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DEPOR ON ADMINISTRATION

11 Jan 2013
The club presented the paperwork to the judge asking for the protection of the bankruptcy law after failing to reach an agreement with the Spanish Treasury. RCDLC.com explains the process of the so called “Ley Concursal”

On Thursday, Deportivo La Coruña asked for the protection of the Ley Concursal; it was already expected as on the past week president Lendoiro had a meeting with Judge Zulema Gento in order to settle the aspects of it. Gento is the same judge that successfully managed the case of RC Celta some years ago. The club isn’t officially in administration, but it will be in the coming days as soon as the judge accepts the petition.

Deportivo is making this move in order to skip the embargo of the Spanish Treasury that was suffocating the economy of the club, because as soon as the judge accept the petition she will lift the embargo over the incomes, which is extremely important as in the coming days the club is collecting €11 million as part of the TV rights, which represents the 25% of the budget for the season (€39.88 million).

For now the club is expecting for the acceptance of the petition and the designation of the administrator or administrators that will be responsible for the decisions made by the club during the process, this last point could take a couple of months. RCDLC.com explains in the next lines the meaning of the administration and the consequences for the club.

UNDERSTANDING THE ADMINISTRATION
Administration or Ley Concursal in Spanish is a legal figure created during the past decade in order to protect a debtor -a person or a company- that’s no longer able to face the debt generated by loans or the losses of past periods. The goal is to see the debtor paying their debts through a repayment plan or the liquidation of their assets. The process begins when the debtor asks for the protection to a judge or it can also be started when the creditors present the paperwork, something that can occur when they don’t see another way to rescue their money.

It doesn’t necessarily mean the bankruptcy, because this last term is used when the value of all the debtor’s  assets are below the indebtedness. There are two cases that lead to administration: the first one is when the debtor is facing a temporary insolvency situation caused by the lack of cash, and the second is when a debtor is unable to face a debt as its assets aren’t enough to cover the indebtedness.

The case of Deportivo is the first; at least it is what president Lendoiro has been defending during his public appearances. The indebtedness of the club according to the last financial report was €98.7 million, while the assets were valued in €117.5 million The goal of the process in the first case is to settle a new payment plan accepted by all the creditors, which could include an agreement in which the creditors lose part of their money as they forgive part of the debt; in the second the goal is to liquidate the assets in the attempt to pay the indebtedness .

In the first case it is possible that there’s no agreement between the creditors, and if this happens then the debtor is “liquidated” selling their assets until covering the indebtedness. This is the first dangerous crossroad on this process as the entity could disappear in this extreme scenario. Deportivo tried in the past two months to reach an agreement with the creditors in order to have this ‘repayment plan’ without the necessity of passing through the administration figure, but it failed, mainly as the Spanish Treasury, one of the main two creditors of the club, refused to accept Depor’s proposition of paying the debt in ten years.

Now, the negotiations start all over again, and the club will leave the administration figure when all the creditors sign a final agreement endorsed by a judge. So the debtor is goes to administration and leaves this figure through an order signed by a judge. This same judge names an “administrator” or “administrators” [between one and three persons] who will be the responsible of approving the major operations of the debtor, so the debtor loses control over their own assets and over the big decisions affecting their operation, which include signings and sell of players, after all the administrator respond to the interest of the creditors and not of the debtor. This administrator could even cancel the decisions made by the club in the past two years, but only if these decisions affect the financial situation of the club.

This has been a common thing among football clubs in Spain; actually ten of the twenty clubs currently at Primera already faced the administration at least once within the past decade: Malaga CF, Real Betis, Levante UD, Real Sociedad, Rayo Vallecano, Real Valladolid, Real Zaragoza, RCD Mallorca, Granada CF and RC Celta.

HOW WILL AFFECT DEPORTIVO?
It’s the question that everybody is asking and the true is that there is no response, at least for now. The experts in the subject say that every administration process is different as it depends of three factors: the internal situation of the debtor, the relation between the debtor and its creditors –as least the main ones- and the style of the administrator.

There are several positive examples, one of them is Levante UD, a team that that went into administration in 2008 after been unable to face a debt of €88.7 million, two years later they went out without many problems and today the Valencians are the sensation in la liga and in the UEFA Europa League. Another example is Real Zaragoza; in 2010 Los Maños went into administration with a debt of €103 million, just one year later they reported earnings of €20 million and never faced problems at the moment of making singings, which created a lot of protest from other clubs, Deportivo were one of them.

In the other hand, there are some negative examples. One is Rayo Vallecano, the Madrilenians remain at Primera after going into administration in 2011 with a debt of €80 million. But it has been a tortuous process as the administrator has made some controversial decisions, like suing coach Ramón Sandoval when he was trying to achieve the permanence on the past season or the sell operation of Michu to the Premier League at a very low price, the reasons for these controversial decisions were that the administrator was convinced that the coach was paid more of what he deserved on the campaign that meant the promotion to Primera, and in the case of Michu it was because he thought that the club needed that money. This and other decisions caused the exit of the coach and the fury of the fans and club’s officials.

There are other radical cases, like the one of Palencia CF, a club that began the current season competing at Tercera División, but that was liquidated in November after the administrator stated that the assets of the club weren’t enough to cover the indebtedness. The players and the coach were fired and the club no longer exists, leaving a blank space at group VIII of Tercera División.

IS POSSIBLE THE RELEGATION TO SEGUNDA?
This process won’t affect the competitive situation of the club; there is no deduction of points as it happens in other leagues and neither the demotion of the club for going into administration. The Spanish authorities are studying future sanctions for the clubs using this figure, but the point is that these sanctions are not yet in effect. The only way the club could face the relegation is if the coaches and players’ wages aren’t paid before July 31 and, of course, if the team ends among the last three places in the league.

However it has an effect at the moment of competing in Europe; the new UEFA Club Licensing and Financial Fair Play Regulations present a series of rules that include suspensions and fines in case of not meeting the requirements settle by the UEFA Club Licensing Financial Fair Play. In 2010, RCD Mallorca, club that at the time was in administration, was excluded from the Europa League after not fulfilling some of the stipulations, and this no matter they already had the license to compete in Europe. Currently Malaga CF have been excluded of any European competition for the season 2013/14 as they also failed to complete some of the financial requirements, and the Andalusians aren’t in administration.

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