With auditors issuing a stark warning, the club is paddling to catch up with money already paid out

Ever since Hull City’s financial results were published this month the club’s predicament has been the focus of bewildered head-scratching by keen watchers of football turmoil. The figures, for the year to 31 July 2009, look distinctly un-Portsmouth-like, even healthy: turnover at £51m, wages £34m, a £1m profit – a decent effort for any Premier League club – and bank debt down to only £4.6m.

Yet the club’s auditors, Deloitte, for the second year running slapped an alarming warning all over the accounts. City face a severe financial shortfall, they said: £16m even if they stay in the Premier League and, a much more severe prospect, £21m if they go down. “These matters represent a material uncertainty that may cast significant doubt over the [club's] ability to continue as a going concern,” was Deloitte’s stark judgment.

The key to the conundrum, between apparently flourishing finances and a forecast of doom, can be extracted from a headache-inducing scrutiny of the accounts, across four separate companies which now control Hull City and the KC Stadium.

Contrary to the impression given when Hull won promotion to the Premier League in 2008, the club’s new owner, Russell Bartlett, had not invested significant money into the club. In fact, £4.4m had gone out of the club and stadium company to Bartlett’s holding companies in loans, at least £2.9m of it towards helping him buy the club in the first place. A further £560,000 was paid by the stadium company to Bartlett’s holding companies in management fees and at least £1m was owed to him personally as a salary.

During that year, in fact until January this year, Bartlett had loaned only £1m in return, to the KC Stadium company from his own property company, R3 Investment Group. Then, following the first warning given by Deloitte in the 2007-08 accounts, Bartlett redressed the balance in January this year, lending the club a further £4m.

After City won promotion and tore tigerishly into Premier League life the former chairman, Paul Duffen, told the Guardian that Bartlett had “provided the funding” to get the Tigers up. That was taken to mean that Bartlett was a wealthy new backer who, after buying City from Adam Pearson and Pearson’s financial backer Peter Wilkinson, had ploughed investment into the club.

However, a close reading of the accounts for the club itself, the KC Stadium management company, and a holding company for each which Bartlett set up, establishes that he had not. The club financed a £7m increase to the wage bill in the Championship by making a £10m loss that season. Overall nearly £5m left the club to Bartlett and his companies, in two loan payments totalling £4.4m, and £560,000 in management fees.

Bartlett, who runs his property investments from offices in Shenfield, Essex, bought City from Pearson and Wilkinson in 2007 for a sum reported to be £13m. They had steered the club from administration and League Two to the Championship and a new stadium and were looking to sell at a profit and find a buyer who would provide new investment. There was then no debt on the club or the stadium, which City lease ultimately from the local authority, who built it with £43.5m of public money.

After Bartlett took over, the holding company he formed to buy Pearson and Wilkinson out of the stadium lease borrowed £3.4m from the Royal Bank of Scotland to do so. The stadium lease was mortgaged to RBS, Bartlett personally guaranteeing the loan. The football club themselves, still in the Championship, immediately paid out £3.2m as a loan to Bartlett’s other holding company, Tiger Holdings Limited.

Bartlett’s group company accountant, Andrew Redman, confirmed this week on Bartlett’s behalf that City paid that money out to help Bartlett meet his instalments to Pearson and Wilkinson. “£2.9m of the £3.2m paid by Hull City AFC to Tiger Holdings Limited formed part of the purchase consideration due to the previous owner,” Redman said.

That means the club’s own money, from fans buying tickets, and TV and sponsorship income, was loaned out for Bartlett’s use, to pay for him to buy the club in the first place. The KC Stadium management company, which makes its money from rent paid by the club, also loaned a further £1.2m to the stadium holding company, described in the 2007-08 accounts as “financial assistance”.

So £4.4m went out of Hull City and the KC Stadium company during the season to Bartlett’s companies in loans, but Redman did not explain what that £1.2m payment was for. The stadium holding company’s 2007-08 accounts also stated that it owed £1m to Bartlett personally. That, Redman explained, was Bartlett’s salary, saying: “There are no payments from the companies to RD Bartlett other than salary.” The club’s more recent accounts, for the year to 31 July 2009, record the highest paid director receiving a £1.035m package. Redman would not confirm whether that director was Bartlett. “Salary information is confidential,” he said.

In 2007-08 Bartlett’s company, R3 Investment Group, loaned £1m to the KC Stadium company, meaning that around £4m more had gone out of the club since Bartlett took over than he had put in.

After promotion had warmed hearts in an English game glazing over with billionaires, Hull borrowed £22m from a bank, Investec, to finance the signings Bartlett and Duffen wanted to have a go at keeping the club up. Investec took a mortgage on the TV money Hull were due to receive, and personal guarantees from Bartlett.

Here lies the reason why Deloitte slapped their warning over the club’s very future: Hull arrived in the Premier League having made a £10m loss in the Championship and having paid out millions to Bartlett’s companies. They then increased the wage bill by almost £20m, to £33.6m. The more recent accounts, to 31 July 2009, show borrowings down to £15m, suggesting that Investec reduced its loan by £7m.

So Hull are committed to paying Premier League wages but paddling continually to catch up with money already paid out. Although the debt is now down to £4.6m, with another £7m due to be borrowed, it has to be repaid in August and the wage bill must still be met.

Hence Deloitte’s warning that particularly if the club is relegated to the sparser TV climes of the Championship, it must find £21m extra to meet its liabilities, a “material uncertainty” about whether the club can “continue as a going concern.” After that warning was issued Bartlett provided the club with a £4m loan in January. That brought him and his companies about even, in money in and out since he took over at Hull. It is all rather different from the impression created when he took over from Pearson – now back at Hull to sort the club out – that Bartlett was the wealthy backer who would provide the investment to launch the Tigers into the

The Premier League was a ‘ridiculous ambition’ for the Tigers, who now face tricky decisions to secure survival

When this column reported in September that Hull City’s financial accounts for the year to July 2008 were significantly overdue, the club, run by its then chairman, Paul Duffen, responded with a statement on its website claiming that the article “contained a number of inaccuracies”. Neither Duffen nor anybody else at the club specified what these inaccuracies were supposed to have been and, since he resigned shortly after the accounts finally came out at the end of last month, Duffen has not returned calls to discuss them.

The financial reports came eventually wrapped in an apparently alarming warning about the state of the club, and the romantic tale of the Tigers, promoted to the top flight for the first time in their history in 2008, has been replaced with agonies over their future. Duffen himself maintained until he left that the club were not in financial difficulties, and said the delay in filing the accounts for all four Hull City-related companies – two responsible for the club, two for the KC Stadium – was due to caution being shown by the auditors, Deloitte. They had to consider whether the club have enough cash to “continue as a going concern”, and like all clubs, if relegated from the golden Premier League to the earth of the Championship, City would rely on selling players to balance the books.

Duffen said he was discussing the wording of the accounts with Deloitte, who he said were wary about accepting that sufficient money could be made from selling players, and, as it turned out, the auditors did insert a grim warning. They noted that in July 2007, just after the former chairman Adam Pearson sold the club to the Essex property investor Russell Bartlett, City had no loans or overdraft from any bank. A year later, the club had borrowings of £22m, and City faced: “The requirement to make full repayment of the current bank loans by July 2010.”

That produced the stark view that even if City survive in the Premier League, they need to make a £16m surplus through “player trading, match day and commercial income and/or through additional finance raising”. If the club are relegated, they need to make a daunting £23m surplus.

The accounts did include the doom-laden assessment Duffen had been keen to avoid, that the unpredictability of how much can be made from selling players, and whether City would be able to raise extra finance: “Represent a material uncertainty that may cast significant doubt over the company’s ability to continue as a going concern.”

Duffen argued that it would paint an unduly severe picture of a club which will report a £2m profit for the year to 31 July 2009, and neither he nor Bartlett said Duffen’s resignation had anything to do with the club’s financial position. Pointing to his part in City having achieved the “ridiculous ambition” of promotion to the Premier League, Duffen acknowledged that the team, with the signings made this summer, were struggling on the pitch and so he had to: “Take ultimate responsibility for the disappointments of 2009.”

Pearson returning last week to the club whose rise he oversaw from administration and the bottom division in 2001, to the KC Stadium and the Championship, immediately instructed accountants to itemise City’s current financial situation. They found the club’s bank borrowings had been reduced to £9m, which supported Duffen’s case that the finances were not running out of control. Pearson, though, has expressed alarm at the weight of an annual wage bill, for 41 players, which he says has grown to £36m, with a further £2m payable in appearances and bonuses, and £5.3m committed to be paid in agents’ fees.

Pearson has acknowledged emphatically that the club are not facing collapse, but said they are struggling to meet day-to-day commitments; Bartlett, he said, has put in additional money, the payments to agents and the club’s cash–flow need to be rescheduled and players will inevitably be sold in January.

“It is solvable and manageable, but it is a challenge,” Pearson said. “We need to get the wage bill down, and a large part of my job is also to attract additional investment to the club.”

Pearson added that Bartlett, who has kept a low profile since taking over, “continues to privately fund the club”.

Bartlett and Duffen met when both were looking to buy West Ham before Bjorgolfur Gudmundsson, then a billionaire, now ruined, bought the London side – and they teamed up to acquire Hull City instead. The accounts show Bartlett provided £4m for the club to spend, in return for preference shares, after he took over, an investment which bore fruit when City won promotion.

A complicated series of loans then took place in the year to 31 July 2008 which suggests that, overall, some money went back to Bartlett. Personally, and via one of his companies, R3