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Sheffield Wednesday Points Deduction: A Legal Analysis

The latest article for The Legal Pitch is written by final year LLB Law student Toby Newton-Dunn, and supported by trainee solicitor of Hogan Lovells, Blaise Salle. The piece discusses in detail Sheffield Wednesday’s recent EFL point deduction following a breach of spending rules. The club had included the sale of Hillsborough stadium in their 2017/2018 accounts to avoid the penalty, but with the sale taking place almost a year after the final date for those accounts, Wednesday were unable to persuade the EFL that a binding contract to sell the stadium was in place during the relevant accounting period and were handed down a 12 point penalty, later reduced to six on appeal.


On July 31st, the EFL announced in a statement that an Independent Disciplinary Commission (the Commission) had ruled that Sheffield Wednesday would receive a 12-point deduction for breaching the League’s Profitability and Sustainability Rules (P&S Rules), taking place from the beginning of the 2020/21 season. This was after the club were found guilty of exceeding the “Upper Loss Threshold” of £39m over a three-year period, by incorrectly including profits from the sale of Hillsborough in the club’s financial statements for the period ending July 2018. This article explains:


  1. why the EFL came to this decision;

  2. why Sheffield Wednesday were found not guilty of another charge relating to good faith; and

  3. the potential reasons behind the initial points deduction being halved after an appeal by Sheffield Wednesday.



The first charge - breach of P & S Rules


P&S Rules (previously known as Financial Fair Play rules) state that clubs are allowed to make a loss not exceeding £39m over a period of three seasons. The rationale behind this was to ensure that football clubs were not spending beyond their means and, in doing so, to prevent them from falling into financial difficulties which may threaten their long-term survival.


‘The Owls’ decided to take full advantage of a loophole - which the likes of Aston Villa, Reading, Birmingham City and Derby County had already done - to sell their stadium/training ground to their owner for a profit. As a result, Wednesday sold their stadium, Hillsborough, to club owner, Dejphon Chansiri, for around £60m resulting in the club making a £38m profit and staying within the threshold set out in the EFL’s P&S Rules. In November 2019, a charge was brought by the EFL against Wednesday due to the timing of the sale and lease back of the stadium as it should not have been included in their 2017/18 accounts. We will explore the reasoning behind this decision in this article.



Why would Chansiri buy Hillsborough?


Sheffield Wednesday were heading into deep financial trouble in 2018. Their difficulties in complying with P&S Rules were due to losses incurred over the previous three year period dating from 2015/16 to 2017/18 before including the sale of Hillsborough.


Without the sale of Hillsborough, Wednesday would have exceeded the £39m threshold imposed by the EFL by approximately £18m, as shown below, by losses incurred.



Chansiri had set up a newly incorporated company, Sheffield 3 Limited, to finance the purchase of Hillsborough, but records from Companies House and the Land Registry showed that Sheffield 3 Limited was registered as a newly incorporated company on June 21st 2019, the same day that Sheffield Wednesday’s 2017/18 accounts were filed, yet it was not until a week later that the sale occurred. The issue was that the sale was accounted for a year later than it should have been, which would mean it would have been too late to include in their 2017/18 accounts and consequently, would have breached the said P&S Rules.


In December 2019, Chansiri announced at the club’s fans’ forum that Wednesday had breached the £39m threshold imposed by the EFL by an eight-figure sum (at least £10m), but for the same accounting period for 2017/18, Wednesday were showing a pre-tax profit of £2.6m. This raises two questions:

  1. First, if Hillsborough had been sold, why did Chansiri fail to announce this news at the fans’ forum?

  2. Second, in 2019, why did the Land Registry still show Sheffield Wednesday as the owners of Hillsborough if it was sold during or before the 2017-18 season as stated in their accounts?

(Image courtesy of FootballFanCast)


The verdict explained


Wednesday were found guilty of the charge relating to breaching P&S Rules for including the sale of Hillsborough in the club’s financial statements for the period ending July 2018. As established, the sale itself was not the issue, but the fact that the sale occurred after this date denied any chance of Wednesday escaping a guilty verdict. In the official 51 page decision released by the EFL, the Commission discovered that “nothing was done to put in place any kind of agreement for the sale of the stadium by midnight July 31st”. It was therefore clear that Sheffield Wednesday had missed the July 31st deadline. However, they had revived the plan that they had previously been discussing with the EFL - the sale of Hillsborough - as early as April 2018.


It was later decided at a meeting at EFL HQ that providing the club’s auditors were happy to accept a backdated document for an unconditional agreement to buy Hillsborough, the process of the transaction could be included in the 2017/18 accounts. The club claimed this was done on the basis of an agreed deal before July 31st, but not completely signed off. As it transpired, the Commission found that this was irrelevant as Wednesday and the EFL were wrong as a matter of law. It was a matter of fact that the deal to sell Hillsborough was never signed off, which resulted in Wednesday’s argument that the contract existed before July 31st being unsuccessful as the contract was in fact entered into after July 31st.


This is because on the basis of the complex nature of this case, a verbal unsigned agreement would not provide sufficient evidence to prove an intention to create legal relations between the parties due to the sale being of such high value (£60m) and being a transaction involving the transfer of land. Instead, it would be expected that all the necessary terms and conditions would be expressly documented for all parties to see and rely upon. Therefore, this oral agreement at EFL HQ was not sufficient to prove a legally binding agreement had been arranged. Paragraph 65 of the Commission’s Decision states that the club’s auditor would not have accepted the inclusion of the sale in the 2017/18 accounts had he known that there was no legally binding contract.


The key point here is that the Heads of Terms (typically setting out the commercial terms of a contract agreed in principle only), which Wednesday were trying to argue reflected a pre-agreed oral contract were not signed until after the financial year had ended, did not set out the consideration (price) for the purchase with sufficient certainty, and therefore could not have been accounted for in the 2017/18 accounts.



The second charge - breach of utmost good faith


The second charge relates to whether Wednesday had purposely intended to mislead about the timing of the sale of Hillsborough to the EFL in order to comply with P&S Rules. This was a more serious allegation and if found guilty, Wednesday would have faced an even more severe punishment in addition to their 12-point deduction over questions regarding their financial integrity. However, fortunately for Wednesday, the Commission dismissed the charge due to a “high threshold” of evidence required to satisfy the offence and to prove that the club had acted dishonestly.


The collation and review of evidence regarding both charges was a lengthy process, which could be argued as the principal reason for the delay in the Commission reaching its decision; it includes arbitration between the club and the EFL. Moreover, all timings were determined by the Commission and as a result of the volume of accounting and audit documents, alongside the issue of a global pandemic, the development of proceedings was slower than usual. Wednesday maintained the position that they had “sought to engage with the EFL in order to agree a sensible procedure to resolve the dispute” after they provided evidence to indicate that the sale had been ratified by the EFL. This undoubtedly boosted Wednesday’s chances of a not-guilty verdict, not to mention the fact that individual charges against Chansiri, former chief executive Katrien Meire and finance director John Redgate were dropped; an early sign of Wednesday’s confidence in clearing their name on this charge.


By providing evidence of the ratification of the sale and active cooperation with the EFL, Wednesday’s escape from a guilty verdict was assured. We have already seen the EFL charge other clubs, such as a 30 point deduction to Luton Town in 2008-09 season, for serious breaches in relation to financial irregularities and, if found guilty, Wednesday could have seen a similar penalty imposed on them, severely damaging their chances of survival in the Championship for this season.



Why was the 12 point deduction awarded at the beginning of the 2020-21 season, and not at the end of the 2019-20 season?


The rules around Profit and Sustainability are less explicit than those, for example, surrounding insolvency and administration. According to Appendix 5 of the EFL Regulations regarding Financial Fair Play, Regulation 8.4 states that:

  • 8.4 Where the Disciplinary Commission imposes a points deduction:

  • 8.4.1 During the Normal Playing Season, the points deduction shall apply immediately;

  • 8.4.2 Outside of the Normal Playing Season, the points deduction shall apply in respect of the following Season such that the Club starts the Season 0, minus the points that they have been deducted.

It is clear that there is no requirement that any sanction relating to breaches of the P&S Rules should be imposed in the same season as they were charged, notwithstanding that this season has exceptional due to the delay of fixtures as a result of COVID-19, prolonging the season to August 2020 (usually the month in which the following season would begin). In a typical year, the date at which this verdict was announced on July 1st would have been close to the start of the new season.

When comparing these rules to those of administration, Section 3(12) of the EFL Regulations regarding “The League” states that:

  • Subject to the provisions of Regulation 12.4 below, where the Club becomes subject to or suffers an Insolvency Event, or the Board impose a deduction in accordance with Regulation 12.2:

  • 12.3.1 During the Normal Playing Season but prior to 5.00pm on the fourth Thursday in March, the points deduction shall apply immediately;

  • 12.3.2 During the Normal Playing Season but after 5.00pm on the fourth Thursday in March, Regulation 12.4 shall apply.

These guidelines make it clear that if a club enters administration before the end of March, the sanctions must be imposed during the playing season in which the club becomes insolvent which explains why Wigan Athletic were deducted 12 points midway through the 2019-20 Season which resulted in their relegation to League One. This diminishes any claim for legal action that Charlton Athletic may take after their relegation to League One on the final day of the season, after it was announced that Wednesday’s point deduction would take effect from the beginning of the next season. Had the points deduction been imposed during the previous year, Wednesday would have been relegated to the benefit of Charlton, who would have remained in the Championship, but given the rules do not specify whether the sanction must be imposed in the same season as the charge, Charlton’s chances of a successful claim after an initial complaint to the EFL are seemingly low.



Derby County - a comparison


In January 2020, Derby County were charged with breaching the EFL’s P&S Rules in relation to losses incurred over a three year period exceeding the permitted £39m threshold imposed by the EFL. The club had sold its ground, Pride Park, to their owner Mel Morris for around £80m. The £80m sale allowed the club to stay within the maximum loss threshold of £39m over a 3 year period, recording a pre-tax profit of £14.6m for the accounts submitted in 2017-18. The club had the stadium independently valued but the EFL valued it lower, at approximately £50m, meaning that the club was still in breach of the P&S Rules.


The charge relating to the valuation of the sale hinged on the meaning of the “fair market value” of Pride Park with the EFL’s chartered surveyor Roger Messenger and Derby’s expert Christopher Honeywill both agreeing that the correct metric to be used should be its “depreciated replacement cost” (DRC) which is equivalent to what it would cost to rebuild the stadium if it burnt down minus, in Pride Park’s case, 21 years of wear and tear from its opening in 1997 to its sale in 2018.


This is where the dispute begins to unfold. Messenger believed Pride Park was “bog-standard” and “not almost Premier League” standard that the club had previously claimed, comparing Pride Park with the likes of Chesterfield’s Proact Stadium and Morecambe’s Globe Arena resulting in an estimated cost per seat of £2,500. He also took into account Derby’s average attendance instead of actual attendance which was rejected by the Commission.


Honeywill, for the most part, agreed on the valuation Derby used from property firm JLL in 2018 amounting to an estimated cost per seat of £3,500 after two previous inspections. The panel went in favour of Honeywill since he had actually consulted with builders which added credibility and reliability to his valuation. The Commission eventually reached a sum of £83m resulting in the overturning of a guilty charge.

Although on the surface there are similarities between the cases of Derby County and Sheffield Wednesday, the differences between the two become quite apparent after exploring the details. Despite the two clubs being charged for breaching P&S Rules, the matter of the breach is quite contrasting and the fact that Derby had an independent firm value Pride Park on more than one occasion strengthened their case for acting properly and in accordance with the P&S Rules. In Wednesday’s case, no amount of cooperation with the EFL could absolve them of the fact they had breached the rules by accounting for the sale of Hillsborough in the wrong year. This mistake on the part of Sheffield Wednesday was inevitably costly.



Land law fundamentals - contractual requirements for the sale of land


As above, the key issue in this matter was whether the profits from the sale of Hillsborough could properly be recognised as income in Sheffield Wednesday’s 2017/2018 Annual Accounts. If this was not the case, Wednesday accepted that its losses over the three year accounting period preceding the sale would have been in excess of the threshold permitted by the P&S Rules.


The Commission accepted that a valid open contract for the sale of land or an interest in land is possible, citing Alexander Kuznetsov v Camden London Borough Council [2019] EWHC 805 (Ch). However, the Commission disagreed that the Heads of Terms upon which Wednesday were relying on to form an open contract, could be understood to constitute such a contract.


The essential fact is that the Heads of Terms were not signed until after 31 July 2018. No agreement for the sale of the stadium had been concluded prior to this. As a matter of English law, any oral contract for the sale of land is void.

The auditors of both Sheffield Wednesday and the EFL agreed that if the Heads of Terms had no effect as at 31 July 2018, the sale of the stadium and any profit arising from its sale should not be included in the financial statements for the period ending on 31 July 2018.


Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale of an interest in land “can only be made in writing and only by incorporating all terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.” A major problem for Wednesday’s version of events was that the Heads of Terms did not constitute the specifically enforceable contract envisaged by the 1989 Act.


Therefore, the Commission did not accept that the Heads of Terms represented a legally binding contract for the sale and purchase of Hillsborough and so could not be included in the 2017/2018 accounts.


As the Commission recognised, this was a very unhappy scenario from which there are some lessons to be learned. With a significant number of EFL teams currently facing serious financial difficulties and the COVID-19 pandemic all but eliminating matchday revenues, this may be one of many cases of the EFL enforcing point deductions for breaches of their regulations. One might assume that given the unprecedented circumstances presented by COVID-19, the EFL might exercise some discretion when reviewing its constituent clubs’ finances, but given the recent rejection of Project Big Picture, this remains an area of great uncertainty.



Was a 12 point deduction an appropriate sanction? Or was the reduced six-point deduction following the appeal justified?


A 12 point deduction is the maximum penalty that can be imposed upon a club for breaching P&S Rules, which, at the time of the original verdict, could not have come as a surprise to Wednesday. English law would not be in a position to enforce an oral agreement on the sale of a football stadium for £60m, as the Commission decided that despite the fact the EFL and Wednesday thought they had reached an agreement, it was held to be insufficient to satisfy the P&S Rules. Also, during the proceedings, the club did not admit the charge or offer any explanation as to why the loss threshold was exceeded so significantly. Furthermore, the Commission expressed a desire for the punishment to be meaningful and fair. If the penalty had been applied to Wednesday in July 2020, they would have had no chance to save themselves from relegation, rendering the sanction disproportionately harsh.


However, in the written appeal verdict issued on the 4th of November, the appeal’s Independent Disciplinary Commission disagreed with the original Commission’s Decision to hand down a 12 point deduction on Wednesday due to the fact the club did eventually sell Hillsborough. It was noted that the points deduction due to the overspend was still warranted “in order to deter overspending by wealthy clubs and preserve the integrity of the P&S regime” (paragraph 114). However, they held, in paragraph 113, that: “the sale of the Stadium so close to the end of the accounting period was clearly relevant to the seriousness of the breach. Since the Disciplinary Commission failed to take into account a factor which was highly material to the assessment of the sanction, we do not feel constrained by its view as to the appropriate sanction.


The Independent Disciplinary Commission at the appeal was satisfied that the original sanction was disproportionate because the sale of the stadium was never considered, which is why they decided to reduce the initial 12 point punishment down to a six-point deduction with a guilty verdict maintained.



What next for the EFL?


This year has seen the EFL undergo lengthy disputes with two clubs, Sheffield Wednesday and Derby County, which has seen both clubs and the governing body fork out thousands of pounds on legal costs during one of the biggest financial crises following the severe economic effects of COVID-19. It could be argued that the EFL should provide more certainty surrounding the sale of training ground and/or stadiums to owners to avoid issues like this again in the future at a time when clubs are fighting to recover from the several losses incurred, especially as so many clubs in the EFL rely on matchday revenue and without fans in the stadium they are struggling to survive financially. If there was more certainty surrounding these problems, the EFL would not have to take legal action and instead could prioritise assisting clubs that are going to financially suffer in the upcoming years.


In addition, the Commission detailed some recommendations for the future:

  • Clubs and owners need to understand timelines set by the league for compliance with P&S Rules as it is unfair on some clubs that “clearly established” deadlines expire and then for retrospective efforts made to rescue the position.

  • Evaluate the language of the rulebook in relating to proving dishonest conduct on the part of the clubs. At the moment clubs are obliged to conduct themselves in regards to the league’s rules with “utmost good faith” which is too difficult to prove and hard to define. The league needs to spell out what it means.


(Image courtesy of FootballLeagueWorld)


What next for Sheffield Wednesday?


At the time of writing, Sheffield Wednesday currently sit 23rd in the Championship with only Derby County below them. After sacking Garry Monk, Chansiri had to look for a new manager whose capabilities would ensure Wednesday’s survival, which is why the owner looked towards Tony Pulis - a manager who is yet to be relegated. His direct style of play might not be pleasing to the eye, but Pulis has a good record of turning teams into winning sides quickly when they most need them. Notably, he took over at Crystal Palace when they were six points from safety in 2013 and got them out of the relegation zone by February when they eventually finished 11th in the Premier League. At this point, Wednesday fans will just want to score points on the board to keep them in the Championship and cannot be too critical about the new style of play if they can start scoring more goals and tightening their defence, an area in which Pulis’ teams have been renowned for. Wednesday managed to pick up 4 points before the international break and after the points deduction was halved, they now find themselves four points from safety with 32 games remaining, with Pulis yet to pick up a win after his first three games in charge.


Now that the matters regarding Wednesday’s off-pitch related activities are resolved, the appointment of a new manager can be the beginning of a new chapter in the club’s history. Now is the time to get a positive feeling around the team, the supporters and the owner and there is no better way of doing so than by getting a few wins under their belt. Pulis undoubtedly has a huge task on his hands, but his arrival may have come at the right time to do just that.




This article was written by Toby Newton-Dunn, supported by Blaise Salle, and edited by Adam Smith.


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