The long awaited judgment in The Commissioners for her Majesty’s Revenue and Customs v. Football League Limited, on the so called “football creditors’ rule” (the “Rule”) has been given.
This article only concerns itself with the issue of whether the Rule was or was not considered void on the grounds that it was contrary to the pari passu principle and the anti-deprivation rule and not on the fairness of the Rule itself.
The Rule operated by the Football League (“FL”) provides that in the event that a member club of the FL becomes insolvent then unsecured “football creditors,” including (but not limited to) players, other member clubs and the FL are afforded a super-priority for sums owed to them resulting in payment to them before all other unsecured creditors.
The Commissioners for her Majesty’s Revenue and Customs (“HMRC”) challenged the Rule on the basis that the relevant provisions of the Rule appeared to conflict with two fundamental principles of insolvency law, namely: (i) the pari passu principle; and (ii) the anti-deprivation rule. As a consequence of which, HMRC were unfairly prejudiced.
Both the pari passu principle and the anti-deprivation rule were considered in the case of Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Ltd  1 AC which also helpfully set out a definition of both principles: “the anti-deprivation rule is aimed at attempts to withdraw an asset on bankruptcy or liquidation or administration, thereby reducing the value of the insolvent estate to the detriment of creditors. The pari passu rule reflects the principle that statutory provisions for pro rata distribution may not be excluded by a contract which gives one creditor more than its proper share.”
HMRC argued that the Rule was an attempt to contract out of the insolvency legislation, in that: (i) the property distributed to football creditors’ should properly be made available for distribution to unsecured creditors pari passu, in accordance with insolvency legislation; and (ii) the provisions of the Rule are void and unenforceable as, in breach of the anti-deprivation rule, they allow for property to be removed from the insolvent club following the onset of insolvency, thus reducing the value of the insolvent estate which would otherwise be available for distribution to creditors.
Applying the facts, the Court ruled that in most circumstances the Rule will not be rendered void by the anti-deprivation rule or the pari passu principle. However whether it is rendered void or not will be decided on the particular facts of each matter. The Court declined to make the declarations sought by HMRC and concluded by saying “The FL should not regard the result of this case as an endorsement of its approach to football creditors. It is, as I said at the start, a decision on a challenge brought on a particular legal basis.”
It is fair to say, that the Rule has been the subject of some criticism. Before handing down his judgment, Mr Justice Richards stressed that “These proceedings are not concerned with whether giving priority to football creditors is socially or morally justified. The issue is one purely of law, whether the provisions which together accord this priority are void and of no effect on the grounds that they are contrary to insolvency law.” This point notwithstanding, whilst the decision has maintained the status quo it has not resolved the underlying issue of football creditors’ being paid in priority to other unsecured creditors and it remains to be seen what (if anything) HMRC does next.
The judgment also clarified a number of legal principles that are not related to football