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Football creditor rule under review

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19th May 2011
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IBB Solicitors' Funke Abimbola examines claims by HMRC that league rules governing the way football clubs clear debts are unfair.

When a football club starts a formal insolvency procedure (usually administration), its membership of or share in the league is suspended.

The suspension is not lifted (and the club remains ineligible to participate in league football) until certain “football creditors”, for example other clubs (transfer fees), players (salaries) and managers are paid in full. The remaining money is then divided between the unsecured creditors including HMRC who lost preferential creditor status when the 2002 Enterprise Act became law.

The rule applies irrespective of the position of any other unsecured creditors of the club. The rule is known as the “football creditor rule”.

Even where there is no formal insolvency, the league can use monies due to the club from central funds (including television monies such as revenue from broadcasting rights) to pay those football creditors. In an administration, leagues have been known to pay out image rights revenues to football creditors mid-season, effectively ring fencing those funds away from other creditors.

HMRC has been relentless in its efforts to force changes to the football creditor rule, arguing that by giving football creditors preferential treatment when football clubs get into financial difficulties, the football creditor rule offends the principle that all unsecured creditors should share equally in the assets of the company in proportion to the debts due to them (an application of the “anti-deprivation” principle). HMRC’s latest claim against both the Football League and the Premier League, which will be a direct challenge to the football creditor rule, will be tried at the High Court on 28 November.

There have been a number of recent high profile examples supporting the unfairness of the football creditor rule. Following Bradford City’s collapse in 2002, the highly paid players had to be paid in full (for example, Benito Carbone who was earning £40,000 a week). Unfortunately, 36 workers in club shops were made redundant and monies owed to local authorities and St John Ambulance remained outstanding.

When Leeds United experienced difficulties in 2007, HMRC was in line to receive only £77,000 of the more than £7m tax bill it was owed while Leeds’ football creditors would have received full repayment.

Other critics of the football creditor rule argue that it operates unfairly simply because it overrides the order in which creditors are ranked by insolvency legislation and is, therefore, unlawful. The question HMRC will undoubtedly ask is why a football creditor (who is also an unsecured creditor) should receive payment ahead of HMRC, the club’s workers or other unsecured creditors? Why should football creditors receive preferential treatment at all?

 In HMRC’s view, football creditors are being given “super creditor” status when all unsecured creditors should be paid in the same way. There seems to be no legal basis for this. HMRC’s contention is that “non football creditors are being seriously short changed and enough is enough”. There is no reason for taxpayers to suffer when football remains the richest game internationally.

Despite the apparent unfairness of the rule, it is arguable whether HMRC will succeed with this latest claim. In September of last year, the High Court ruled against HMRC and dismissed a challenge by HMRC to Portsmouth City FC’s creditor-approved company voluntary arrangement which, although brought on the grounds of unfair prejudice and material irregularity, was essentially based on HMRC’s opposition to the football creditor rule.

In addition, both leagues dispute HMRC’s claims and argue that the rule is actually fair. The Football League and the Premier League will continue to argue that the rule maintains competition and is crucial for “the integrity of the competition”. Football clubs are seen as a community of businesses that can only survive as a community. One club should not be allowed to escape its liabilities to another club. The leagues’ respective constitutions contain a duty to its members to act in good faith to each other. To allow one club to “buy” a player from another club but not pay for him or not actually pay him at all, is not good for competition.

Forcing failed clubs to honour their debts to competitor clubs contains the problem - without the rule, there could be a knock-on effect causing more insolvencies. Any change to the rule could, therefore, lead to more insolvencies than rescues, leaving creditors receiving even less. Banks are not always keen to fund football clubs and changing the rule could mean real cash flow problems for some clubs.

Similarly, what is not commonly mentioned is that the football creditor rule is only a part of the Football League’s regulations. There is an additional layer of insolvency policy and regulations which actually benefit HMRC. One example is the introduction of “HMRC Reporting” for PAYE. Where a club is behind in paying PAYE, the league forbids that club from spending on more players thereby worsening its financial position. The Football League effectively imposes a transfer ban on clubs with one month’s tax arrears. Sanctions for tax debts also apply in the Premier League.

However, the tide does seem to be turning in HMRC’s favour. Financially solvent clubs would not be particularly affected by any changes to the rule. Senior player representatives have privately admitted that they are embarrassed by a rule that protects footballers over groups such as St John Ambulance. More publically, there has been a football-governance inquiry by a parliamentary select committee at which even senior football figures such as David Gill (Manchester United’s chief executive) declared the rule indefensible. Others have gone as far as saying that, by enforcing the rule, the Premier League and Football League create their own cartel and actively encourage reckless financial behaviour from clubs.

It seems unlikely, therefore, that millionaire footballers will continue to maintain their protections over insolvent clubs’ local-community suppliers for much longer.


Funke Abimbola is a senior solicitor at IBB Solicitors in Uxbridge and heads the Corporate Restructuring team.

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Replies (11)

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By carnmores
19th May 2011 15:50

quite right we discussed this a couple of years ago

the idea that highly paid players wages should rank over small creditors is increasingly distasteful - its not only UEFA /  FIFA that have a whiff aboutthem so does the FA (so approptaitely named)

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By brianheg
20th May 2011 10:57

This is a disgraceful rule and clearly contrary to insolvency le

I don't understand how the directors and administrators of football clubs can operate this rule without breaching their other duties under Companies Act and insolvency legislation. If the Premier League and FA want to put in place a scheme to bail out the "football creditors" to ensure stability this should be put in place as a levy on all clubs to create a bail-out fund paid for by the eventual beneficiaries of the fund, not by taking money from all of the other creditors and giving it to the "football creditors".

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By Blue Osprey
20th May 2011 11:18

HMRC going after Football

Not before time. HMRC need to win this. This is one of the biggest swindles in the corporate world. If you can't afford to pay your 'normal' creditors when you lavish tens of thousands of pounds per week on overated and badly behaved neanderthals then you should be banned from all corporate life indefinetly. Alternatively why not have a rule that makes the FA, premier league or football league legally responsible for the debts of their members clubs should they default. Then they can use the TV money constructively.

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By chatman
20th May 2011 14:15

Don't understand

I didn't really understand the argument in favour of the football creditor rule. How can it be legal?

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By Arthur_Phillips
26th May 2011 23:14

Unbelievable shock

Football has deep roots in society, local fans will always turn out, look at Wimbledon. It should be a criminal offense for directors to allow a club to get to insolvency. This Football Creditor rule is new to me an explains why clubs run at a loss. The gamble is worth it as HMRC provides extra capital. I thought big money brought big tax benefits for society as a whole.   The "Football creditor rule" is nonesensical.      For once I am rooting for an HMRC victory.

 

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By carnmores
27th May 2011 15:42

no to one rule for them and one for us

insolvency should not be a criminal offense

and as for those at FIFA far too many dodgy dealers , esp that walker bloke

 

ans the law of unintended consequence    ok guys we will waive the FEU rule so we can get the cjhampions league final - another sop to those dreadful people

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By jonbryce
12th Jun 2011 22:15

Compliance with insolvency legislation

The Football Association can justify it on the grounds that they, like anyone else, are entitled to withhold services from people who don't pay for them.

Individual directors can justify going along with it on the basis that if they didn't, there would be no business, and that would be to the detriment of creditors.

In the case of teams like Gretna and Chester City who were expelled from the league, I would imagine normal insolvency rules apply, and there would be no preference given to football creditors.

I'm not saying I agree with any of this, but I believe it is the case the other side would make.

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By mikewhit
16th Jun 2011 14:02

Disqualified directors

As I may have said before, I understood that company directors who gave preferential treatment to certain creditors during insolvency, were at risk of at least a 5 year disqualification ?

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By twickers
27th Aug 2011 14:00

May be the recent riots sum it all up/ why bother to obey the law if the law can be avoided without normal consequences/  when trading business/ sole trade or company leaving tax upaid
winds up with CCJ or being wound up- it really does raise questions. The personalities involved in ownership from Maxwell who owned 2 and Bates who bought Chelsea.and Leeds(he currently is refused to explain the clubs finances) Veneables who bought Portmouth for allegedly a £1 and refused to hand it back. Manchester city bought by alleged fraudster, MU bought with it's own assets, Heats bought by mid euro billionaire (how did anyone living there ever make money ?).
and that lovely story years ago of the "spiv" who walked into Southend FC and practically bought the place before they discovered he was penniless.   God Save the Queen, I am taking up Bowls.  

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By Alice White
05th Jan 2012 20:53

If they get rid of the football creditors rule that will honestly get rid of a lot of the financial issues facing clubs. For example, the likes of Tottenham wouldn't have sold players at inflated sums to Portsmouth if they weren't assured of having their debts protected.

People like Sol Campbell, Peter Crouch and Jermaine Defore wouldn't have signed contracts if they weren't guaranteed of receiving the sums and by the same token, players will be willing to accept £30k which they know a club can definitely afford rather than sign a contract for £50k with a club that may not actually have the money in the bank and payday loans UK won't be helpful in such situations.

Hopefully the government and HMRC will have the strength to challenge this rule in the courts or amend existing legislation to see it through.

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By AlexReeves
31st Oct 2013 10:46

Frequent

Another downside to this rule is the frequency it's being used. People might not realize just how many football clubs go into administration each season and the amount of money that's at stake. Just look at this list of football clubs in administration. In 2009 there we 8 clubs in administration! 

I'm completely on the side of the HMRC here and will be doing my part to help campaign for changes.

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