When you read the papers do you start from the front or back? I usually skim read the front-page headlines and immediately flick to the back (sport) pages. It’s less dispiriting that way. Or if it’s the weekend, I fumble my way through the different sections, past the gazillions of adverts showcasing tyre inflators and hair loss treatments, before I land at the sports section. They don’t make it easy for you do those weekend editors.

Anyway, rewind to last week and The Guardian kindly informed me that seven out of ten English Premiership rugby clubs are now balance sheet insolvent. This was based on a report prepared by insolvency specialists, Leonard Curtis, with a foreword by former English rugby international, James Haskell. So, lots of weight behind the headlines.

But does it matter if these rugby clubs are balance sheet insolvent?

Potentially yes. Especially bearing in mind that the Premiership is already three clubs short – Worcester, Wasps and London Irish each having collapsed in recent years.

By balance sheet insolvent, we mean liabilities which exceed one’s assets. In other words, if the company (or club in this case) were put into liquidation today, there wouldn’t be enough money in its piggy bank to pay all its creditors in full. This contrasts with being cashflow insolvent – in other words, unable to pay one’s debts as they fall due – effectively, an inability to keep the lights on for perhaps a few days at most.

Many businesses and individuals (myself included when I was a student enjoying my £500 overdraft) find themselves in balance sheet insolvency. That’s especially likely to be the case if one takes account of long term (as well as current) debts, and contingent as well as actual liabilities. With exceptions for the likes of Apple and Berkshire Hathaway, there are relatively few businesses out there who can grow through acquisitions or investments without at some point incurring debt of some kind. Add in complicating factors such as inflation, taxes, rents, salaries and such like, and it’s not difficult to see how at some point many businesses may find themselves balance sheet insolvent. Most start-ups probably are balance sheet insolvent. But that can be a passing phase – for example, in the context of a start-up, there will be a longer term (and realistic) plan for returning to a state of balance sheet solvency and it is this plan which enables the directors to continue trading. The large volume of compulsory liquidations in recent years relative to some other forms of company insolvency supports the idea that it’s cashflow insolvency that is of greater concern.  

Many loan and commercial contracts often include insolvency-related default or termination events. Balance sheet insolvency defaults sometimes feature among these, but it would be a very unhappy bank or counterparty that chose to pull the plug on the relationship due to a balance sheet insolvency event alone. Often there would have to be something much graver – such as a payment default for example (which has the added benefit of being easily evidenced). 

When it comes to Premiership rugby clubs, one cannot lose sight that these exist for reasons that are difficult to put a value on. The sporting world has become ever more commercialised in recent decades on the back of lucrative TV and advertising deals. In the process, the distinction between club and business has often been blurred. Certainly, there are likely many more football clubs who are also balance sheet insolvent but are scraping by on the generosity of a wealthy backer. That’s the subject of a separate piece. 

To sum up, I’m not saying that being balance sheet insolvent is a non-issue. Certainly, it’s not ideal and something the directors and accountants need to keep a close eye out for – a measure of good financial health, of living according to one’s means and all that plus the all-pervasive need to comply with director’s duties. Clearly, balance sheet insolvency is important: otherwise, it would not be a gateway for entry to liquidation. All I’m saying is that it’s important to keep things in perspective, and being balance sheet insolvent doesn’t mark the immediate end of the road. Directors will need to carefully consider their duties when deciding whether to trade on. And the remaining Premiership rugby clubs might want to think about increasing their revenues.