Facts
HMRC's case
The Football League's response
Decision
Comment
In The Commissioners for Her Majesty's Revenue and Customs v The Football League Ltd(1) Her Majesty's Revenue and Customs (HMRC) sought a declaration from the court that the so-called 'football creditor rule' in the Football League's articles of association fell foul of two fundamental principles of insolvency law: the pari passu principle and the anti-deprivation rule. This would have been an important determination for HMRC, as it is common for football clubs to incur significant tax liabilities before they enter into an insolvency process.
The Football League is a company limited by shares. It has issued 72 shares: one to each football club that plays in the league competition. Ownership of a share is a prerequisite of playing in the competition.
The Football League's insolvency policy provides, as a starting point, that "no club should gain (or seek to gain) any advantage within the context of professional football over other clubs by not paying all its creditors in full at all times". Furthermore, it states that "it is not tenable to allow a Club to remain in membership of the League if fellow Clubs are not paid in full". The three main objectives of the insolvency policy are the survival of the club, the payment of football creditors and the protection of other creditors' interests.
On certain insolvency events, the Football League causes the withdrawal of the share that the club in question has in the Football League. This share is crucial, as it gives clubs the right to play in the league and receive related income streams. The Football League can suspend withdrawal on certain conditions, the central condition being the payment of the football creditors.
The Football League has substantial commercial functions and receives and distributes income derived from television rights, headline sponsorship and other sources. This income goes into a central account, known as the pool account, which is divided between the shareholders as consideration for the club's participation in the Football League competition. This money is paid monthly throughout the season on the basis that the payments are interim on account, but fall due only at the completion of a football season and can be withdrawn if, for example, a club fails to fulfil its fixtures. In the event of insolvency, the Football League may use money in the pool account - otherwise payable to the club - to pay the club's creditors, which leaves very limited funds available for the club's remaining unsecured creditors.
HMRC summarised its case as follows:
"Certain of the Football League's rules are expressly designed so that in the event of the insolvency of one of its member football clubs, a particular class of creditors known as 'Football Creditors' receive preferential treatment over ordinary creditors in breach of fundamental principles of insolvency law. This effect is achieved…through contractual machinery under which on insolvency a football club is deprived of valuable assets [the share held by each club and the accompanying rights to play in a league and obtain sums from the pool account]. As a result of the operation of these rules HMRC has suffered loss and will continue to do so."
HMRC alleged that the articles and the insolvency policy of the Football League are an attempt to contract out of the Insolvency Act 1986, and that they conflict with two fundamental principles of insolvency law:
- The pari passu principle requires the distribution among unsecured creditors of assets available in an insolvent estate on a pro rata basis. Parties cannot contract out of this principle.(2)
- The anti-deprivation rule renders void any attempts to withdraw an asset on bankruptcy, liquidation or administration and thereby reduce the value of the insolvency estate to the detriment of creditors. It applies only if the deprivation is triggered by insolvency proceedings, and the deprivation must be of an asset of the debtor that would otherwise have been available to creditors. Moreover, there must be a deliberate intention to evade the insolvency laws. In borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the anti-deprivation rule.(3)
HMRC therefore submitted that the insolvency policy:
- deprives the insolvent club of valuable membership of the league;
- deprives it of funds in the pool account; and
- creates a basis of distribution which does not accord with the pari passu principle.
The Football League's response
The Football League argued that neither the anti-deprivation rule nor the pari passu principle was offended. The Football League share held by a company in administration or liquidation has no value; therefore, neither rule can apply to its compulsory transfer. The Football League submitted that the club has no right to payment from the pool account until it has completed its fixture obligations for the relevant season. If it ceases to be a member before the end of the season, it is therefore not deprived of a debt or an accrued right to payment.
It was also submitted that the anti-deprivation rule and the pari passu principle arise only in the context of a distribution of assets in accordance with the act, and that a distribution does not occur in the case of an administration unless this is ordered by the administrator. Therefore, any arrangements that were completed before the administrator gave notice of his or her intention to make a distribution to creditors, under Rule 2.95 of the Insolvency Rules 1986, could not be invalidated by the two principles. Such arrangements could include payments to football creditors, which would therefore fall outside the scope of the pari passu principle and anti-deprivation rule.
The alternative argument put forward was that the Football League's articles existed for bona fide commercial and regulatory reasons. This would bring them into the category of sensible transactions entered into in good faith, which would mean that they did not infringe the rule.
The court held that the pari passu principle applies only if the purpose of the insolvency procedure is to effect a distribution. This would always apply in relation to liquidation or bankruptcy, as the purpose of these processes is to effect a distribution. It would not always apply in administration because the purpose of an administration is the continuation of the company. Thus, it was held that the pari passu principle applies in an administration only when the administrator gives notice of a proposed distribution.
The court held that in a typical football insolvency, the club would enter into administration and eventually make distributions by means of a company voluntary arrangement, which would not invoke the pari passu principle because no distribution is made by the administrator.
The anti-deprivation rule would apply from the onset of an insolvency process which would include both administration and liquidation, as the removal of an asset might equally hamper both processes. However, the court accepted that the dominant purpose of the Football League's articles is to take a commercial approach to a club's insolvency, as opposed to depriving that club of an asset, and accepted the aims of the insolvency policy.
In relation to payments from the pool account, the court held that although payments are made monthly, the legal entitlement to those payments arises only at the end of the season. This meant that where the club enters into administration in mid-season, in a typical football insolvency the funds from the pool account are not a company asset. In addition, the transfer of the share from the club to the Football League does not amount to deprivation as it is a mechanism by which the Football League maintains confidence among the parties that contract with it.
The judge found the detachment of HMRC's claim from the facts of any particular case difficult, as the arguments on the applicability of the pari passu principle and the anti-deprivation rule will vary according to circumstance. There would be cases where the rules would be invoked, but the court felt unable to make the declarations sought.
The court had some sympathy for the morality of the football creditor rule, but saw no justification for applying the anti-deprivation rule widely, so as to interfere with arrangements between companies. The point of wider significance is the ruling that the anti-deprivation and the pari passu rule apply at different points in the insolvency process; the pari passu principle will apply only where a distribution is made.
For further information on this topic please contact Rebecca Birkby at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (rebecca.birkby@rpc.co.uk).
Endnotes
(2) British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 758.
(3) See Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383.
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