Football Management

Commentary on the management of over 160 English football clubs by Dr John Beech, winner of the FSF Writer of the Year Award 2009/10 Twitter: @JohnBeech Curator of Scoop.it! Football Finance

Pompey and the potential for points deduction

Posted by John Beech on November 29, 2011

Having carefully got through as far as Prescot Cables in the first half of my round up of clubs in trouble below the Premier League, I had rather assumed that I could at least get Part 2 published before returning to the subject of Portsmouth.  Clearly that was not meant to be.  So here are some first thoughts on what will be an ongoing saga of, well, Pompeyesque proportions.

For most fans there will be the question of points deduction, a matter for the Football League.  As it stands, at least for the moment, the company which owns Pompey, Portsmouth Football Club (2010) Limited, is not in Administration, as it is at pains to point out in its official statement (1); it is the parent company, Convers Sports Initiative plc, which is (2).  It is the issue of how closely the two companies are linked that the Football League will have to rule on.

The obvious precedent to spring to mind is that of deadly rivals Southampton, where the decision was that the company owning the club and the parent company were so intimately involved that the club should suffer points deduction on account of the parent company going into Administration.  It’s worth quoting from the Football League’s statement (3) at the time:

The [Grant Thornton] report [on which the decision was based] concluded, among other things, that:

1.The Holding Company has no income of its own; all revenue and expenditure is derived from the operation of Southampton Football Club Limited (SFC) and the associated stadium company.

2.The Holding company is solvent in its own right. It only becomes insolvent when account is taken of the position of SFC and the other group companies.

3.The three entities (the Holding Company, SFC and the stadium company) comprise the football club and they are inextricably linked as one economic entity.

If we compare the situation at Southampton then with the situation at Portsmouth now, there are major differences.  At Portsmouth currently:

  1. CSI does have income of its own and definitely does not derive all its income and expenditure from Portsmouth Football Club (2010)
  2. CSI is insolvent in its own right; its insolvency does not arise because of any insolvency on the part of Portsmouth Football Club (2010)  [I grant you that it’s hardly a cash cow, but it’s not Portsmouth that has brought CSI down]
  3. CSI and Portsmouth Football Club (2010) are not inextricably linked as one economic entity; CSI’s website shows their structure (4) to consist of a number of unrelated subsidiaries: Boom!, DGB Convers, GP Week, Leaders, Power Play Golf, Sportpost and WRC, as well as Portsmouth FC

On this basis, there is a strong case that CSI’s Administration should not result in a points deduction for Portsmouth.

If Portsmouth Football Club (2010) should itself seek protection by going into Administration, that would be entirely different matter, and points deduction would without doubt be incurred.  The Football League has no precise published tariff, but I would expect something in the region of 17 to 20 points.  How likely is that to happen?  The Administrators of CSI will almost certainly be looking to sell off its components, and Portsmouth is in effect already ‘on the market’.  With the added complication of Portpin and Balram Chainrai’s involvement in the insolvency of CSI though, it’s not a club that will be fighting off suitors.  In the meantime, the club “has funding in place for the short term, but will now be seeking alternative investment for its longer-term requirements”.

Not a very encouraging situation, but what’s new for Pompey fans?

[For new readers, I make clear that I am Portsmouth fan and a member of the Pompey Supporters Trust.  The thoughts above are, nonetheless,  my thoughts from the perspective of an academic researcher.]

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16 Responses to “Pompey and the potential for points deduction”

  1. Ernest said

    Thanks, John, for your thoughtful analysis.
    I would have thought the following:
    * If the major differences with the Southampton case do exist (it looks like they do), then that particular parallel suggesting a deduction of points does not hold water.
    * However, the Southampton case is only one (glaring) variant of the general principle that a points deduction is called for where the parent company and the football company are so linked that the football company is not self-financing, but substantially dependent on (at least) topping-up from the parent company.
    * Thus PFC will have to show that it is indeed self-financing, which as I understand it would mean that it could meet all its obligations, including CVA and instalments due to Chainrai).
    * This is also (roughly) the take of the accountant quoted by the BBC.
    * So it wouldn’t be enough to argue that PFC has not brought CSI down, or that CSI has more subsidiaries than just PCF.

    • John Beech said

      One important distinction I would also make is that in Southampton’s case it was a holding company rather than a parent company. The only case that springs to mind of a parent company bringing a club down was the 1992 case of Birmingham City, when the owners’ (the Kumar brothers’) BCCI bank collapsed, in the days before points deduction, so no help as a precedent.

      I didn’t hear the accountant on the BBC I’m afraid.

  2. Ernest said

    P.S. – The sentence from the new PFC statement, which you quote, to the effect that the club “has funding in place for the short term, but will now be seeking alternative investment for its longer-term requirements” is oddly asymmetrical. Any club (in fact company) may always be “seeking investment for its longer-term requirements”. So those words tell us very little. What would have settled the matter either way (as far as the claim is concerned) is one of the two alternatives – either:
    * The club “has funding in place for the short term, but cannot fund its longer-term obligations”; or
    * The club “has funding in place for the short term, and could fund its longer-term obligations, but will nevertheless be seeking alternative investment for its longer-term ambitions”.
    But it might have been problematic to make things clear in this or a similar way.

  3. Ernest said

    Right! Thanks. The holding versus parent distinction may indeed be significant.
    I just wanted to add one more thing before disappearing , which is that the third part-owner of PFC, Chris Akers (quoted today in the Guardian and re-quoted on the News discussion board), said that Antonov had put £10.2 million into PFC since buying the club, to cover transfer fees and underwrite wages, and that “the club were relying on Antonov for continued funding”, which makes it sound as if PFC is not self-financing.

    (The accountant on the BBC, actually an insolvency lawyer called Thomas, said “It will have to be decided whether CSI and Portsmouth were effectively run as one economic entity … The penalty – ranging between 10 and 25 points – will depend on the outcome of that review.” I take “effectively run” to mean in the sense above. But there’s plenty of work for lawyers here, I should think.

    • John Beech said

      Yes, I’m afraid that once again the woes of Portsmouth will prove to have a silver lining for lawyers, accountants and insolvency practitioners!

  4. [...] M27 had the same problem a while back when the company owning them suffered the same fate. However, Dr John Beech suggests that ‘there is a strong case that CSI’s Administration should not result in a [...]

  5. Steve Grant said

    John,

    You’ve called it the same as me with the likelihood of a points deduction based on what’s happened so far (i.e. not likely at all), although obviously it wouldn’t be a proper Pompey story without a few twists and turns along the way!

    David Lampitt has apparently been quoted as saying that Antonov has personally injected £10.5m into Pompey since June – if that’s the case, it would seem to only be a matter of time before we start hearing stories of players being paid late or not at all, etc.

    • John Beech said

      Sadly for Pompey, the ‘twists and turns’ disclaimer has had to be appied to anything written about them for over forty years!

      What will be interesting to learn (if we ever do) will be how that £10.5m breaks down – infrastructure improvements (haven’t been to Fratton Park since CSI took over, but I would doubt much falls into this category), clearing debts (shouldn’t be the case) or sustaining unrealisticly high wages (again, shouldn’t be the case, but time will tell).

      CSI had been presenting an image of cautious and wise investment until this latest twist (or, probably more accurately, turn) which had largely been welcomed by fans. We shall see…

      • Steve Grant said

        I should clarify that it was actually Chris Akers who gave the £10.5m figure.

        Everyone’s favourite administrator has also said that he believes Pompey only have enough cash to survive until the end of the year, which clearly paints a very bleak picture, but I guess the question has to be asked as to why the club wasn’t reducing its wage bill in line with the CVA projections.

        According to the final CVA document, the monthly wage bill should have been down to £450k (about £5.4m a year), but that surely can’t have been achieved with the players still at the club. Ben Haim alone accounts for about a third of that figure!

        The FFP rules can’t come into play soon enough for my liking.

  6. I’m glad the points deduction issue has got such a clear, accurate airing here. The Pompey and Southampton situations struck me as different straight away, indeed there’s something in the back of my mind suggesting that placing Southampton Leisure Holdings in admin was designed to avoid a points deduction, although I’m quite prepared to be corrected on that before any lawyers get in touch.

    A thought also entered the front of my mind today – and quite disturbing it was too (hope there’s no kids reading). The first suggestion I read on the BBC website that a points deduction was unlikely brought out this terrorising combination of words: “Andrew Andronikou is right.”

    I’m feeling better now, thanks…

  7. Matt said

    I speak with an appreciation on the possibility of jinxing the situation (and hope I don’t have to eat my words) but it seems we should be safe from a points deduction. Notwithstanding the fact a combination of the Football League passed CSI as “fit and proper” to run the club in the first place (thus making a bit ironic to then deduct us points when it appears they didn’t have the requisite funding to do so) its a simple matter of Company law, as John has pointed out, from the Salamon principle, which means the club are a separate and distinct legal entity from the parent company of CSI.

    The football league has the precedent of the case at Southampton, however the difference there is that there were a number of factors which allowed them to say that the club were effectively the same entity as the company, to use their words “inextricably linked as one economic entity”, and in that instance then in effect the club were the same as the holding company. They then effectively said this meant the club was in administration (as the holding company was) and as a result incurred the mandatory points deduction.

    The fact that CSI is a parent company (and not a holding company involved just with the club) and has many other assetts means they are clearly distinct from us. The real issue comes if we cannot gain funding and get to the point where administration (again) is our only option!

  8. kski said

    Convers are undoubtedly underwriting the debt at PFC and covering some of the costs..

    But given the ownership has lasted 6 months, to declare the ocmpanies intirinsically linked would be a leap of lunar proportion.

    Moving forward how attractive is a club with Portpin haning around like an albatross, and £16m of CVA to repay? even with the £26m of parachute payment cash left.

    If PFC are trading outside the terms of the CVA and on a monthly loss, does that imply legal action? Also I imagine the FL would take a dim view of a club utilising the shelter of a CVA and then failing to stick to the terms?

  9. [...] Pompey and the potential for points deduction John Beech [...]

  10. [...] Pompey and the potential for points deduction [...]

  11. John Beech said

    In the absence of a purchaser emerging, the situation looks as if it will significantly change, with a ten points dection to be applied, as it is reported that HMRC are about to advertise a winding up petion against the company which is the club itself (1).

    • kski said

      John
      from the statements today, and the HMRC action, a points deduction would seem the least of the problems. AA has been unable to raise any funds form other “assets” suggesting they are worthless. Furthermore, PFC have engaged in hiring funded by CSI, and are unable to meet their tax committments without external support. Points deduction seems only logical.

      What I find slightly surprising is that PFC exited CVA with a clear fiscal plan, and a P & L over 5 years drawn up at great expense by AA. This seems to have been disregarded within 12 months.
      It cast credibility issues on the administrator overseeing the payments and the directors at PFC. One can see a Judge granting a small window of appeal in order to find a buyer, but their will be little empathy at the FL or the court.

      Clearly the clubs hand has been forced by HMRC. HMRC who were criticised last time round for failing to act swiftly and have their house in order. One can hardly blame them for being on the ball this time.

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