David Conn: Six directors resign as Exeter plunge towards insolvency

Exeter City, with one boot on the Football League trapdoor, suffered another indignity this week when six directors resigned following a report by the Football Association's Financial Advisory Unit, which concluded that the club is insolvent and highlighted practices which the outgoing directors described as "deeply disturbing".

Uri Geller, who had been named as Exeter's co-chairman this season even though he was never officially registered as a director, also departed, along with his son Daniel, leaving the club in sole control of two men who arrived last summer: Mike Lewis and John Russell.

Lewis has had a long career on the business side of football, most recently as the commercial director of Swansea City, which he passed on for £1 to Tony Petty, a controversial Brisbane-based businessman. Petty was subsequently ousted and the club went into administration shortly afterwards.

Russell, a Yorkshire-based football enthusiast, was formerly the chairman of Scarborough when they were relegated from the Football League in 1999, and took them into a Company Voluntary Arrangement a year later with debts of £1.25m. In March 1999, Russell received a 15-month prison sentence, suspended for two years, after pleading guilty to obtaining £180,000 hire-purchase finance by deception.

This week Lewis and Russell came out fighting, saying the FA's report raised only "a few minor issues", that they were "glad to see the back of five of the six" former directors, whom they accused of mismanaging the club previously.

The report concluded that the club has made a net loss of £312,000 for the nine months to the end of March, owes £120,000 in PAYE tax and still owes Mowlem, a building company, £580,000, although £100,000 was paid last Monday.

The report was produced by the FAU, which sends accountants, not investigators, into clubs to review figures and company procedures provided for them by clubs' management. It recommended to Exeter's directors that, unless new sources of finance were imminent or they were prepared to fund the shortfall, they should seek advice from an insolvency practitioner. If a company continues to trade while insolvent, its directors can become personally liable for the debts they take on, and may be committing a criminal offence.

The six departing directors are understood to have complained about the absence of regular board meetings, a point noted by the report, and they were not prepared to fund a shortfall which they had never sanctioned. The report's warning of insolvency was the crucial factor leading them to resign.

Lewis admitted this week that the club is "technically insolvent", but said he and Russell were "fighting on".

"We have revised predictions showing the club has actually made an operating profit to the end of March," he insisted. "We also believe we can make a small profit next year if we stay in the League, or lose only £15,000 if we are in the Conference."

The report also highlighted further concerns. When Lewis and Russell moved down from Swansea and Yorkshire respectively, they said they would take no salary, but nevertheless work full-time to revive the club.

Very quickly, several staff left, including Ken Baker, a retired cashier and Grecians' fan, who for 17 years had been helping to cash up at St James' Park. The club's matchday practice was for gate money to be counted by two employees of NatWest Bank, and for Baker to hand it to Securicor, who took the takings to the bank. Shortly after Baker left, Lewis and Russell dispensed with the two bank cashiers, and stopped using Securicor. Now, they told me, Russell's wife Gillian, who is working full time at Exeter, counts the matchday cash. They either take it away or leave it in the safe, to be banked later themselves.

The FA's report strongly recommends that they re-employ a security firm to bank the money, questioning whether the club has sufficient insurance to leave cash around the offices. Lewis told me they have now changed banks, and do have plans to re-employ Securicor.

The report also said the club has problems accurately recording its attendances – an accounting worry as old as the professional game itself. At Exeter, some of the turnstiles are described as faulty, and so cannot reliably record how many people have come through. The club has also not included people arriving on corporate or hospitality packages, and Lewis admitted that the report suggested that counting methods could be improved.

"The FA is not suggesting there has been misappropriation of cash or understatement of attendances at all," he said. "But we need some new turnstile equipment and a way of counting in corporate fans."

Fans, and the directors, have been concerned about how Lewis and Russell could decamp such a long way to Exeter and work full-time without taking salaries. The pair have since said that they are taking "legitimate expenses", which includes a waterside flat paid for by the club. The report noted £10,000 paid out in directors' expenses, £25,000 in total rents, as well as £33,000 consultancy fees – which Lewis said were not paid to them but to commercial consultants. There is also a heading of "other expenses", not broken down, amounting to over £300,000.

Lewis said the expenses they are taking are modest, but the outgoing directors are known to be upset because no arrangement at all was authorised by the board. They said they had been relegated to the role of bystanders and decided to resign when they read the FA's report. Their resignation letter was handed to Russell and Lewis at the 2-1 home defeat to Bury last Saturday, which left the club three points adrift of safety having played two more games than their rivals for the drop, Shrewsbury and Carlisle.

The letter said: "We find the report, with its detailed comments and recommendations regarding the financial position and current management of Exeter City, deeply disturbing."

Lewis said he and Russell had previously taken some advice from insolvency practitioners, and had now taken further advice following the report: "The advisors asked us if we realised we were trading insolvently, and we said of course we did. Then they reminded us of our duties as directors, and set out the options we could follow: administration, CVA or liquidation. But we're battling on. Sixteen players are out of contract at the end of the season," he added, "and we will only re-sign half of them, reducing the squad to 18 next season. We can turn it round."

Lewis and Russell issued a letter last Saturday claiming that they had been given insufficient information on the club's debts before they took over, and that some of the club's contracts and commercial arrangements were poor. The outgoing directors have not replied, but are believed to be looking to force the issue and have Lewis and Russell removed.

Exeter have had a perilous scrap to survive not just this season but for decades. Despite a decent catchment area, the Grecians have always struggled for support. All the directors have personally made significant loans to the club, although it is unclear whether Russell and Lewis have too. The report notes they have put in £45,200 and £1,000 respectively, but suggests they have been repaid in full. Lewis said the loans were still outstanding and were higher than stated.

Uri Geller is understood to have loaned £5,000 for the signing of the striker Sean Devine from Wycombe Wanderers for a club-record £75,000. The outgoing directors are known to be outraged that the club signed Devine when in financial trouble, on a huge wage for the bottom of the Third Division: £1,600 per week plus £200 per goal.

Lewis and Russell have sacked two managers and two assistant managers. John Cornforth, who was popular with fans and has a benefit match on 14 May, and his assistant Sean McCarthy, went in October. Last month Neil McNab was sacked from his first management job along with his assistant, Gary Bennett. Exeter are struggling to pay off all four – and pay the new manager, Gary Peters.

Mowlem, the club's biggest creditor, has agreed to hold off taking any further action until the end of the season, allowing Exeter to finish their fixtures, for better or worse.

At the game's apex, Arsenal are gunning for another Double, the fourth in their history, third in five years. In the basement, John Russell is hoping to avoid a unique and somewhat less glorious double: the first chairman to steer two clubs out of the Football League.