Leeds United will be allowed to begin the season, but the possibility of ending it with relegation to the fourth tier of English football looms, as last night the Football League deducted 15 points from the stricken giant for failing to find an acceptable way out of their financial crisis.

The League decided, for the first time, to use the “exceptional circumstances” provision within its insolvency policy to allow Leeds to compete in Coca-Cola League One this year despite breaching its rules on how to exit administration. But it punished the club with the points deduction for failing to comply.

“The Football League Board agreed that, notwithstanding the manner in which this administration has been conducted, the club should be permitted to continue in the Football League,” a statement read. Leeds have appealed against the punishment. The appeal will be held at a special meeting of all league clubs, at a time yet to be announced.

“We are delighted we are back in the league,” Ken Bates, the Leeds chairman, said. “We are surprised it has taken so long. We intend to appeal against the 15-point deduction because we have still to have an explanation for that.”

“The only good news is that we will be able to compete in the league, but the fans are bewildered by it all. It’s a recipe for relegation,” Ray Fell, the chairman of the Leeds United Supporters’ Club, said.

With the club in administration, creditors voted in June for a newly formed company headed by Bates, the former Chelsea owner, to take charge. He made an offer of 8p in the pound. But HM Revenue and Customs, which was owed £7.7 million, felt that was insufficient and challenged the Company Voluntary Arrangement (CVA). The case was due to be heard in September.

Fearing the club would fold in the meantime, KPMG, the administrator, put the club up for sale again. Bates’s new bid, offering up to 52.9p in the pound but without a CVA, was accepted last month but the Football League refused to sanction the deal because it was unhappy with the terms and wanted the CVA reinstated.

Bates’s company, Leeds United 2007, bought Elland Road and the players’ contracts, but not the player registrations. Until now, the League withheld Leeds’s right to enter this season’s competition, meaning that the club were unable to sign any players.

Their squad went unpaid for much of the summer and they do not have a fit goalkeeper on their books. Their first match, away to Tranmere Rovers, is a week today.

Leeds have been deducted 25 points in three months. Effectively already relegated to the third tier for the first time in their history, they went into administration with debts of about £35 million the day before their final match of last season. Duly deducted ten points, they finished bottom of the Coca-Cola Championship.

Leeds are the highest-profile victims of the League’s determination to punish clubs for financial mismanagement, which in the club’s case goes back to the days when they were in the Premier League and racked up debts of about £100 million in an attempt, as Peter Ridsdale, the chairman at the time, described it, to “live the dream”. The dream turned sour and a footballing decline precipitated a financial collapse from which they are yet to recover.