In this article Catherine Forshaw from our Sports team looks at the issues which led to the collapse of two long standing rugby union clubs, and legal support that could help ensure other clubs are better protected against similar threats.

The year 2022 ended under a dark cloud for professional rugby union in England.

The widely publicised financial troubles of both Wasps and Worcester Warriors, two of the rugby union’s longest standing professional clubs, has highlighted the potential financial crisis facing the game as a whole.

Not only did their collapse lead to immediate suspension from play, relegation and financial oblivion, the additional impact of the collapse was the loss of hundreds of jobs for employees, financial loss to local businesses who rely on match day spending and the emotional toll on supporters.

These developments have resulted in a call for financial and governance reforms to secure the future of the professional game, which have been further compounded by the recent release of the Report by the Digital, Culture Media and Sport Committee (‘the Parliamentary Report’), which commented that the financial situation of Premiership clubs is “clearly unsustainable”.

If the media is to be believed, 2023 looks set to present further financial instability and cost of living increases across the board. It is therefore vital that English rugby union teams take the opportunity to learn from the mistakes made by their unfortunate predecessors and give themselves the best chance of financial survival.  

Is Covid-19 to blame for financial instability?

RFU clubs, in particular, are heavily dependent on match-day sales for revenue. This revenue stream was effectively severed between 2020-2021 due to the closure of stadiums to the public, effectively reducing match-day income to zero.

Whilst no doubt the pandemic had a significant impact on rugby clubs, as it did across many sectors, it would be too easy to point to the Covid crisis as being the only cause of their financial woes. 

The fact is that rugby union clubs have been reporting losses for many years.

The average annual loss for clubs in the Premiership was roughly £4 million per club in 2018-2019, well before ‘Hands, Face, Space’ and ‘next slide please’ became well-worn phrases.

Research into Premiership clubs in 2017 identified a significant disparity between wage spend and the likely cash flow available as a result of turnover between 2006 and 2015, and this was despite the introduction of a salary cap in 1999. For example, Wasps were found to have spent 103% of its income on wages alone in 2014, indicating financial mismanagement rather than the impact of external market factors such as Covid-19.

The total debts of Premiership clubs in October 2022 were said to be over £500m, albeit including the £112m owed by Wasps and £28m owed by Worcester. Of those debts, some £36m relates to deferred tax debt, showing increasing reliance on delaying payment to HMRC to keep clubs afloat.

When compared to the total revenues of Premiership rugby clubs (in 02018/19) of approximately £220m (an average of less than £20m each), the signs of an unsustainable model are there.

The salary cap is clearly also something that impacts on profitability. The ‘senior ceiling’ is £6.4m per annum and most clubs operate within a few percentage points of this ‘hard’ cap. It is notable that the salary cap is a blanket figure across all clubs and is not determined by individual club turnover. Whilst that may assist in maintaining a level sporting playing field, from a financial management perspective there is danger in such a system.

What Mistakes were Made?

Wasps

On 18 October 2022, Wasps’ holding company entered administration. The Administrators’ progress report, released on 2 December 2022, identified that it was necessary to make all 168 employees of the club redundant, leaving Rugby Creditors’ debts (as defined by the RFU regulations) totalling approximately £3.4 million. Whilst the administration was predominantly blamed on legacy debt and issues following the purchase and move to Coventry, the failure to properly address these issues, leaving significant Rugby creditors also underlines systemic failings.

It is abundantly clear from the sobering report that the failure of the club had significant adverse effects on a wide range of businesses and individuals who financially relied upon the club’s success.

Less publicised knock-on effects of the administration were the redundancies of players and staff of the affiliated netball team and the uncertainty surrounding Coventry City Football Club which groundshare the Coventry Building Society Arena (“CBS Arena”) with Wasps. The three operating companies for the CBS Arena which were bought by Wasps in 2014 were also placed into administration with only £1,201 in their bank accounts combined.

The companies have since been bought by Mike Ashley’s Fraser Group for £17 million. The Fraser Group served an eviction notice to Coventry City in December and will likely attempt to negotiate a more favourable commercial agreement for the use of the ground, potentially to the detriment of Coventry City.

At the time of writing, however, hope has emerged with the sale of the club’s intellectual property, history and memorabilia to a consortium of Wasps’ former players being approved by the RFU with confirmation that they will be playing in the Championship next season, at an as yet unspecified Midlands location.

Worcester Warriors

The trading entity for Worcester Warriors, WRFC Trading Limited, appointed administrators on 27 September 2022. The Administrators’ progress report for Worcester tells a similar story to Wasps, with debts of over £30 million owed to HMRC and the government relating to Covid-19 support loans.

More alarmingly, the Parliamentary Report unleashed a scathing criticism on the clubs’ owners and the RFU:

‘One of the most striking facets of the problems at Worcester Warriors was the lack of due diligence undertaken regarding its owners, particularly Colin Goldring.’

It also commented that the finding of the Solicitors Disciplinary Tribunal that Mr Goldring “failed to act with moral soundness, rectitude, and steady adherence to an ethical code” was not enough for the Rugby Football Union (RFU) to intervene and end Mr Goldring’s ownership of Worcester Warriors.

The owners of Worcester have denied any wrongdoing whilst the administrators have carried out investigations into potential wrongful trading.

Additional issues highlighted by the Parliamentary Report included the lack of communication and transparency between the club and its players. It is noted that the players were often paid late, meaning players were forced to rely solely on contractual provisions to enforce payment as a regulatory system to protect players from late payments from clubs does not currently exist.

The sale of the club to a consortium under the name of Atlas Worcester Warriors Rugby Football Club Limited (“Atlas”) is currently being progressed. Atlas is headed by Worcester’ former CEO, Jim O’Toole.

What lessons can be learned?

It is clear both from the political, commercial and media post-mortem of the failures of Wasps and Worcester Warriors, that too little action was taken, far too late for them to have any real chance of survival. There were significant areas of mismanagement in the case of both clubs, but beyond that there are clearly some systemic and regulatory issues to address.

Whether that regulatory review will happen with any effect remains to be seen. The underlying theme of Premiership owners having to support their clubs to the tune of an average £4m per year is not sustainable, with the fragility of the model being brought into sharp focus by the recent failures of Worcester and Wasps.

To avoid a repeat of these incidents, it is hoped that the RFU and Premiership Rugby listen to the findings of the Parliamentary Report and invoke changes to governance and regulatory regimes to prevent a repeat of what has been a sorry chapter for Rugby Union.

The recent news from Premiership Rugby that they have appointed Sir Nigel Boardman, one of the country’s leading experts in corporate governance, to lead a review into the ‘financial position of all Premiership clubs and the subsequent translation into financial regulation’ is certainly a positive sign. It is hoped this will lead to systemic, sustainable change to enhance the governance of the game as a whole.

In the meantime, it will be up to the individual clubs and their owners to adhere to rigorous and sustainable revenue models, ensuring they do not overreach their finances in a desire to achieve their sporting dreams and take (sometimes hard) decisions that protect the future of the clubs at the relevant times.

How Brabners Can Help?

At Brabners we have extensive experience in assisting our clients during difficult times and equipping them with the expertise and strategies to maximise their position, whether that be on behalf of the clubs, players, suppliers or regulators.

Some examples of how we can assist you with these types of issues include:

1. Employees can not only be a club’s biggest assets, but also their biggest liability. We recommend that regular reviews are undertaken in order to ensure that your workforce is working as smart and as hard for the club as possible. This may include retraining staff to carry out multiple roles, providing additional flexibility, and also introducing new initiatives such as agile working in a bid to keep unnecessary costs to a minimum.

1. In many cases, employees are also lifelong fans of the club, and may be willing to share the responsibility, which the club endures tough times. The benefit of open communication with the workforce cannot be underestimated and should be used to its full potential.

1. We can help review your contractual position and understand your rights and obligations, often looking to negotiate new or updated terms of payment or service provision. We can also help you manage your debt profile and engage with creditors to seek agreement on repayment plans.

1. We can advise clubs, their directors and employees about potential insolvency options, their ramifications and risks, as well as liaising with insolvency professionals to ensure you are receiving the best advice and protection available.

Whatever the legal issue, we support our clients with the best advice, whenever they need us. Whether in good times or bad, we will stand with you as a partner in action and get the job done.