THE HIGH COURT DECISION on the future of a controversial football insolvency rule has seen the taxman fail in its challenge.
The insolvency profession held its breath to see what, if anything, could be changed to bring a balanced approach to payment of creditors in the event of a football club’s collapse.
Although many empathised with the taxman’s plight, some are left wondering where they went wrong and how they could lose such an apparently open and shut case.
The taxman had filed a legal claim against the Football League in May 2010, claiming its Football Creditor Rule (FCR), which prioritises some creditors over others, was unlawful.
If a club collapses, all football creditors, including the players, will be paid first and in full. Unsecured creditors, such as the taxman and St Johns Ambulance Service, will be paid with what’s left. Usually in administrations of businesses undertaken in the UK, secured creditors such as lenders are paid first, the remaining funds are divided between the unsecured creditors.
Many insolvency practitioners find football insolvency difficult to navigate – especially as practitioner fees, which are normally the first to be paid, are also superceded by the FCR. Therefore, the profession had a vested interest in seeing HM Revenue & Customs victorious.
However, High Court judge Mr Justice David Richards found in favour of the Football League.
HMRC’s challenge was that the FCR circumvented two insolvency principles: pari-passu, which stipulates all creditors will receive the same percentage of their debts repaid out of the available assets; and the anti-deprivation rule, which outlines that no debtor should be deprived of assets or funds in priority over another.
HMRC argued the FCR contravened both.
The Football League argued that the structure of the League doesn’t offend either principle.
All clubs are part of a membership in the League and must pay about 5p for this privilege. The contracts and league fixtures belong to the club, and the funds, mainly from broadcasting games, are paid directly to the league which divides it between the clubs, according to their entitlement.
However, these funds are only paid out if the club finishes the season. A club has no right to a share of the money pot derived from TV or other commercial contracts unless it completes its fixture obligations. If it fails to finish a season, it has not been deprived of any funds as it has no right to them in the first place, so there is no violation of anti-deprivation or pari-passu as there are no funds to divide between creditors.
Some interesting arguments were raised by the Football League. Firstly, a struggling club can’t play in a competition if other clubs refuse to play against them because it either cannot pay a debt or is in financial difficulty.
There is no insolvency law that forces teams to continue to play against a collapsed club. In an insolvency, utility companies such as electricity or gas businesses are forced, through legislation, to continue to supply to an insolvent business – there is no such rule or legislation in football.
However, confusingly, the Football League also points out that in order to fulfil their fixtures and complete the season, clubs have no choice but to work together, whereas suppliers and or lenders have a choice not to deal with a struggling club.
The League also points out that an insolvent club that doesn’t pay back football creditors is gaining an unfair advantage against its competition.
The Football League’s chief operating officer Andrew Williamson, who outlined many of these arguments during the trial, said: “A club that spends beyond its means is able to acquire better players and so achieve better results than those that operate prudently. It is cheating.
“It achieves an obvious and improper competitive advantage, in particular (but not only) where some of the debts in question are owed to clubs against which it is competing, which are more socially and financially responsible.
“The actions of the reckless risk tempting other clubs also to act imprudently just to compete on equal terms.”
However, Justice Richards hit back, in that “a club which buys players and is able to pay for them by not paying its lenders, suppliers or HMRC gains a competitive advantage over those clubs which live within their means”.
He also added that clubs must assess the credit-worthiness of any team with which it enters into a contract, like all businesses. Failing to do so encourages risk-taking and certainly doesn’t deter from it.
The judge’s feelings against the FCR became clearer when he said in his judgment that the case is not based on good or bad motive, but whether the league has evaded insolvency laws.
Justice Richards sympathised with HMRC but found that the Football League, in its structure of football creditor payment, was not violating either pari passu or anti-deprivation rules. He also added that HMRC seemed, at times, to treat the anti-deprivation rule as general anti-avoidance, but said this is to “misunderstand the rule which is specific in what it prohibits”.
On these grounds, he found in favour of the Football League.
In many respects, the case has shed light on a complicated insolvency process and outlined why these rules are important.
However, insolvency practitioners advising and working in the football industry should take note that, although Justice Richards found in favour of the Football League, he sympathised with HMRC’s plight in his judgment: “The Football League 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.”
The battle isn’t over. It is very likely HMRC will appeal the judgment (which it must submit by 30 June), with Justice Richards already giving his blessing for them to do so.
It is very likely the taxman will take this all the way to the top if it fails at the next round. But it’s winning the championship, not the match, that counts.