Should the government red card the football creditor rule?

by Rachael Singh

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05 Feb 2013

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A RECENT parliamentary committee suggestion that the government should scrap the football super creditor rule has caused quite a stir.

The Culture Media and Sport Select Committee claimed that, throughout its investigation into football governance clocking two years and counting, that the controversial rule must be updated. In its latest 'football governance report', the Committee says that "the government legislate to ban the use of the Football Creditors Rule (FCR) at the earliest opportunity".

However, the insolvency profession that enforces the rule is clearly split on whether it should be sent off - or whether it deserves to stay in the game.
If a football club collapses the FCR prioritises the payment of football creditors, such as players, managers and clubs.

When a club enters an insolvency process the football creditors are paid in full - with the remaining funds divided between other creditors. An example given in the report is the administration and sale of Crystal Palace FC. The unsecured creditors were owed about £27m, with £1.9m attributable to the football creditors. The administrators managed to recover just £2.4m to repay the unsecured creditors with the football creditors paid their £1.9m in full, and the remaining unsecured creditors, such as the taxman, were repaid just 2p for every pound owed.

SEND OFF

HMRC claims the rule is unethical and unfair, even going so far as to label it "unlawful".

Insolvency trade body president and Deloitte partner Lee Manning is generally in support of HMRC's stance. "The impact of the ‘Football Creditors Rule' challenges the general principle in insolvency that all creditors of the same class should be treated equally," he said.

"The cost of meeting this obligation is invariably so significant that it substantially erodes the ‘pot' of funds available for the unsecured creditors.
He points out that a club willingly sells players with a fee deferral, knowing the payments are protected. However, the club is free to negotiate the terms of the sale including upfront payments. "These should be treated the same as any other commercial transitions," he added.

He is not the only senior practitioner to suggest the FCR has had its day. Stephen Allinson is an IP and non-executive director of Yeovil, and has been supervisor of the CVA insolvency process at Exeter City. He is also against the FCR in its current guise.

"It's just the football clubs looking after their own. Football clubs live on another planet and regard itself as a different industry. It believes it can run itself and look after itself," he said.

Allinson says the FCR is morally wrong, and for the greater good of the game the law should be changed.

THE LINE UP

However, the FCR has been vigorously defended by the Football league.
In a previous High Court ruling between the taxman and the Football League last year, the league claimed that all clubs are part of a membership and must pay for this privilege. The contracts belong to the club but, the funds, mainly from broadcasting deals, are paid directly and belong to the league - which divides the funds between the clubs, according to their entitlement. However, these funds are only paid if the club finishes the season.

A club has no right to a share of the pot unless it completes its fixture obligations. If it fails to finish a season, it has not been deprived of any funds as it had no right to them in the first place, so it has not deprived any creditors or created a "super" creditor.

But some in the insolvency profession see this rule as vital to the survival of the league, and the decision to legislate against it is one that is unworkable.
John Verrill, partner at Chadbourne & Parke and someone who represents the Football League in insolvency matters says: "My personal view is that it would be almost impossible to create a situation where you could legislate out the FCR."

According to European and UK laws such as TUPE (Transfer of Undertakings Employment), employees' services and outstanding wages are protected in the event of a transfer to new ownership - which must happen in the rescue of a collapsed club.

In all administrations from all sectors these laws ensure that services and contracts are upheld. An illustrative example could be an IT contractor who will work for one company. If that company collapses and enters administration their contract is void. The administrators may be forced under TUPE and by the IT contractor to repay outstanding wages owed and ensure future wages if the administrators want them to continue to work at the company.

"It's woolly thinking. The players are not only protected by the FCR, they are protected by the TUPE legislation. The buyer always has an obligation to pay the wages of employees and their contracts in the sale of any insolvent business not just football," says Verrill.

"You don't want any legislation to suffer the law of unintended consequences," he warns.

The knock-on effect of a change in insolvency law to work-around the FCR would mean all administrations would be affected, not just football.
He is not alone in this sentiment. One insolvency practitioner who is currently working on a league club administration also claims that under the TUPE rules, the FCR is not violating any laws.

"This is a highly emotional subject and it is mainly because of the expensive and sometimes over-paid players being paid above smaller organisations such as St Johns Ambulance that this issue has come up. But this is not the case when you look at the detail," he said.

The government could create a law circumventing the rule in football only. However, Verrill argues this would be "targeted malice on football clubs purely because they have highly paid players". He adds if a change were to be implemented, it would have to include other sporting industries such as rugby - which currently uses a similar rule but which may also need changes to insolvency law as a whole.

Both arguments for and against the lawfulness of the FCR have already been made in the High Court between HMRC and the Football League. HMRC lost, but gained sympathy.

Mr Justice David Richards found in favour of the Football League in the case of HMRC's challenge 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 no debtor should be deprived of assets or funds in priority over another. The taxman claimed the FCR contravened both.

Justice Richards sympathised with HMRC but found the Football League was not violating either pari passu or anti-deprivation rules. However, he added that: "The Football League should not regard the result of this case as an endorsement of its approach to football creditors."

In July, Football Association general secretary Alex Horne argued that although there is no obvious alternative to the FCR, "the Regulatory Policy Group, the Professional Game Board and the leagues can consider this [FCR] and come to a view".

Unlike other types of football changes that are due to be discussed the FCR could be tackled quickly, according to an office holder for the Culture Media and Sport Committee.

The government could add rules to prohibit the FCR onto existing insolvency legislation. Other changes recommended in the football governance report will need to be included in a new football bill.

"Arguably the FCR doesn't have to wait for any bills or legislation to be passed before it can be brought in," said the office-holder.

"The committee has said it would like change at the earliest opportunity and if the FA shows a degree of unwillingness to get rid of it, legislation wouldn't have to wait for a football or sports bill."

Any change could mean that whether a practitioner steers clear of the football industry or not, they could find themselves caught up in the knock-on effect of the government crack-down on football insolvency rules.

The government has until Easter to respond to the recommendations in the football governance report. For insolvency practitioners the game has only reached half time.

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