A Look at Administration: Palace, Promotion, and Portsmouth

When Crystal Palace F.C. meets Watford F.C. on Monday in the npower Championship Playoff Final, an estimated $181 million payout is at stake, as previously discussed here at Business of Soccer.  And while neither team would shun such spoils, whether Crystal Palace would be in a position to claim the winner’s prize, and in fact, Crystal Palace’s very existence, was in question only a few years ago.  In January 2010, while playing in the Football League Championship, Crystal Palace entered into administration after racking up more than $45 million in debt and failing to timely pay its players’ wages on multiple occasions.  The Football League assessed Crystal Palace a 10-point penalty, but Crystal Palace managed to stay in the Football League Championship in 2010, surviving relegation to League One by just two points.

Most casual followers of football in the U.K. will be familiar with the concept of administration, which is one of several formal insolvency procedures under U.K. law employed when a business ceases to be able to pay its debts in the ordinary course.  Administration is an alternative to immediate liquidation of a company, and is comparable (with some important distinctions not discussed here) to Chapter 11 bankruptcy proceedings under U.S. law.  Some of the most recognized clubs in the U.K. have been faced with administration, with falling star Portsmouth F.C. and Scottish powerhouse Glasgow Rangers being two of the most recent examples.Crystal_Palace_F.C._logo_(2013)

From a legal perspective, upon entry into administration by court order or voluntarily by appointment by the company, one or more administrators are appointed to manage the company’s day-to-day operations.  The administrators will attempt to preserve the company’s ability to operate as a going concern or, if such a resolution is not feasible after assessment of the company’s financial position, administrators begin taking steps to preserve and maximize assets available for distribution to creditors.

Football clubs are unique in the universe of companies that enter administration, as the beneficiaries and constituents of football clubs are not merely employees, consumers or customers, but supporters with long-term fan commitment to the club, rooted in tradition.  As a consequence, the objective for administrators is more often to salvage the club by entering into a Company Voluntary Arrangement (sometimes referred to as a “CVA”) with creditors that allows the company to survive while arranging for the satisfaction of the club’s prior debts over an agreed period of time.

Football clubs are also unique in that their local governing bodies will assess additional penalties on the club beyond the legal process of administration.  If a club enters into administration, the Premier League and the Football League will deduct points from the club’s position in the table: 9 points if the club is in the Premier League, 10 points if the club is in the Football League.

On August 20, 2010, Crystal Palace emerged from administration after the club was sold to CPFC 2010 Limited. That Crystal Palace managed to stay in the Football League Championship for the next few years and schedule a trip to Wembley for the playoff final on Monday is no small feat.  More surprising still, should Crystal Palace win, it would not be the first time that Crystal Palace bounced back into the highest level of soccer after facing administration: Crystal Palace went into administration in 1998, exited administration in 2000, and ascended to the Premier League in 2004 after defeating West Ham United 1-0 in the Football League Championship playoff.  Should Crystal Palace defeat Watford on Monday, it will have achieved a dubious double: entering into and emerging from administration twice, and subsequently gaining promotion to the Premier League twice.

Practically speaking, and notwithstanding Crystal Palace’s record, emergence from administration and future success on the field are in no way guaranteed.  During administration, administrators look to cut expenses and generate revenue quickly to allow the club to service its debt.  Perhaps the most efficient means of doing so is to sell high-value players, thereby cutting wage expenses and simultaneously bringing in transfer fees.  While the sell-off strategy may mitigate financial issues for the club, the sale of key players is likely to be the detriment of the club’s performance in the table.  In addition, the automatic assessment of point deductions by the Football League or Premier League when the club enters into administration causes a further drop in the standings.  This double whammy—the loss of key players and point deductions—threatens the club with relegation, which in turn results in decreased revenue from ticket sales, broadcast rights, and marketing rights when playing in lower divisions.  The end result is that it becomes difficult to regain a competitive posture on the field.

In the years since the Premier League was founded in 1992, six teams have entered into and emerged from administration, and subsequently climbed back into the Premier League:

Team

Date of Emergence from Administration

Next Premier League Season

Portsmouth

May 1999

2003/04

Crystal Palace

July 2000

2004/05

Hull City

March 2001

2008/09

Queens Park Rangers

November 2002

2011/12

Derby County

October 2003

2007/08

Southampton

July 2009

2012/13

In that context, Crystal Palace’s potential achievement is impressive.  Contrast Crystal Palace’s success with the downward trajectory of Portsmouth F.C., and the feat is extraordinary.

Portsmouth, which boasts the achievement of entering into administration three times since 1992, was on the ascendancy in 2008, having won the FA Cup and thereby securing a place in European competition for the 2008-2009 season.  By the summer of 2009, however, financial problems at Portsmouth forced the club to sell many of its top players.  Yet Portsmouth’s financial woes persisted.  Portsmouth’s new ownership elected to enter the club into administration in February 2010, and with relegation from the Premier League assured after being assessed a 9-point penalty, Portsmouth again sold a veritable squad of high-value players.  In 2009 and 2010, the club sold Younes Kaboul, Nico Kranjcar, Sylvain Distin, Glen Johnson, Peter Crouch, and Kevin Prince-Boateng.

Portsmouth emerged from administration under tenuous new ownership in October 2010, only to once again enter into administration in February 2012, for which the club was assessed a 10-point penalty in the Football League Championship table, assuring that the club would be relegated to League One.  Portsmouth’s struggles continued this past season, where Portsmouth was relegated for the second year in a row, this time to League Two.  And while a second relegation in as many years would normally be devastating, there was a peculiar sense of relief among Portsmouth supporters at the end of the season.  The Pompey Supporters Trust acquired the club in April of this year, warding off expulsion from the Football League and establishing the largest fan-owned football club in the U.K.

The severity of the financial problems for a club will dictate the gravity of going into administration and the administrators’ strategy for managing the club.  Crystal Palace’s financial condition in 2010 cannot reasonably be compared to Portsmouth’s mismanagement, which included incurring $180 million in debt.  Rather, Crystal Palace’s situation may be more analogous to Southampton F.C.  Indeed, Crystal Palace may hope so: Southampton F.C. entered into administration in 2009, was relegated to League One, and then climbed back to the Premier League by the 2012/13 season where it finished 14th in the table.

Whether Crystal Palace earns promotion on Monday or not, its continued performance in the Football League exemplifies that administration is not necessarily the death knell for a football club, but an opportunity to reorganize and reassess.

Reporting on the business side of the world's game.