Following on from my topic about my college assignment , here it is. I limited it to one club but the same principles appl to any club in administration.

The Administration of Luton Town

Administration is a procedure under the insolvency laws in a number of countries which functions as a rescue mechanism for insolvent companies and allows them to carry on running their business. The process which is an alternative to liquidation is often known as "going into administration."


For this assignment I have chosen to use the football world as the basis for my discussion as an ever increasing number of clubs are going into administration, the most recent case being that of Luton Town F.C and the most high profile being Leeds United F.C.

In the case of Luton Town, a small club by today's standards, the question that must be asked is how a club of this size could be allowed to find itself in such a poor financial state. This is not the first time the club has found itself going into administration. In July 2003 the club was also placed into administrative receivership by its major creditor at that time. Football clubs are businesses and therefore need the same control and management as an organisation such as Coca Cola. Luton Town's corporate decline, resulting in the club going into administration, can be attributed to a number of factors; poor financial control, poor corporate governance, a number of legal cases against the club and extremely poor working capital management.

Luton Town's path into administration began in November 2007, when the club was hit with over 50 charges in connection with alleged breaches of rules relating to player transfers and agents fees conducted between July 2004 and February 2007. The charges are a clear example of Luton Town ignoring their duty of practicing fit and proper conduct in the area of corporate social responsibility. The club had a duty to their stakeholders to conduct business in a proper manner. Luton Town also failed to disclose the agent fees to the Football Association which they are required to do so. The payments to the agents were also allegedly made through the clubs holding company, Jayten, rather than through the club as required by FA rules.

Corporate Governance

Corporate governance encompasses the system of laws, codes and regulations that govern the way in which corporate organisations - including football clubs - behave and operate. The system of corporate governance defines the rights and roles of different participants in an organisation - the shareholders, the Board of directors, employees and other stakeholders - and the relationships between them. Where football clubs are concerned, two of the major stakeholders are the clubs supporters and the local community in which the club is based.  Corporate governance structures are important because they directly influence the way in which owners, directors, managers, players, supporters and the local community interact to determine club goals, and the way in which the club behaves in its quest to meet those goals. The Luton Town Board at the time clearly did not implement the Code of Best Practice in relation to corporate governance which was issued by the Cadbury Committee in 1993 due to the lack of confidence which was perceived in financial reporting. The proof of the Boards neglect of proper corporate governance is evident in the charges resulting from the investigation carried out in relation to the payments to the agents, including former chairman Bill Tomlins handed 15 charges, former finance director Derek Peter was handed charges for approving the payments to the agents and two current directors were charged with failure to report the breaches to the FA.
 
Good corporate governance systems aim to ensure high levels of transparency, accountability, competency and corporate responsibility, all of which are essential to good corporate performance and all of which were absent from Luton Town Football Club.

Another reason for Luton Town's demise into administration is the poor financial management of the club over the past number of years. When the club came out of administration on 2004, it restructured its finances and the new owners, Jayten, only had one loan, of £500k, on an interest-free basis, which was to be repayable once a new stadium is completed, but was otherwise debt-free. However plans for a new stadium were revoked in 2005 due to a proposed building of a new runway at London Luton airport. This was a major setback for the club as it was hoped that the new stadium would become a major revenue generator in years to come.

It must be question how having been in administration once before, the club found itself in such a predicament for a second time. Much of the blame can be attributed to Bill Tomlins and his holding company, Jayten. In just two years, the Jayten group accumulated transfer expenditure of over £6.5 million, a massive sum for a club the size of Luton town. The working capital management of the club must also be called into question.

Working Capital Management

Working capital management is basically a trade off between ensuring that the business remains liquid while avoiding excess conservatism, whereby the levels of working capital held are too high with an ensuing large opportunity loss. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses.

In the case of football clubs, a large part of working capital management is involved in the management of creditors. Excessive use of this source of finance can lead to poor relations with creditors, which can be damaging and is exactly what happened in the case of Luton Town Football Club.

The club's major creditor is HM Revenue and Customs, (HMRC), the debt to whom is said to be in the region of £2.5 million, and equating to approximately 75% of the total indebtedness of the club. HMRC has a duty to the public to maximise their income from debt owed by Luton Town. The total indebtedness of the club is increased by deferral of players` wages when current chairman David Pinkney's funding dried up.

However the Football League has a policy that clubs entering administration must pay any football debts at 100p in the £. Therefore, as a result HMRC no longer have priority status and are now objecting to the priority status of football debts. In effect, this means that HMRC are effectively in control of whether Luton Town continue trading or not, if no party willing to pay 100% of all debts can be found, or an alternative arrangement cannot be agreed with them.

The poor working capital management of Luton Town by the Board has effectively put the future existence of the club into jeopardy. HMRC can now attempt to block the voluntary administration unless it is paid at the same rate as the highest rate creditors, in this case the rate of 100% being paid to football debts.

On November 22nd 2007, Luton Town announced that it would be entering into administration as a result of the clubs decreasing income, changing circumstances and potential huge liabilities. It is hoped that by going into administration the club will now have some breathing space to restructure its finances. In the short term however, for the club to continue trading, chairman David Pinkney has agreed to fund trading losses until the conclusion of a sales process.

The Acquisition Process

The next step for Luton Town is the acquisition of the club from the administrators. The bid will only be accepted if the potential investors have the money demanded by the administrators. At the present time, the leading bid is that of a fans consortium named Luton Town Football Club 2020 Ltd fronted by Nick Owen. The consortium's bid is backed by the three principal supporters' groups, including the supporters' trust which helped oust former chairman John Gurney from power in 2003. The administrator gave the consortium the preferred bidder status on January 15th 2008 and on that day the consortium made a loan to the club which bought them a period of exclusivity while a sale is negotiated. It is hoped that the acquisition will be completed by the end of February.

However, the 2020 group will have a number off issues to put in order when the acquisition is complete. As highlighted earlier the issue regarding HMRC, the clubs major creditor is going to be one of the biggest problems. Added to this, former manager Mike Newell also has a claim against the club believed to be in the value of £3.5 million.

One of the options for the consortium would be to pay everyone off at 100%, which could be possible. If a lower offer than 100p/£ was accepted by HMRC, it is suggested that Newell  may well settle out of court or accept the lower offer, but if 100p/£ was agreed, he would almost certainly continue his lawsuit resulting in the possibility of his being awarded the full amount together with the high legal costs associated with defending the case. This could cost the consortium up to £7 million which is 70% of the budget they have available to them.

The 2020 group are continuously working behind the scenes with HMRC and the Football League, attempting to persuade both groups to be more flexible in the matter while at the same time trying to create a more favourable precedent for clubs who are unfortunate enough to fall into the same situation as Luton Town of going into administration.

To summarise, Luton Town Football Club found itself going into administration due to poor financial management, failing to control their creditor levels and ignoring corporate governance codes and their corporate social responsibility to their stakeholders. However, with the pending acquisition by Luton Town Football Club 2020 Ltd, the club now has the opportunity to restructure its finances and start afresh.