David Conn: Creditors call for investigation after Darlington escape administration

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Darlington Football Club somehow scraped out of administration this week, so maintaining a remarkable record: of the cluster of clubs which have collapsed into insolvency since the April 2002 plug-pulling of ITV Digital, not one has so far gone out of existence.

Darlington Football Club somehow scraped out of administration this week, so maintaining a remarkable record: of the cluster of clubs which have collapsed into insolvency since the April 2002 plug-pulling of ITV Digital, not one has so far gone out of existence.

The League was most worried about Darlington, which was still deadlocked until late last week, and the club's landmark escape was appropriately grim; the moneylenders the Sterling Consortium have taken over Darlington after releasing the former chairman, George Reynolds, from bankruptcy proceedings, a settlement greeted with protests from some creditors, who have been forced to accept almost nothing.

John Shannon, a director of Beacon Woodcraft, a joinery company owed nearly £50,000, has written to the football authorities, the Department of Trade and Industry and the Insolvency Practitioners' Association, claiming that the administration was "not properly conducted" and calling for an investigation. Shannon argues that the club and its new 27,000-seat stadium have, at just £2.5m, been sold for too little to the Sterling Consortium, and he is questioning the closeness of the relationship between the moneylenders and the administrators.

"We have lost money, probably our profit for the year," Shannon told me, "while these people have ended up owning the whole business. It stinks."

Hall Construction, a large company based near Darlington which built the stadium, is also contesting Tuesday's Company Voluntary Arrangement settlement, claiming that it offered £3.7m for the club back in February, but was told it was not enough. Stephen Hall, the company's managing director, told me: "We believe the administrator has undersold the club and not looked after the interests of all the creditors."

The administrator, David Field, has been adamant that he received no firm offers for the club other than the one from Sterling, and Hall told me his offer was verbal, not in writing.

Reynolds, the one-time criminal turned mansion-dweller estimated to be among Britain's richest men, has lost everything, having bailed Darlington out of an earlier administration in 1999, then built the club the brand sparkling new 27,000-seat stadium, at a cost, he said, of £20m. He had come into conflict with many of Darlington's 3,500 core of fans after saying publicly he would confront dissenters at their homes, and his sorry financial fall began when he ran out of money with the stadium still some way from completion.

In May 2002, Reynolds borrowed £2m from the moneylenders Melvyn Laughton, Sean Verity and Stewart Davies, partners in the accountancy firm BKR Haines Watts, who, as the Sterling Consortium, have lent at high rates of interest to other football clubs in crisis: Cambridge United, Scarborough, Barnsley and Chesterfield. Altogether, Reynolds told me Darlington borrowed £3.5m from Laughton, Verity and Davies, although the mortgage on the stadium is stated to be for £2m. Reynolds guaranteed that and also personally borrowed a further £400,000 from Davies, secured on Reynolds' County Durham mansion, Witton Hall.

Last December, Darlington collapsed into administration, and the Sterling lenders, as secured creditors, had the right to appoint an administrator, which they did: David Elliot. That appointment is the subject of complaint from John Shannon of Beacon Woodcraft, and Stephen Hall, of Hall Construction, because of Elliot's relationship with Sterling. Elliot was formerly an accountant at Laughton, Verity and Davies' firm BKR Haines Watts. While he was there, in August 2002, as the administrator of Carlisle United, he recommended to creditors that Carlisle should borrow £2m from the Sterling Consortium, spelling out that they were partners in his firm but saying: "The administrators ... have no direct connection with the Sterling Consortium."

Elliot has since left BKR Haines Watts. At Darlington, his co-administrator was David Field, who told me several weeks ago that Elliot was acting as a consultant with his firm, Wilson Field. On 10 February, Elliot ceased to act as Darlington's administrator, and David Field continued with another partner, Lisa Hogg. David Elliot now appears on Wilson Field notepaper as a director of the firm. Stewart Davies, one of the Sterling moneylenders, appears to have left BKR Haines Watts, but is a director of another finance company based in Barnsley, HW Sterling Plc. David Elliot was also a director of the company, alongside Davies, until 31 March this year, when Elliot resigned.

David Field has stressed throughout that, despite this inter-connectedness, there was no conflict of interest, a judgement he and David Elliot arrived at after taking detailed legal advice. He recently reiterated the view to the Football League board that this was the case. However, the League is understood to have written to the DTI expressing its concern about the administration. The Insolvency Practitioners Association is also currently investigating. "We take very seriously the need for insolvency practitioners to be independent and objective," a spokesman said. "If there is any suggestion that that principle may have been breached, we do investigate."

There would, perhaps, have been less unhappiness among creditors had the administration realised anything for their unpaid debts. Field has said that although there were consortiums expressing an interest in the club, he had no better firm offer than Sterling's £2.5m, which bought them the Quakers and the stadium. One of their first acts was to take down from the stand the letters GEORGE REYNOLDS ARENA, which Reynolds grumbled cost £63,000 to put up.

Reynolds' loans from Sterling provided that if he defaulted on a payment, all overdue amounts would be charged at 30 per cent annual interest. In March, Davies' solicitors, Cobbets of Leeds, wrote to Reynolds demanding possession of Witton Hall, citing the overdue amount as up to £5.9m. They also served a bankruptcy petition on him.

Reynolds' main bargaining chip was that he was a major creditor of Darlington, having sunk a great deal of money into the club, and his vote could block any CVA giving control to Sterling. The CVA and bankruptcy hearing were both due to be heard last week in a bleak crunch for the club. Ultimately, they settled; Reynolds told me that Sterling released him from his personal guarantees and withdrew the bankruptcy petition, and he allowed them to take over his Darlington shares and his vote in the club's insolvency. However, he told me they still took his home.

The CVA went through on Tuesday, with Shannon's company and Hall's voting against, along with others including the Inland Revenue, which will be distinctly unhappy at seeing a £461,000 bill unpaid by yet another defaulting football club.

John Shannon told me his company is getting half a penny in the pound: "We believe there could have been more for the creditors, and that Sterling's relationship with the administrator was too close. We want the authorities to investigate and we'll pursue it until we get an answer."

Davies has this week been rallying the fans, who are above all relieved they still have a football club - rattled, but still breathing. Sterling have appointed as the club's new chief executive Andrew Battison, an accountant who has described himself as a corporate recovery specialist, and was also a director of HW Sterling plc with Davies and Elliot, until he too resigned at the end of March.

Battison said this week he wanted to involve Darlington's 1,200-strong Supporters' Trust, and was offering them a seat on the board. Tony Taylor, the Trust's chairman, told me he was delighted the club looks to have a future: "We want to think and hear a little more about Sterling's intentions before we decide what to do ourselves."

As a symbol of lower division life over the last two years, the financial meltdown and supporter commitment, you cannot do much better than the sight of Darlington, owned by lenders of the last resort, offering a seat on the board to a supporters' trust. We have reached the end of the two years where Carlton and Granada's £185m ITV Digital money should have been, and while millions of pounds of creditors have been left unpaid by the national game and clubs have tottered, not one has folded.

The League insists the trauma has shaken most clubs into financial sanity; the "salary cap", in which clubs pay their players no more than 60 per cent of turnover, is to be extended to Second Division clubs next season, following a trial in the Third generally reckoned a success. Football clubs have proved themselves resilient survivors, but the stories behind that bald fact have been horrible at times, the clubs kept alive because the loyalty of fans means investors calculate they might get more money keeping a club going than putting it into liquidation. The season ends with 92 clubs intact; let's hope the game gets prettier from now on.