The indebtedness to HMRC is now behind us and best placed in that respect for many years. The Club has had a history of monies owed to HMRC long before the current management.
When we bought Vic Jobson's shares HMRC were owed circa £900,000 which, as part of our due diligence and meetings with the Revenue, we agreed to discharge over a period. It was probably well over a year before this was reduced to a controllable level and my recollection is that there has always been a balance outstanding which has ebbed and flowed from a relatively small amount, less than six figures, but which then built up to close to seven figures, as was the case in July 2008. At that time the Parent Company made a lump sum payment of some £660,000 on behalf of the Club and then over the following three months the Club paid a further circa £400,000.
At the time of purchasing Jobson's shares, in addition to the £900,000 owed to the Revenue, there was, as many supporters will remember, further indebtedness to Banks and second charge holders of over £3m. I also recall some nine court cases including Fairview Homes, which alone rose to a claim of £1.4m, not to mention Lapper, Murphy and Whelan each suing the Club for around £100,000 plus costs.
The total debt that we were faced with clearing at that time was therefore well over £5m. It is worth mentioning this and, in doing so, put matters into context as since that time the Club has operated its bank account in credit without an overdraft. The Club remains reliant on its Parent Company to discharge any excess expenditure or budget deficit.
Coming out of the Championship was expensive. Amazingly people still harp on about what happened to the Eastwood money - I suppose SUFC selling a player for real value is remembered. What is forgotten are the players bought who then leave either at low value or at a loss. Freddy was sold for £1.5m but it cost the Club £2.4m being relegated so using simple arithmetic we had an immediate budget shortfall of £900,000. As an ambitious club we wish to return to the Championship and accordingly maintained our commitment to the players and their wages in the hope that we would "bounce back" as they say in football. We did bounce, but only as far as a return match against Doncaster.
Our commitment to competing in League 1 with commensurate wages continued last season and many supporters would have read that we were the sixth highest wage paying Club in League 1. I suspect Leeds United and Leicester City headed the rankings.
Although Leeds commit a great deal to their wage bill you can see that it does not always mean success will follow for Leeds have remained in League 1 for three years to date. Nevertheless, it helps enormously and as a rule of thumb you can buy success in football.
I should say at this juncture that there is no way I would have continued investing to the degree that we have after coming out of the Championship if there were no prospects of moving to a new stadium. I have always had it in mind that the growth and upward spiral that we are wishing to achieve at Southend United is conducted in tandem with the relocation plans where the Club would be able to sustain that level of investment through improved revenue streams. That is not rocket science. The relocation plans were approved by Southend Borough Council and Rochford District Council, and were based on sound enabling development and a financial equation that stacked up.
As every supporter knows, these plans were approved in early 2007 but were Called In by the Government Office for scrutiny via a Public Inquiry by the spring of 2007. We did not get the green light until July 2008 for the stadium and September 2008 for the proposed supermarket at Roots Hall - some 20/21 months of literally treading water. Throughout this period we remained confident of a successful outcome and as a consequence continued to invest in the Club so as to not only maintain that growth pattern but with a strong desire to get back to the Championship with the quality of football and enthusiasm that brings for the Club and Town alike.
In support of that ambition we have by necessity invested in players and their wages to a level impossible to sustain at Roots Hall unless there is further equity investment i.e. cash. To have reduced our commitment to the wage bill and management we would most likely have seen ourselves slip back. The increased asset values associated with the stadium were now tangible and within reach and I said earlier enabling a sustainable position to be achieved including the prospects of continuing the Club's progress and growth further.
It would have been easy eighteen months ago to have sold some of our players, including Adam Barrett and Peter Clarke, to have recouped some of the expenditure and in doing so also significantly reduce the wage bill. I have previously mentioned that Peter Clarke alone, because we did not cash in on him, during his three year stay cost the Club a little over £1m. This is not a criticism of Peter. He was fully committed to the Club during his entire period but equally would not consider renewing his contract even a year before it expired and eventually left on a free transfer, refusing to discuss his future with any intent at Southend United.
There is another cliché in football where a player and his agent say to the manager and chairman "we wish to keep our options open". Another interpretation is "I will just wait and see who offers me the most money"… not always, but often.
In short, continuing our commitment to the Championship in successive years in League 1 meant that the debt to HMRC also grew and although the Group's asset value had increased more so the failure of the world banking system, which coincided with receipt of planning in September 2008, made the ability to underpin the Club's finances still further difficult. Football Clubs have always been "red sector" with Banks but this was compounded by the collapse of not just the UK banks but worldwide and as a result a huge reduction in property values in the commercial sector.
The majority of fans will be aware that housing prices in the UK have dropped circa 20% depending upon the region but in the commercial market i.e. retail and offices, values have been hit by in excess of 40% and even 50%. The combination of the banking collapse and the dramatic depression of property values stifled the ability to raise liquid capital either by way of bank facilities or disposal of assets and we have had to look outside the box (football vernacular!) to underpin the investment. As I said last week, almost inadvertently "HMRC Bank" was a stop gap.
During this period and first mooted in October 2008 the Football League were discussing with HMRC ways in which the football industry could be less indebted to the Revenue. It is nearly always the taxman to which clubs owe money, and Leeds United was perhaps the case in point that triggered a proposed change in the Football League rules surrounding the clubs' debt to HMRC.
Many of you will know that Leeds had debts of around £36m, which included some £7m owed to HMRC, but through administration and a CVA they ended up paying 11p in the pound and writing off approximately £31.5m. The Football League considered that this writing off of debt gave Leeds a very unfair advantage over other Clubs in escaping over £31m and as a result increased the minimum 10 point deduction to 15 points. At £2m a point I guess Ken Bates would have been content! Since that time, of course, clubs such as Luton have been hit by a 30 point deduction and have fallen from grace from the Championship in almost successive years to the Conference, decimating the football club and everything associated with it including, I suspect, the Town's reputation.
Some could argue that Southend could easily have escaped the £2m owed to the Revenue but that is not my way. I have always maintained that the debt would be paid in full and it was. Not just because I did not want the Club to lose 10 points but morally not paying our way does not sit comfortably with me. It is a case of credibility and whilst the press might dramatise the position by talking about "Southend nearing administration" or using such other emotive language to engender public response, the reality is I never intended the Club to go into administration, no matter what headlines were written this caused great unnecessary concern and worry to perhaps thousands of our supporters. Administration did not happen and if I had anything to do with it was never going to happen.
However, getting back to the point about the Football League rule change, Lord Mawhinney, the Chairman of the Football League, and the Chairman of HMRC, David Hartnett, were holding conversations and a number of consultation papers were distributed to Football League clubs as early as October 2008 eventually manifesting itself in a Football League change of rules on June 12th 2009. In the preceding 9 months there was always the expectation of the draft rule change being adopted and giving clubs time to meet their historic debt.
I attach a letter sent to all clubs during the consultation period [click here] from which you will read that it was anticipated and, as I say, expected that clubs would be able to draw a line under historic debt and be given a reasonable if not extended period in which to not only negotiate payment of historic amounts but also a reasonable period in which to discharge that debt. Para 6 highlights this point and I think all readers will agree that it was reasonable to assume the time to pay recommendation, which was adopted on June 12th, would apply. These provisions were put forward to enable all clubs to compete on a level playing field and avoid the Leeds United benefit. A position that I agree is eminently sensible.
Supporters would have read at the time that the rule change on June 12th was passed around midday and at 5.00pm the very same day we were issued with a Winding Up Petition for some £700,000. Was that a case of bad (or good) timing, or the right hand not knowing what the left hand was doing, or was there some Machiavellian activity at work … I do not know. I suspect it was the middle option and simply HMRC were carrying through a process.
If the Petition had not been issued on that same day as the change in rules of June 12th I suspect that recent events would have been very different. I believe we may have been able to negotiate payment of the Club's debt over an extended period to reflect the improved circumstances from which the Club would benefit as both the banking and property markets came out of distress and recession.
Whatever the situation, I know HMRC found it impossible to withdraw the Petition once issued and were committed to a course of action. It was not especially difficult to get an adjournment in July to allow more time for the Club to get its ducks in a row and a new date for a hearing was agreed by the Court on 28th October. Throughout the adjourned period there was, of course, dialogue with HMRC and there was an expectation that in discharging the petition debt (£700,000), which was planned, the residual indebtedness (which grew further from June to October) could be discharged over maybe 12 or 24 months in a timely manner to mirror what was expected under the new regime and the Club's Business Plan.
What was unexpected and caused consternation was the HMRC changing its strategy on the evening of 26th October, just 36 hours before the Court Hearing, in changing the plea from £700,000 indebtedness (£691,000 actually) to an administration order and in doing so sweeping up each last penny (we are still checking the correctness) and going back a decade with a claim of £2.135m.
Never before, in the knowledge of our lawyers and barrister, has anybody, let alone HMRC, moved from a Winding Up Petition to an Administration Order.
On the face of it, of course, Administration is a softer and more palatable position but to add over £1.4m to the debt with 36 hours notice was distinctly unpalatable.
Still, let's look on the bright side. They did, by statute, have to give us an additional seven days beyond 28th October to 4th November. I suppose it would have been more explosive had the postponement been on 5th November!
As every supporter knows, I worked furiously to discharge the new total indebtedness within the short time frame then available to avoid any adverse impact on the Club. We had to ask the Court for an extra 48 hours to put additional security and paperwork in place with our Bank and because our Barrister was unavailable on November 6th it was agreed this could roll over to Monday November 9th 2009. We completed the position mid-afternoon on Saturday 7th November and I can tell you the Parent Company's Bank worked tirelessly on our behalf in putting matters in place including through the night on Thursday 5th November enabling us to close all the documents on that part of the transaction at 11.00pm on Friday 6th November.
You can see it was all a finely balanced and an intense period but it is always nice to win, as against MK Dons (and Gillingham for that matter) in extra time!
To be cont...
Ron Martin
Chairman
