David Conn: Cold reality for Sheepshanks' model Ipswich

Overspending, relegation, transfer-market collapse and ITV Digital débâcle prove a financial disaster for Suffolk club

David sheepshanks, the chairman of Ipswich Town, would probably not like a bedtime read of his own words in the club's 2001 annual report.

In it, he glowed about the team's fifth place finish in the Premiership "among the most successful seasons in the history of the club" and a financial result – £2.5m profits, income of £31m – "the best ever recorded". George Burley, the Tractor Boys' manager, had defied expectations with his young, industrious side and was named Manager of the Year. Sheepshanks was "delighted" that Burley had accepted "a lucrative, new five-year contract". The chairman paid tribute to all the club's staff "on and off the field on whose skills and commitment the club were heavily dependent". For steering the club to these heights, Sheepshanks himself was paid for the first time since becoming executive chairman in 1995 – and he gave "sincere thanks" to his fellow directors for his first pay package: £388,000, which included a bonus of £250,000.

Those accounts were delivered proudly to Companies House in February 2002. Just a year on and Ipswich are relegated, insolvent with debts of £45m, 18 staff "across the board" have been laid off, George Burley has been sacked and must now line up with St John Ambulance, the local council, the bank, Inland Revenue and all other creditors for payment of the three-and-a-half years left on his contract.

This week, John Barnwell, the chairman of the League Managers' Association, floated the idea of clubs being relegated if they go into administration. "That would seem very harsh," he said, "but clubs avoid paying what they owe by going into administration and we need a stronger deterrent." There was no bonus for Sheepshanks in 2002; his pay packet shrank to a mere £141,000.

On Monday, announcing that Ipswich had filed for administration, Sheepshanks said the directors had "acted responsibly", applied "careful husbandry" and would not have acted differently even with hindsight. "We have," he said, "been beaten by circumstances utterly beyond our control."

These do amount to a formidable list: the collapse of the transfer market, implosion of ITV Digital and, most damagingly, the "sheer scale of the gap between Premiership and First Division income". Given that the average Premier League club will receive £25m from television this season, as much as all 72 clubs in the Football League combined, this is the most destructive structural fault in the English game. Relegation, Sheepshanks said, means financial ruin, and he now knows. He said he hoped that Ipswich's collapse, following administrations at Barnsley, Bradford City, Queen's Park Rangers and Leicester and serious financial problems at Derby, Coventry, Sheffield Wednesday, Nottingham Forest and others, would finally provoke a meaningful debate about the need to share money more equally and reduce the inequality institutionalised by the 1992 breakaway by the First Division clubs from the Football League to form the Premier League.

But Sheepshanks did say he accepted responsibility for the board's judgement, and Ipswich's collapse has been spectacular. In the 2001 report, relegation and the possibility of returning to the Football League is not mentioned. Ipswich's promotion in 2000, via a 4-2 victory over Barnsley in the First Division play-off final, followed by the fifth-place finish in 2001, was a football good-news story. The Suffolk club, always fondly regarded, flouted predictions with Burley's combination of young players, such as Richard Wright, Titus Bramble and Jamie Scowcroft, alongside shrewd signings, including Marcus Stewart and the captain Matt Holland.

Sheepshanks, an old Etonian, the owner of the mayonnaise-makers Suffolk Foods and one of football's new-model chairmen, enjoyed a starring role in BBC2's The Men Who Changed Football, itself a homage to the Premier League breakaway. He talked at length about a five-year plan to revolutionise the club after the 1995 relegation, to improve public relations, concentrate on youth development and build for a long-term future.

Advanced as a general solution for all clubs, it worked, balanced by the occasional sales of youngsters such as Kieron Dyer, Scowcroft and Wright, when the time and price was right. But, after their first season in the Premiership, last year Ipswich seemed suddenly to mutate into big spenders, paying a record £15m on a procession of players, mostly foreign, including the Nigerian striker Finidi George, bought for £3.1m from Real Mallorca, and the goalkeeper Matteo Sereni, who cost £5m from the Italian club Sampdoria. The club's wage bill doubled to £17.6m in 2001, then swelled to £24m last year.

On the final day of last season, Ipswich were relegated. If there was a Plan B, it was the same hope as that of all other relegated clubs: to sell some players. But the transfer market had collapsed. Sheepshanks, interestingly, contradicted the confident noises coming out of the Premiership by saying the root cause was uncertainty over how much BSkyB would pay for the next Premier League TV deal in 2004.

Transfer windows, in August and January, work in favour of buying clubs by restricting the time clubs can offload players, and although Ipswich sold Titus Bramble to Newcastle for £4.7m last August, Stewart to Sunderland for less than £1m and managed to loan out Sereni and Ulrich Le Pen, Holland declined a move to Aston Villa, the sale of Hermann Hreidarsson fell through and Marcus Bent and Martijn Reuser refused to go out on loan.

Sheepshanks this week said the individuals "showed their belief in the club by preferring to stay", but the fact is that players' contracts are protected whatever the financial mire their club is in and the redundancy of 18 staff on ordinary wages has barely dented Ipswich's huge wage bill.

Burley was sacked last October and, while negotiations continued on a settlement for him, the club continued to pay his salary while also paying the new man, Joe Royle. Sheepshanks said the directors' policy was to back their manager's judgement on players, and he described the fatal spending spree as "investments our manager wanted to make". He added: "Even with hindsight, I doubt whether the board would have deprived the manager of the day with funds for new players of his choice to consolidate Premier League status."

Norwich, their local rivals, reacted to the loss of ITV Digital income with a share issue which has raised £2.5m, mostly from ordinary supporters, but, when Ipswich were relegated, their financial position was too precarious to do the same. Last month, Jamie Clapham was sold to Birmingham, six squad players were released, but "careful husbandry" in the football casino has its limits. On Monday, Ipswich accepted they were insolvent and filed for administration. Sheepshanks said the debts were effectively those stated in the 2002 accounts: £45m net, which includes a £6.6m bank overdraft secured on TV monies, £2.9m in other bank loans, £3.2m owed to other clubs for transfers and a £25m Bond, secured on 25 years of season-ticket and matchday-ticket sales, with annual interest alone running at over £2m.

The job of Nick Dargan, of Deloitte and Touche, who was also the administrator of ITV Digital, is to agree a Company Voluntary Arrangement with the club's creditors. Bluntly, they will be asked to accept less than what they are owed – 10p in the pound has been the norm at the 13 other football clubs in administration in the last year, with, perhaps, the promise of more if the club is promoted. As ever, the ordinary local businesses, suppliers and public services will be the ones left unpaid. St John Ambulance confirmed this week that they are a creditor. The players and other clubs are protected and must be paid in full if Ipswich are to remain in the Football League. Sheepshanks said this week he "felt the pain" of the creditors and that it was "very sad".

Somewhat bafflingly, given that the administrator has a legal duty to inquire into the management of an insolvent company, Dargan said on his appointment that "it is clear this is a very well-run club with an excellent existing management team." Sheepshanks is clear in his intention to continue and is a director of the Football League and on the main board of the Football Association. There, he maintained this week, he will "make the case for action" to tackle the gulf between the Football League and the Premiership. The Premier League, he said, resists sharing the money more equally because the status quo suits the biggest clubs. But most clubs have an interest in seeing sense: three of them drop every year and, on current form, relegation means administration.