How Lehman Brothers could shake football's financial world

Amidst news of Royal Wedding preparations and dissections of Mourinho's conspiracy theories, a really important piece of football news might have got missed today.

The news is that HM Revenue and Customs and the Premier League have permission to make written submissions to the Supreme Court for a hearing about the administration of Lehman Brothers. This might lead to the highest court in the land ruling on the legality of some of the key rules that come into play when football clubs become insolvent. If the Supreme Court finds these rules are illegal, it could well have a significant impact on the way football finance operates in this country.

To understand what is up for grabs here, you need to understand a little bit about one aspect of the Lehman Brothers administration, a little bit about the rules of the Premier League (and the Football League) and a rudimentary grasp of some 19th century case-law.

Let's start with the case-law. At the heart of all this is a principle of English common law, first set out in a case from 1880 called Ex parte Jay, in re Harrison. As far as I know, neither Jay nor Harrison played football to any particular standard, but their case is still relevant because it decided this:

An arrangement that has the effect of depriving someone's creditors of an asset that would otherwise be available to them on that person's insolvency is unlawful.

The principle decided in that case in 1880 is known as the anti-deprivation principle and it has survived, unchanged, from then until now. Or until Lehmans went bust, at any rate.

Lehman Brothers participated in a vast array of immensely complex transactions involving lots of sophisticated derivative products. Amongst these was a scheme set up to allow investment in government bonds. The scheme worked a bit like this:

• Investors lent money to a company set up specifically for the purpose of making the investment (the SPV). 
• The SPV used the money lent by the investors to buy government bonds.
• The SPV then entered into an agreement with Lehman Brothers under which Lehman Brothers agreed to put the SPV in funds to make a return to the investors. In return for advancing that money to the SPV, the SPV agreed that, when the government bonds matured, it would pay the money it received to Lehmans.

The key provision in the documents that set up the scheme is referred to as the "flip" provision. It was part of the deal between Lehmans and the SPV that, if the SPV went bust,  Lehmans (and not the investors) had first dibs on the government bonds held by the SPV. However, if Lehmans went bust, the effect of the flip provision was to reverse that position, so that the investors have first dibs on the bonds.

The Supreme Court is to decide whether the flip provisions is unlawful because it contravenes the anti-deprivation principle. The argument is that the effect of the flip provision is to deprive the creditors of Lehmans of the benefit of the government bonds upon the insolvency of Lehmans. Put another way, the flip provision is said to be unlawful because it takes assets away from the general body of Lehman's creditors and gives those assets to a particular group of creditors.

Which is where the rules of football come in.

Every one of the 92 league clubs in England and Wales owns a share in either the Football League or the Premier League. That share is the magic ticket that allows that club to play in the league. Without it, the club cannot participate in league competition. That's why it's often referred to as the "golden share".

Each football club is a separate company and the share is one of its assets. When a company goes bust, an insolvency practitioner takes over the running of the company's affairs, with a view to rescuing the company or selling its assets and paying the resulting proceeds to the company's creditors.

In a case where there is a viable trading business that has fallen on hard times, the usual approach is to put the company into administration and transfer the business and assets to another company. That leaves a shell company in administration, holding cash that the administrator can pay to creditors. The purchaser, meanwhile, takes over the business, as a going concern, free of the accrued debts (which stay with company in administration).

In the case of a company that runs a football club, the critical asset is the golden share, because that confers league status. No purchaser will buy the a football club business without the golden share, because without the share, the business is worthless.

The Football League and the Premier League have a number of rules that apply to transfers of the share by an insolvent club. The key one is the rule that says that no transfer can take place unless all "football creditors" are paid, in full. Football creditors include transfer fees due to other clubs, player wages and so on.

If it wasn't for this rule, football creditors would be no different to any other creditor of any other company. No different to the printers of the matchday programme, no different to the suppliers of pies, no different to HMRC. HMRC, in particular, think that this rule is unfair ... and unlawful.

Which is likely to be the thrust of their submissions to the Supreme Court. By analogy with the flip provisions with the Lehmans contract, the effect of the football creditor rule is to take assets away from the general body of creditors and give them to the football creditors. So, if the Supreme Court rules that the flip provisions are unlawful because they breach the anti-deprivation rules, the argument will be that the football creditor rule must fall too.

The effect of such a ruling by the Supreme Court could be seismic. As things stand, when one club deals with another over a transfer, the selling club has virtually no need to worry about whether it will get paid. Even if the buying club goes bust, it still has to pay the transfer fee in full.

If the football creditor rule falls, the selling club has no such security. Instead of the staged payments which are common now, clubs could well demand cash up front. With many clubs having borrowed against future cash-flow to fund trading, or with debts to service, that could lead to deflation in transfer fees.

Similarly, players would not be guaranteed to receive unpaid wages in full. It would become in the interest of players not just to get the highest wage, but also to be comfortable that the wage they receive is affordable by the club they're signing for. Wage demands might moderate and player might even renegotiate contracts, rather than risk losing money in an insolvency.

It could work the other way. Players might refuse to defer wages, forcing clubs into insolvency as the cash runs out. Clubs that have sold players and are reliant on the next instalment of the transfer fee might face ruin as the outstanding fee gets written or written down.

But what's possible is that, just like in other industries, caution and prudence might come to the fore. Living within your means might become more attractive than living the dream. It might require a little bit less money to own and run a club. The bursting of the Lehmans bubble might help bring football's feet back to the ground.

A panoramic picture of Kinder Scout

The other weekend, we took our two young boys up Kinder Scout for the first time. 

On the way down, to illustrate the route we took, I took three shots with the intention of seeing if I could make a panorama shot out them. Here's the result (using Hugin, which was really straightforward and did a top job). I'm pretty proud of it!

Andy Scott: first thoughts

Didn't see this coming. Apparently, it's too good an opportunity to miss, which sounds very exciting. Although, I wonder what made us suddenly go from "Liddell's in charge until the end of the season" to "here's the new manager on a three year deal" inside a fortnight.

His record's quite impressive. Inherited a Brentford side doing pretty badly under Terry Butcher and turned results around almost instantly, then took them up and kept them up. He also took charge of some impressive Carling Cup results, beating Everton and taking Birmingham to penalties. Before that, he was part of Martin Ling's coaching team, as Leyton Orient got promoted from the fourth division and then stayed up.

He's young, too, especially to have taken charge of nearly 170 first team games. He seems to have impressed a fair few other clubs in his time at Brentford, being interviewed for the Sheffield United job (whilst still at Brentford) before Mickey Adams took that particular poisoned chalice. He was linked, too, with the Barnsley job that eventually went to Mark Robins.

Indeed, much of the way he operates is reminiscent of Robins. Robins is a meticulous planner and the kind of manager who involves himself in the details of skills-based training sessions. Scott seems to have similar traits. That style of management (as opposed to the more lofty, swan-in-and-bollock "gaffer" style of Moore) seems to be increasingly successful, with the top three in League Two all having the younger, coach-as-leader style of management.

All of which offers hope.

However, despite his time as a player at Sheffield United, this is the furthest north he's operated for a while and ever as a manager or coach. A glance at his signings shows, as you'd expect, a heavy bias towards players and clubs drawn from the south of England. Will he find it so easy to convince the likes of Arsenal and Spurs to lend out youngsters with first team hopes (like Szczesny and Bostock)? Will players with roots in the south be willing to move to Yorkshire? Does he have contacts with clubs up here?

And what of his style? The two games between Mark Robins' Millers and Scott's Brentford were tedious, negative, cagey affairs, between two teams with a determination not to lose and little beyond that. The game at Don Valley, in particular, was awful, with Brentford consciously spoiling and wasting time from the off and keeping eight or nine players behind the ball at all times. Perhaps these were one-offs, but one of the criticisms levelled at Scott around the time of his departure from Brentford was the poverty of quality of play from the Bees.

It'll be interesting to see who makes up his back-room team. Sensibly (and again similarly to Robins), he had the experienced Terry Bullivant as his assistant at Brentford. However, where does that leave Liddell and Warne (who've come across well in their interviews and have clearly worked hard in their caretaker roles)? It would be a massive shame to lose them to the club, having given them valuable coaching and management experience. The ideal would be to have one or both of them alongside Scott: but does he need an "old head" to guide him? And, if so, would Bullivant, a man who's career (again) and life is London based (he was a London cabbie for a while), be prepared to relocate to join him as he pushes 60?

All in all, though, it seems a sound appointment. Like anything, it needs a bit of luck to work out (and we're not exactly the luckiest of clubs) and patience (which neither fans nor board have shown this season). Already some fans seem unconvinced, but then many were unconvinced at Robins' appointment ("the cheap option", "need an experienced man") and he turned out ok. Let's hope Scott can lay the foundations for success on the pitch for a change, and persevere with us to see it through.