married into a family of Evertonians. My children were wearing Everton babygros before they reached the age of one—the indoctrination started early—so they have absolutely no choice in the matter of whom to support. The financial health of football clubs is a hot topic on both the terraces and the sofas of Britain. Fans are perpetually nervous about which club will be the next to struggle or fail and endlessly discuss clubs’ costs and budgets. The Government appreciate the part that football clubs play at all levels across British society. They are a fundamental part of the social fabric of communities up and down the country.

None the less, the rules that govern corporate life cannot be selectively applied. Those who deal with a football club—its suppliers, its employees, the Crown—should have the same confidence that they will be paid as they would if they were dealing with any other business in any other industry. Insolvency is a risk—hopefully a low one—in all industries, including football. No honest person runs a business expecting it to fail, but when there is failure, it is important to have an insolvency process that is fair and transparent and, where possible, saves viable businesses; that applies as much to football as anything else. The UK’s insolvency framework was recently judged by the World Bank to be 7th best out of those of 189 nations; it came ahead of France, Germany and the United States.

The hon. Member for Folkestone and Hythe pointed out that quite a number of clubs have experienced financial difficulties in recent years. The majority of premier and Football League clubs that have become formally insolvent in the last 20 years have entered the insolvency procedure known as administration.

[Mr Jim Cunningham]

Does the Minister intend to answer my questions, and those of the hon. Member for Folkestone and Hythe (Damian Collins)? What are the contents of the legislation that is to be proposed by the Government? Will the Minister support the hon. Gentleman’s Bill? Alternatively, may we have a date for when the Government will introduce legislation? The situation has been going on for far too long—for about two years—and we have heard the evidence from Coventry, which is a good test case.

[Jenny Willott]

If the hon. Gentleman gave me some time, I might be able to answer some of his questions.

Most clubs that have entered insolvency have gone into administration. The primary objective of an administrator is to rescue the company wherever possible. If the business can keep going, that is the best outcome for employees and other stakeholders. Administration is therefore a rescue procedure and, judged on that criterion alone, football administrators have been successful. In spite of the number of clubs facing difficulty, as highlighted by a number of hon. Members today, no Football League club has gone out of business mid-season since the demise of Aldershot in 1992.

Administrators are governed by statute. Their primary focus is on rescuing the company, but the survival of the company or business will always be balanced against the interests of the creditors. Put simply, an administrator cannot save the company if that is not in the interests of the creditors. As was highlighted by the hon. Members for North Swindon (Justin Tomlinson) and for Portsmouth North (Penny Mordaunt), generally, rescuing a football club is in the broad interests of the creditors and the fans. That is because the alternative to a rescue out of administration is liquidation, in which a club’s assets are turned into cash, its affairs are wound up and any remaining funds are distributed to creditors.

On liquidation, football players’ contracts are void and they receive what is known as a free transfer, which means that no transfer fee need be paid to the liquidated club. That is clearly not in the interests of creditors, as the players’ contracts are an important asset of the club, being worth significant amounts of money. As hon. Members have said, including the hon. Member for Coventry South (Mr Cunningham), the Football League is in essence a members’ club, with all the clubs having a share in it, sometimes known as the golden share. To continue membership of this club and to retain the share, members must abide by the rules. Among the rules is the Football League’s insolvency policy.

One aspect of that insolvency policy, as we have discussed today, is the football creditors rule, under which all football creditors must be paid in full if a club is to remain a member of the Football League. The list of football creditors is long, so it would be slightly tedious to read out, but it includes players, the staff of the club, the leagues, the Football Association and other clubs, as was mentioned by a number of hon. Members. Other than in exceptional circumstances, if the football creditors rule is not followed, the club will lose its share in the Football League. Without the share, the club cannot take part in league matches and will in effect cease to trade. If a football club is in administration, the loss of the share will almost inevitably result in liquidation, which, as I said, voids all player contracts. If that happens, the football club is in effect dead, which is disastrous for all classes of creditor, because there is no value in a club that has been kicked out of the league and has no players.

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[Jenny Willott]

Changing the legislation would not necessarily have made any difference. The money that goes to pay the football creditors does not come out of the pot of assets that is used to pay the unsecured creditors. There is no evidence that if we changed the football creditors rule there would be more money available for the unsecured creditors. They would quite possibly still get exactly the same return on a pound. Clearly, in the case the hon. Gentleman cited, the return was extremely low, but I have seen no evidence to suggest that it could have been greater. It is not the same pot of money that is used to pay each group.

To put the matter in the context of insolvencies as a whole, in 2013 there were about 20,000 corporate insolvencies in England and Wales, of which around 2,400 were administrations. The Government feel that using primary legislation to outlaw a provision that is relatively infrequently used is disproportionate, particularly given that the industry is already trying to improve the underlying financial stability of clubs via the financial fair play rules. Other than those to which special regimes apply, all insolvencies are subject to the same legislation, the Insolvency Act 1986. It would be potentially confusing for users of that legislation if we modified it just for football insolvencies. No other industry is treated differently under general insolvency legislation, and the Government feel that there is no compelling reason why football club insolvencies should be.

Football is undoubtedly incredibly important for fans. I understand the frustration of fans whose clubs become insolvent through no fault of those in the stands or on the terraces. Given the emotional importance of football for fans, I understand how distressing it can be when a club goes into insolvency. However, as I said at the start, the rules that govern corporate life cannot be selectively applied—they apply across the board—and those who act as directors of football clubs should act properly in execution of their duties.

A number of hon. Members have highlighted concerns about directors. The law allows the Secretary of State to undertake civil proceedings against company directors who are found to have been culpable in the failure of a company. However, until a person has been disqualified, they are free to act as a director of any number of companies in the UK, irrespective of their track record or any criminal charges that may be pending, although someone who is personally bankrupt or subject to bankruptcy restrictions is prohibited from acting as a director.

Hon. Members have mentioned the owners and directors test, which places additional restrictions on clubs. I understand that those restrictions are increasingly based on intelligence, and that football authorities are co-operating to make the test as effective as possible.

Overseas convictions were mentioned. At the moment, there is nothing to prevent a person who has been convicted of offences in connection with a company overseas from acting as a director of a UK company. However, the “Transparency and Trust” discussion paper published last year included a proposal to enable the Secretary of State to bring disqualification proceedings in the UK against anybody convicted of a serious offence in connection with a company overseas. We will publish the Government response to that consultation soon. The issue is currently being considered.

We want the UK to be a trusted place for people to carry out business. Part of that is ensuring that directors of limited companies take responsibility for their actions and have regard to creditors and employees. The majority of directors do that effectively, but action can and will be taken against those who do not play by the rules. When a company enters formal insolvency, such as administration, the administrator has a duty to report on the conduct of all directors in office in the previous three years. The Insolvency Service, which acts on behalf of the Secretary of State, looks at all reports in which the administrator suggests that misconduct has occurred, and when it is in the public interest to investigate, it will do so.

If disqualification proceedings are highlighted as being necessary, once the Secretary of State has authorised them, the company director can either give an undertaking or be disqualified. If disqualified, a director can be banned for up to 15 years, depending on the seriousness of the misconduct. Over 100 directors are disqualified each month; the average period of disqualification is around six years, and over 10% of disqualifications are for more than 10 years. That is all a matter of public record, as details are held at Companies House.

Various football directors have been disqualified over the years. For example, in 2011 four directors of Luton Town football club were disqualified for a combined total of 19 years, a significant penalty. They were found to have breached Football Association and FIFA rules and caused the company to trade at risk to, and to the detriment of, HMRC.

Hon. Members raised issues about specific clubs. I am an MP for Cardiff, where the Bluebirds now wear red, and was previously a local councillor in Merton, when Wimbledon football club was having a number of local difficulties about where they were going to play, so I have witnessed at first hand the trauma that club ownership issues can cause to supporters. A number of Members have mentioned their concerns about Coventry City football club. The hon. Member for Coventry South raised the golden share, which I mentioned earlier. My understanding is that the Football League has learned from the case of Coventry City and has strengthened its checks on who holds the golden share in response.

[Mr Jim Cunningham]

It took a long time to get an answer from the Football League on that question. It was not clear-cut at the beginning; it took a considerable period of time.

[Jenny Willott]

That may well have been the case. I take the hon. Gentleman’s point. On club ownership and the identification of club owners, the football authorities are confident that they can identify club owners. The Football League has responded to the situation at Coventry City to ensure that that picture is not replicated elsewhere.

Oral Answers to Questions

Debate between Jim Cunningham and Jenny Willott

Thursday 6th March 2014 Commons Chamber

[Jenny Willott]

The hon. Gentleman raises an important point, and the Government take concerns from business about unfair payment terms very seriously. For example, as he says, receiving payments promptly can be critical to the survival of a small business. That is why the Department launched a discussion paper called “Building a responsible payment culture” at the beginning of December. It sought views on what unfair payment terms look like and whether legislative or non-legislative measures should be used to tackle them. The consultation closed at the end of January and we are currently analysing the responses. We will announce shortly what we want to do to tackle the issue.

[Mr Jim Cunningham (Coventry South) (Lab)]

6. In how many of the last 24 months net lending to business by banks has risen.

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[Mr Cunningham]

Will the Secretary of State say what the latest position is regarding Hibu, as he met a small delegation of MPs some months ago to discuss the situation? He will know that many of the shareholders have lost a lot of money, especially those in Coventry.

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jenny Willott)]

The hon. Gentleman is right that many people have lost significant amounts of money, and they are clearly keen to see action. The administrator has a statutory duty to report on the behaviour of Hibu’s directors, and that report is due before the end of May. At that point, the Secretary of State and the Insolvency Service will look at whether action needs to be taken to disqualify the directors.