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Last Updated: Tuesday, 8 May 2007, 08:19 GMT 09:19 UK
Will Leeds Utd escape their creditors?
By Nick Hood
Senior London partner at business rescue experts Begbies Traynor

Nick Hood of Begbies Traynor
Nick Hood says football rescues often lead to false hopes

Administration for Leeds could mean a big write-off for tax payers.

Leeds United's fall from footballing grace is finally complete, adding the insult of administration to its demotion from the Championship.

But, while the administrators seem to have a ready-made rescue party in Ken Bates and his consortium, some of the creditors will be facing huge losses, whilst others will be paid in full.

This strange outcome is one that would be contrary to insolvency law in any other industry - except the fantasy world of football finance.

In every other type of insolvency, the creditors rank equally and they all stand to get the same payout when things go wrong.

But the football authorities will insist that the so-called "football creditors", such as the players and other clubs owed money for transfer deals, must be paid in full.

Otherwise, the insolvent club will be ejected from the professional football world and the players' contracts will revert to the league authorities. If that happened, the club would, in effect, be destroyed.

Creditors' approval

The way things are looking, the only penalty which Leeds will suffer will be a mandatory deduction of 10 points, which is likely to be applied this season under the football league rules.

This will make little difference, given that the club was already as good as certain to be relegated to League 1.

The chosen rescue path starts with administration to protect the club from the actions of creditors and ends with a company voluntary arrangement (CVA), in which a deal is struck with the creditors.

This requires the approval of 75% of those creditors who vote on the deal.

In Leeds' case, it looks as though the Bates' consortium and other creditors who will inevitably support them may have sufficient voting power to force through their acquisition of the club from the administrators.

That is despite any opposition from other creditors such as the Inland Revenue, who are said to be owed about 6m.

Tax payers' loss

The Revenue, which has specialists dealing with football problems, hates this sort of situation.

Standing back from the protective bubble of football passion and the power of the football authorities, it is hard to criticise their view, given that a large amount of taxpayers' money will be lost, while highly-paid footballers and affluent clubs will get all of their money back.

But unfortunately, if the mathematics of this particular situation dictate that this is the outcome, then there is nothing illegal about it.

A previous challenge by the Revenue in another football case - that this was a breach of the law - was rejected by the courts.

It can only be hoped that the arrival of hard-headed foreign sports entrepreneurs in the British game, such as the new owners of Liverpool, may herald an era of much greater financial responsibility, so that sagas like Leeds may become a thing of the past.

But the administrators are already signalling that there will little or no money for the non-football creditors of stricken Leeds.

As a result, the only hope for them is if one of the rumoured alternative bids turns into reality very quickly indeed and proves to be better for the creditors than the Bates deal.

Sadly, experience shows that football rescues often generate false hopes and vain promises, so any counter-bidder will have to play a good game, not just talk it.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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