Does Lehmans loss denote disaster for HMRC?

THE TAXMAN HAS FOUGHT long and hard against what it considers an unfair principle that it is ranked lower than other creditors in a football club’s insolvency. Has a Lehman Brothers case that has reinforced the principle of different ranks of creditors dealt HM Revenue & Customs a hammer blow?

The principle of treating creditors equally was bashed out in a Lehman Brothers Supreme Court challenge, which has finally ended after weeks of deliberation. HMRC and the Premier League both waded into the argument with written submissions, because the judgment was likely to affect the outcome of their own legal battle.

The Supreme Court found that not all creditors should be treated equally.

In this case the consortium of investors Belmont Park Investments signed a contract with Lehman Brothers subsidiary Lehman Brothers Special Finance (LBSF), to receive payment ahead of the subsidiary, which it had previously bought bonds for.

Supreme Court judges decided the contract was in good faith and not designed to deliberately evade insolvency laws.

HMRC’s battle against the leagues is centred on the football creditor rule, which stipulates football creditors, such as players, managers, other clubs etc, are paid first and in full – essentially giving them ‘super creditor’ status when a club enters administration.

Whenever a business enters administration the secured creditors, such as lenders, are paid first with all other unsecured creditors, including the taxman, paid next.

Football creditors are able to leap-frog ahead in the payment hierarchy, which HMRC labels as “unlawful”.

HMRC launched a legal claim to argue the rule’s unlawfulness in court last year. However, when news of the Lehman case broke the action was postponed until November. It was hoped clarification would be given from the Supreme Court judges on the “anti-deprivation” rule which requires creditors in all administrations to be treated equally.

Although at first glance the court’s decision appears to hit HMRC, Belmont Park Investment’s win may not have as much bearing on the taxman’s legal challenge as originally perceived.

The Supreme Court decided that the Lehman Brothers ruling was centred on an entirely different asepct of the insolvency rule compared to that being argued between HMRC and the Premier League. The Lehman Brothers case focused on a particular contract for a subsidiary, rather than membership rules that contravene equal payment.

“In its judgment the Supreme Court was careful not to pre-judge any of the issues in the case between HMRC and the Premier League which did not arise for decision in the Belmont appeal. The purpose of HMRC’s intervention in this case was therefore achieved,” said a spokesman for the taxman.

So what lies ahead for the taxman if they are to resolve the war on equal payment in football administrations?

The taxman may have found a powerful ally in the form of a parliamentary committee.

The Culture Media and Sport Committee has recently called for the scrapping of the insolvency rule by any means necessary.

Its football governance report suggested if HMRC is unsuccessful in its bid to tackle the rule, the government should legislate against it.

The report stipulated the rule “epitomises the extent to which financial priorities are being distorted” and recommends if HMRC loses its court battle and the football governing bodies fail to change government should consider “scrapping” it through legislation.

The debate held by the parliamentary committee was long and all encompassing. It allowed comments from insolvency professionals, as well as from CEOs of clubs, to come in thick and fast.

Burnley chairman Barry Kilby accepted that the insolvency rule was a difficult issue, but without it lower league clubs would have “ceased to exist”.

CEO of Exeter City also claimed that small businesses were happier receiving a percentage of debt rather than see a club disappear.

If one club enters administration it could end up taking two or three others with it if there was no rule, claimed Crewe chairman John Bowler.

However, the crème de la crème of football, Premiership clubs, were not so wedded to the rule.

Manchester United CEO David Gill suggested the rule had “had its time” and that the FCR supported a recent trend of allowing transfer fees to be spread out over several years rather than the previous defacto of one year.

Many, when pressed, suggested that the insolvency regime was actually more important further down the league tables than in the cash rich Premiership.

A spokesman for the Premiership said it would await the sports minister’s response before taking a view on the report’s recommendations.

However, Hugh Robertson, sports minister, suggested the rule could go in an interview earlier this year. Namely that he would be “very surprised” if no changes were made.

HMRC is due to have its day in court against the Football League on 28 November, with the Premier League given permission to intervene and submit written statements.

All eyes will be centred on the court battle, which could see the football industry radically changed if HMRC win; or the taxman sent away, only to take its aggression out on individual clubs with winding-up petitions galore.

One thing is for sure, football insolvency is likely to be as hotly debated in the coming season as goal line technology.