Ramshackle: Derby County’s costly FFP miss amid threat of relegation and liquidation

Derby County FC’s (Derby) fortunes have gone from bad to worse over the past year. Issues surrounding the club’s compliance with the financial fair play (FFP) requirements of the English Football League (EFL) have led to multiple points deductions as well as news of administration. Derby is now left in a relegation battle at the foot of the Championship table and reportedly teetering on the brink of liquidation. In this post, we provide a recap of the EFL v Derby proceedings and consider what it tells us about practical compliance with the EFL’s FFP rules, limitations exposed in the EFL’s enforcement as well as details of the ongoing administration procedure.

Recap: The Football League Limited v Derby County Football Club Limited

In January 2020, the EFL kicked off the saga with two charges against Derby under the Championship Profitability and Sustainability Rules (P&S Rules):

1. The first concerned the sale by Derby of Pride Park Stadium at a price of £81.1 million to its owner, Mel Morris, via a new company Gellaw Newco 202 Limited in June 2018 (First Charge). The EFL considered this price too high and not reflective of the Fair Market Value of the Stadium.
2. The second was that the club’s amortisation approach did not comply with Financial Reporting Standard 102 (FRS 102) (the EFL listed five alleged reasons) meaning that Derby’s accounts for the relevant years failed to comply with the P&S Rules (Second Charge).

In August 2020, an independent Disciplinary Commission (DC) found that the EFL lost on the First Charge. This was not appealed by the EFL.

With respect to the Second Charge, the DC only upheld ‘particular five’ of the alleged reasons Derby had failed to comply with FRS 102, namely that it had failed to adequately disclose the changes to its accounting policies and/or estimates in respect of the amortisation of player registrations (Particular 5). The EFL appealed this decision to the League Arbitration Panel (LAP). The LAP’s decision, published in May 2021, found that Derby, along with failing to disclose changes to its accounting policies, had also failed to amortise player registrations on a straight-line basis (in amortising, Derby had accounted for the possible resale values of players) (Particular 2).

The issue of sanction for Particulars 2 and 5 was remitted back to the DC. In June 2021, the DC: (i) reprimanded Derby; (ii) ordered Derby to pay £100,000 to the EFL; and (iii) effectively required Derby to submit revised and restated Annual Accounts.

The proceedings focused not just on the accounting treatment, but more notably on the lack of disclosure and transparency around it. While the DC accepted Derby’s accounting treatment, it found that Derby did not fairly disclose the change of approach. On appeal, the LAP’s characterisation was more scathing, describing Derby’s explanation as “at best confusing and at worst seriously misleading”.

Extra time, heading into penalties

The issue of sanctions presented a number of challenges to Derby, the EFL and the adjudicators. As the DC noted in its sanctions decision, the P&S Rules provide no helpful indicators for determining the correct sanctions to be imposed by the DC pursuant to the sanctioning powers provided to them under Regulation 92 of the EFL Regulations (i.e. there was no prescribed tariff or published guidance to assist). The DC therefore had to resort to general principles including proportionality, deterrence and the need to preserve public confidence. It also laboured over whether a sporting sanction such as a points deduction could be applied for these breaches.

The uncertainty over sanctions was not the only issue revealed in the EFL’s enforcement mechanism. It took 18 months from the time the initial charges were brought to sanctions being issued (with a sojourn through two unsuccessful procedural challenges brought by the EFL to seek a de novo hearing and tender new evidence on appeal). The LAP itself indicated that, whilst it sought to move as quickly as possible, it was hamstrung by scheduling difficulties and the need to deal with preliminary issues.

The prolonged legal battle meant that the futures of at least two clubs – Derby and Wycombe Wanderers – were mired in uncertainty between football seasons as both clubs awaited confirmation of which club was relegated from the Championship in the 2020/21 season. It led to the unprecedented situation of the EFL publishing interchangeable fixtures in advance of the 2021/22 season for the two clubs pending the finality of the sanctions.

Financial regulation in sport is rarely straightforward, but the dispute provides a helpful reminder for sporting bodies to ensure that rules are clear, and that swift and focused enforcement action is taken. A prolonged compliance and enforcement process risks being detrimental to all sporting stakeholders, including governing bodies, clubs (as well as their sponsors), players and fans.

Financial misconduct ⇨ sporting sanctions

The final whistle hadn’t yet blown on the end-to-end legal saga. While Derby escaped a points deduction through the adjudication process, its mounting financial issues and the outcome of the dispute with the EFL soon crossed the white line and stepped onto the pitch:

• Due to its financial irregularities, the club was placed under an EFL transfer embargo in the 2021 summer transfer window. This prevented it from making permanent signings, as well as imposing wage restrictions.
• On 22 September 2021, citing COVID-19 as the cause, Derby entered into administration. The EFL immediately imposed the standard 12-point deduction under Regulation 12 of the EFL Regulations.
• After submitting revised and restated Annual Accounts, Derby and the EFL agreed a further nine-point deduction for Derby’s breaches of the Upper Loss Threshold (as defined in the P&S Rules) for the three-year periods ending in 2016/17 and 2018/19 as well as the four year period ending in season 2020/21. That decision includes a suspended sanction of a further three-point deduction if, in the opinion of the EFL Executive, Derby fails to comply with a budget set by the EFL as well as the continuation of the existing embargo policy implemented in the summer transfer window.

Derby’s fight for survival – on and off the pitch

Derby agreed, via its joint administrators, not to appeal the 12-point deduction imposed as a consequence of entering into administration, taking the club’s total penalty to date this season to a staggering 21 points. Whilst it won’t provide much comfort to long-suffering Rams’ supporters, the club is not alone in falling foul of FFP rules and conceding a sporting penalty this season. The Championship’s Reading FC has also been deducted six points (with a risk of a further six-point deduction should it fail to comply with a business plan) for failure to comply with the P&S Rules. On the pitch, the Championship table tells its own tale – both sanctioned clubs are in a relegation dogfight.

Off the pitch, Derby’s joint administrators will together look to cut costs and find the club a new owner. Several parties have submitted “serious bids”. The joint administrators have continually emphasised that there is considerable interest in a purchase, potentially by the end of January 2022, and that the club will have a viable future. However, early indications are that any potential purchaser would need to foot a debt bill in excess of £50 million before any amounts are directed to rebuilding the club. This debt comprises:

1. several creditors, including £10 million to “football creditors” who must be paid in full before any other creditor and £20 million to HMRC which benefits from the preferential status afforded to it under the Finance Act 2020, among others; and
2. a number of footballing litigants who claim to have suffered on pitch consequences from Derby’s financial misconduct, including Wycombe Wanderers (regarding their relegation to League One last season) and Middlesbrough FC (after narrowly missing out on the Championship play-offs to Derby in May 2019).

With Derby’s future far from guaranteed – the Wycombe and Middlesbrough disputes are reportedly proving to be obstacles to a sale of the club – the EFL recently imposed yet another transfer embargo on Derby amid concerns it does not have the funds to finish the season. Following “positive developments”, crunch talks between Derby and the EFL about the club’s financial position were at least put on hold for now with Derby being granted an additional four weeks by the EFL to provide proof of funds as the search for a buyer continues.

Comment

Derby’s two-pronged fight for survival goes on. The combination of manager Wayne Rooney’s determination and Derby’s uptick in form might still not be enough to stave off relegation, but that may be the battle that Rams’ supporters are willing to lose if it means their club finds a buyer and survives the imminent financial threats that surround it.

Whatever Derby’s future, the saga should serve as a stark reminder to other clubs that potential sweeping sanctions (which in turn can lead to protracted, costly and reputationally damaging private legal disputes from other stakeholders) underscore the need for compliance with FFP rules so that off-pitch events don’t impact on-field performance.

Looking to the broader footballing horizon, the FFP tussle is likely to continue for clubs and governing bodies. With the lure of success, including promotion and silverware, clubs may well continue to test the boundaries of FFP to gain an advantage. For the same reason, governing bodies will continue to keep a watchful eye.

And a game-changing substitution may yet be imminent. UEFA recently changed the enforcement structure of its FFP Regulations and updated its procedural rules. The procedural changes are expected to be a precursor to substantive FFP rule changes, including a move away from the backward-looking ‘breakeven’ requirements and a push towards a more forward-looking focus on club wage levels and the scale of fees in the transfer market in the form of a luxury tax.

Whilst many will watch UEFA’s next steps closely, English football faces its own financial regulation conundrum. The Fair Game movement, comprised of a collection of EFL clubs, is pushing for responsible salary caps and an end to parachute payments. Meanwhile, in November 2021, the fan-led review of English football (led by Tracey Crouch MP) recommended an overhaul of existing financial regulation, to be overseen by a new “Independent Regulator for English Football”.

Whilst Derby fans may wince at the thought of their club’s future being debated in the House of Commons, financial regulation is likely to stay at the top of the agenda for years to come.

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