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Hope For Hatters Despite Leeds Loss

2 May 2008

The Football League may feel quite pleased with itself as a result of the Arbitration Panel's support of its decision to impose a 15 point penalty on Leeds for the clubs failure to come out of insolvency, other than through a Company Voluntary Arrangement ('CVA'). However, it is a feeling that is unlikely to last long as there are some dark clouds hovering on the their horizon.

The Arbitration Panel decided that their actions were not '...unlawful, void and of no effect'. In effect the League is within its powers to punish a club that does not come out of Administration in an approved manner.

When a club goes into administration, the Football League's Articles, Regulations and Insolvency Policy are engaged. Leeds were given an automatic 10 point penalty on entering Administration (meaningless to Leeds as they were doomed to relegation from the Championship when they went into Administration) and their share in the League was forfeit in accordance with its rules.

The League's policies are designed to ensure the survival of the club in membership of the League where possible; the need to satisfy Football Creditors means that the club has to pay their players even in insolvency. The interests of other creditors are protected by requiring the approval of creditors to a formal CVA, except in exceptional circumstances. Of course they also allow the League to try to keep the integrity of its competition intact by making sure teams do not gain an unfair advantage by entering Administration. If a club does not come out of Administration by way of a CVA the league does not have to give it back its league share.

Leeds were unable to come out of Administration by way of a CVA, meaning the League had to decide whether they were going to accommodate Leeds under the 'exceptional circumstances' discretion and if they did so, on what terms (so that the integrity of the competition remained intact). One option, provided for by Regulation 11, was for Leeds to be 'relegated' to League 2 rather than starting the season in League 1. Leeds did not want this and agreed the compromise with the League that the Arbitrators upheld - in return for getting their share in the League back, they accepted they would start the season with a 15-point penalty (subject only to an appeal to the member clubs of the League). They also waived all other claims. Not surprisingly the Administrators felt no need to go behind this compromise and Leeds’ challenge to it was always likely to be doomed.

Leeds' Chairman, Ken Bates has claimed that they had '...lost the battle but won the war'. From Leeds’ perspective that is an odd statement indeed. However, while many would doubt that Bates was looking at the wider picture, if he was, he may have a point. A host of clubs are on the verge of entering or have entered Administration and many of them (especially given the objection that Her Majesty’s Customs and Excise seem to have to this process - where football creditors are given preference) will not be able to exit via a CVA.

Luton and Rotherham (who attempted to join the Arbitration and support Leeds) are just two clubs who now face a wait to see what penalty they face. The Arbitrators recognised that such uncertainty is not helpful and suggested the League make specific provisions for cases where there is no CVA.

Unlike Leeds, Luton suffered an effective penalty (on entering Administration) by the loss of 10 points when their season was still alive and Rotherham will lose the faint hope they have of reaching the League 1 play-offs. Both have been hit in sporting terms in a way that Leeds would not have been had they overturned the 15 point penalty, but will the League hit Luton and Rotherham twice? Certainly the Arbitrators were at pains to point out that the 15 points in Leeds case was as a result of the specific circumstances leading up to their entering Administration (presumably one of those circumstances - whether the League would admit it or not - was their avoiding any effective points deduction on entering Administration by doing it after they were relegated). They noted it was not a precedent and that each '...case has to be assessed by the League having regard to the Club's individual circumstances leading up to and of the insolvency itself. Such conditions as the League considers are required will reflect these circumstances and any merits the Club can establish'.

So the League have options when deciding on the penalty that other Clubs will face but they need to ensure that the range of possible sanctions and what could effect the level of them is clear to avoid more challenges. Those challenges could be helped by the Arbitrator’s observation that the process where any appeal is to members of the League is unsatisfactory (the possibility of self interest being a factor in the way the other clubs vote is clear). They suggest an appeal to an Independent Tribunal - with the Appeal lodged within 7 days and decided 21 days after that. Such certainty would be welcomed. No doubt Swansea, who lost the right to parade the League 1 trophy they had won with some style over the course of a long season, because of Leeds’ painfully long attempts to get out of the agreement they entered, would have liked such a process in place.

© Davenport Lyons 2008. All rights reserved.
This document reflects the law and practice as at May 2008. It is general in nature, and does not purport in any way to be comprehensive or a substitute for specialist legal advice in individual circumstances.