When a football club is in administration, the typical headline grabbing question is whether millionaire footballers should be paid their wages in full whilst a St John's Ambulance may only get pennies for a debt they are owed? Although framed in a rather blunt manner, clubs, football authorities, fans and in particular HMRC have all had their say on the controversial football creditors’ rule (‘the FCR’). The below article examines (with the fewest Latin phrases possible) what the rule is, why some deem it unfair and the latest court battle involving HMRC and the football authorities.
Insolvency is essentially where a company is deemed unable to pay its debts. When a company becomes insolvent an administrator or liquidator is appointed to manage its affairs. UK insolvency law ranks the company's creditors accordingly. The FCR essentially re-orders such established priorities in favour of the football family. It thus gives preference to players and clubs over the tax man.
When a Football League (‘the FL’) club in England experiences ‘an insolvency event’, the FCR provides that football related debts, i.e. those owed to ‘Football Creditors’ (e.g. FL, players, and transfer fees owed to other clubs) are prioritised ahead of other debts, i.e. trade creditors, suppliers and HMRC. The FCR sets out that such debts must be paid off in full or clubs can face severe sanctions imposed by the FL, such as points deductions or league exclusion.
The FCR was implemented not by Parliament but by the FL. HMRC does not believe football clubs should be treated differently to any other UK business that has to observe the priority order applied in insolvency law. Ultimately, HMRC believes that whenever the FCR is applied the public purse is disadvantaged to the benefit of footballers and other football clubs. Indeed, the recent government response to the Select Committee Report into Football Governance stated that it had
“sympathy for those who described the consequences of the rule as ‘morally indefensible’.
The beginning of Justice Richard's judgment in the present case sets out the stark reality of what administration means to those creditors outside of the football family. Whilst football creditors were paid in full during the recent Crystal Palace and Plymouth Argyle administrations, other creditors received 2p and 0.77p in the pound respectively. Justice Norris in the 2010 Portsmouth FC case stated that he understood the
"disquiet from the creditors, who [may] wonder why they should subsidise the club’s wage bill and only get back pence in the pound for the services they have provided."
All out Attack – The HMRC Position
This case brought to light two long standing insolvency law principles: ‘pari passu’ distribution and ‘antideprivation’. The first states that all assets belonging to the insolvent company must be distributed to its creditors in a manner proportionate to what is owed. The second voids any attempts to reduce assets belonging to an insolvent company to the detriment of any creditor. HMRC submitted that FL Rules contradicted these two principles. HMRC also contend that the FL’s rules were a deliberate attempt to give football creditors preferential treatment above those creditors of the same class under insolvency law.
A Case for the FCR: Stability, Community and Supporter Interest
Those that defend the FCR point to the fact that clubs operating within FL are inter-related businesses with debts due to each other. If one creditor, particularly HMRC, successfully challenges the FCR, then one club not paying its transfer debt to another club may lead to knock-on effects which may be to the detriment of the league as a whole. If multiple clubs then fall into financial difficulty because of clubs defaulting on transfer payments and other obligations, the integrity of the FL competition could be under threat if numerous clubs were not able to fulfil their fixture obligations.
The FL Defence
The FL disputed HMRC's contention that their regulations breached either the pari passu and antideprivation rules. They argued that a FL club is not entitled to any commercial or broadcasting money unless it completes its entire fixture list. If a club ceases to be a FL member prior to the season finishing (because it goes into administration), the club is not deprived of those monies as they would not yet be the property of the club.
The Full Time Whistle
A crucial fact that that the Court set out was that a club does not have an entitlement to receive payments from the FL (the Pool account) until it fulfils its fixtures (even if interim payments before the end of the season are made). The Court therefore concluded that if there was no asset (i.e. FL pool account revenues) that the club was entitled to at the date of administration or liquidation, both the anti-deprivation and the pari passu principles could not apply because:
- the club had not been deprived of an asset (antideprivation rule); and
- there was no asset to distribute at the time (pari passu principle).
Specifically the Court stated that:
“If an individual member club has no legal entitlement to payments from the Pool Account until it has completed its fixture obligations for the relevant season, it is not deprived of an asset if, as a result of going into administration or liquidation, it cannot or is not permitted to complete the season. Likewise, if sums from the Pool Account which would have been paid to a club if it completed the season are paid instead to football creditors following an administration or liquidation occurring before the end of the season and preventing the club from completing its fixtures, there is no asset of the club to which the pari passu principle can be applied.”
The Post-Match Fallout
There was obvious delight on the part of the FL in effectively having its rules upheld. Its spokesman stated
"The judgment confirms that The Football League's rules and insolvency policy do not breach the principles of existing insolvency law. We recognise that some regard the application of these rules as being imperfect. However, they remain an essential part of football's approach to handling insolvent clubs within the wider context of competitive league football."
HMRC were probably as despondent as a Spurs player without his Champions League bonus for the coming season despite finishing fourth.
"We are naturally disappointed with today's judgment. Our view remains that the football creditor rule is unfair to all other unsecured creditors who are forced to make do with much smaller returns - if anything - on monies owed to them by football clubs which enter administration."
Whilst many including HMRC believe the current FCR arrangements are inherently unfair, the FL's FCR has stood up to an HMRC challenge. Ultimately it remains to be seen whether there is an appetite for Government intervention and whether that may include legislation.
The full judgment text is available here http://www.bailii.org/ew/cases/EWHC/Ch/2012/1372.html and an excellent, in-depth piece on this judgment is available here http://www.lawinsport.com/articles/editors-choice/item/why-the-football-creditors-rule-is-here-to-stay.