The taxman will have to ‘take a haircut’ and write off millions of pounds of debt it is owed by Derby County, if a deal is to be struck to save the Championship club.
The second-tier side are believed to owe around £28 million to HMRC, but sources spoken to by Sportsmail, say the taxpayer is unlikely to receive full payment if the club is to survive.
The actual amount the government would have to write-off in any rescue bid will depend on the deal the administrators and buyers can strike, but analysts have put the figure at £10m or more.
The problem for Derby is that the club’s total debts are far greater than its market value, and the taxpayer holds the lion’s share of the money owed, which all in is believed to be over £60 million.
Derby County’s administrators have already received ‘seven or eight credible expressions of interest’ in buying the club
One option is for the club to be bought and then the debts settled through a company voluntary agreement, which would see unsecured creditors offered 25 pence for each pound owed. However, through this route, a separate agreement would be needed with the taxman.
‘As it stands, the future hangs in the balance,’ said one source, who has acted for potential buyers. ‘And it depends on HMRC. Ultimately, it is a political decision. Derby is one decision away from going out of business.’
Of course, the Revenue has been forced to accept reduced payments in previous football club administrations.
But this one is different. It is the first one since HMRC’s preferential status as a creditor was restored.
Fed up with playing second fiddle to football creditors, such as rival clubs and former players, who are guaranteed full payment in an administration under EFL rules, the taxman reclaimed Crown Preference as part of the Finance Act 2020, which came into force in November.
Hence, the timing is awkward, to say the least.
‘It comes down to, ‘are HMRC going to cut a deal’? the consultant told Sportsmail. ‘Do HMRC decide to make an example of Derby? Or do they get a percentage of something rather than 100 per cent of nothing [if the club goes out of business].’
Senior figures within the game are now facing up to the possibility that Derby may not emerge from the financial ruins of its current predicament brought on by years of overspending in pursuit of promotion to the Premier League.
Some have suggested the club’s chances of survival may be as low as 50 per cent.
Critical to survival is how much a potential buyer is prepared to pay.
Establishing a market value of a football club is not an exact science, since there is always the possibility that a local benefactor, wealthy supporter or billionaire may step in and bail it out at well over the odds.
However, Derby has been on the market for the best part of two years with the same deal on the table for a potential buyer: Take on the debt and takeover the club.
Despite interest from Derventio Holdings and Spanish businessman, Erik Alonso, nobody has been prepared – or able – to do that deal.
Despite their troubles off the field, Derby are fighting hard on it with two wins and two draws in their last five league games – they sit bottom of the Championship on two points
‘Everyone in the market would have looked at this club and if they would not pay the money then, why now?’ said the consultant.
Derby’s market value is estimated at significantly less than £30 million, so the costs of taking it on need to be reduced to that level.
Analysts say this is based on comparisons with previous sales, such as Sunderland, which had a value of £30 million and Ipswich at £25 million.
And those clubs were more attractive propositions than the Rams, since they own their own grounds. Sunderland’s Stadium of Light has a capacity of 49,000 and Ipswich’s Portman Road, 30,000.
Pride Park is a fine stadium holding 33,000 fans but it is no longer owned by the club
Derby’s Pride Park, which stands like a cathedral in the low-rise regeneration of a former rail yard on the outskirts of the city, holds 33,000.
However, the club sold it in 2017-18 to another company owned by Mel Morris to raise funds to pay for players’ wages and balance the books in the promotion push.
The Rams’ situation is complicated by the status of its stadium, say experts.
Of the total debt, £20 million is owed to MSD capital and secured against the ground. As a result, MSD will have to be part of the solution to the club’s problems.
Under EFL rules, Derby will have to show security of tenure through ownership or a lease on the stadium for 10 years otherwise the sale will not be allowed to go through. Mel Morris has reportedly indicated he is prepared to sell the ground as part of any deal to save the club.
Leaving the problem of the stadium aside, the Rams still have a huge challenge to restructure the remaining debt.
Well in excess of £100m is owed to Derby owner Mel Morris in soft loans, and he will not be seeking a penny
Football creditors are thought to be owed about £7 million and are secured, HMRC (£28 million) has Crown Preference, which leaves a further £10 million or so owed to others creditors like kit and pie suppliers.
Those unfortunate firms may be forced to accept 25 per cent of what they are owed in any recovery plan.
Even so, with the cost of the administrators factored in (which came to more than £2 million when Wigan was in administration earlier this year), the remaining debts will still be in the region of £40 million.
Hence, consultants spoken to by Sportsmail are all of the view that survival will require HMRC taking a big cut.
One analyst says that if HMRC can be persuaded to accept £10 million less, then the cost of taking over Derby can be reduced to £30 million and a sale could take place, but it is still considered a ‘difficult deal to do’.
There is three months panic-free leeway, and beyond that the January transfer window will be open if player sales are required for further funding
‘That gives you an idea of the haircut HMRC will have to take,’ said the football consultant.
There are potential alternatives.
In another scenario, if a buyer (or benefactor) is willing to pay above the market rate for the club, HMRC may be persuaded to accept some money up front and then long repayment terms on the rest.
Another alternative method would involve a new company buying the club’s assets, including its licence to play in the EFL, and using third party funds to pay unsecured creditors and HMRC 25 pence in the pound.
Wayne Rooney’s side are bottom of the Championship on two points after a 12-point deduction following administration and another nine point deduction is likely for breaking financial rules
This would require the agreement of the EFL – or in other words the 71 other clubs – but if successful it would wipe £20 million off the HMRC debt. Opinion is divided on whether this is a viable option.
The administrators, Quantuma, struck a confident tone, when they were called in by former owner Mel Morris, almost two weeks ago.
Their aim, in the first instance, is to do deals to crunch down the debts and make the sale of the club more attractive.
‘I think there is a 95 per cent chance this will be restructured. Look, I’m confident,’ said lead administrator, Andrew Hosking.
The EFL chief executive, Trevor Birch, himself an accountant, sounded less bullish when he was asked by the media if he thought HMRC would accept less than the money they are owed.
Derby fans have rallied in support of the team, which is picking up points in the Championship
‘I share your scepticism that it will be a simple situation with HMRC,’ said Birch.
‘It’s the first administration since 2002 where they’ve had preferential status. It will be interesting to see how they vote in any (Company Voluntary Arrangement) or alternative exit route.’
Insolvency practitioners also share Birch’s concern over the position of HMRC and on Monday the administrators admitted to fan groups that the Revenue was the biggest challenge.
‘The change in HMRC status means it is harder to save a football club now, than it was before November last year,’ one debt specialist told Sportsmail. ‘It has always been difficult, but it has become even more difficult.’
EFL chief executive Trevor Birch is sceptical about whether HMRC will accept reduced payment
Whatever route out of administration that Derby County can take, the buyer will have to deep pockets, since as well as dealing with the debt, they will also have to show proof of funds in order to assure the EFL they can run the club for two years.
Derby County has been losing around £15 million a year. While the administrators are cutting costs – up to 20 staff have been made redundant in the last week and there will be more savings ahead – losses will continue and that will have to be factored in.
However the numbers shake down, they are eye-watering for a club that looks destined for League One following a 12-point deduction for entering administration and another nine-point cut looming for breaching the EFL’s financial rules.
‘Someone is going to have to knock on the door of the EFL [to show proof of funds] for around £40-50 million,’ said another insolvency expert, who specialises in sport.
The attractiveness of Derby lies in the possibility of reaching the Premier League, where the club’s potential value will sky rocket. However, Morris has already sunk £200 million of his own money into Derby in a bid to realise that dream and any new owner would be starting from a more challenging position.
‘The numbers we are talking about, why would you bother?’ said the insolvency practitioner. ‘You can buy a live club for that.’