Historic rugby club London Welsh was saved from collapse by a successful takeover on Monday but must start next season with a five-point deduction because of its financial problems.

The Rugby Football Union, which governs the game in England, imposed the penalty on the 124-year-old club but said it was satisfied with the takeover terms proposed by new owner Red Dragon Rugby Limited.

One of the two Red Dragon directors is Neil Hollinshead, chief executive of Saudex Global, an investment firm owned by a member of the Saudi Arabian royal family.

"London Welsh are once again solvent and so will continue to play in the (second-tier) Championship in the upcoming season," the RFU said in a statement.

The governing body insisted that Red Dragon pay about STG450,000 ($A915,000) to existing creditors and prove it could fund the club for at least two years.

Club shareholders and directors wrote off debts of STG1.3 million ($A2.65 million) in the takeover deal.

London Welsh overstretched its finances last season trying to build a team capable of promotion.

It will line up in the 12-team Championship division, where the top eight teams compete in end-of-season playoffs to decide which one advances to the top-tier Premiership.

The club was founded in 1885 by the Welsh community in London.

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