How Lehmans could soothe the taxman's football woes

HOW CAN a Lehmans insolvency court battle have ramifications for the football industry?

The Lehmans action centres on the principle that all creditors should be treated fairly. US administrators for Lehmans are battling against a consortium of investors. The consortium argues that its contract with Lehmans entitles it to super creditor status – in that it should be paid off ahead of other creditors.

The administrators argue that consortium’s claim for super creditor status goes against the principle that all creditors should be treated equally if a business collapses.

So why is this so important to the football industry?

The Premier League is fighting against the taxman in the courts on a similar issue – and the Lehmans result is likely to affect the outcome.

The taxman is battling to have the football creditor rule overturned as it believes the rule – which prioritises the payment of players, managers and clubs in the event of a club entering administration – is “unlawful”. If a club enters administration the football creditors are paid in full with the remaining funds divided between the creditors, treating them disproportionately.

In the Portsmouth FC administration, for example, players and managers were paid in full. However, the taxman and several other creditors are likely to receive 20p for every pound they are owed, repaid over five years.

The taxman postponed its day in court to see if the outcome of the Lehman Brothers’ appeal to the Supreme Court would have a positive effect on its case.

The bank’s argument is based on a breach of the anti-deprivation principle. This principle ensures all creditors should be treated equally if a business collapses. Lehman’s case is focused on a contract which gives super creditor status to Belmont Park Investments, which Lehmans claims breaks the anti-deprivation rule.

Prior to Lehmans’ collapse the bank signed a contract with several Australian companies so they would invest with it. As a guarantee Lehmans agreed in a contract that the consortium would be paid first out of the assets of the bank if it became insolvent.

Lehmans’ administrators are fighting to have that contract overturned as they believe it breaches the anti-deprivation principle. In law the principle states that: “There cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his creditors.”

However, the omens aren’t good for Lehmans, or the taxman in the other court case.

Lehmans has already lost this argument in both the High Court, and the Court of Appeal. On both instances the judges felt the contract did not deprive the bank of funds with the court of appeal judge finding the anti-deprivation rule did not apply in this argument.

Now the administrators are now taking their argument to the Supreme Court (previously known as the House of Lords).

HMRC is claiming the Premier League is breaching the anti-deprivation principle, as it is allows some creditors to be paid ahead of others.

In the Supreme Court both Lehmans and HMRC are hoping the judges will look at the anti-deprivation principle and clarify it, in their favour. When making their decision it is hoped the judges will explain how the principle works and who it applies to, essentially bringing an old rule up-to-date.

If the Supreme Court decides in the Lehman’s case the anti-deprivation principle should be upheld, it will set new case law and could reinforce HMRC’s chances against the Premier League.

Jamie Wheatley, a partner and head of insolvency at law firm Mills & Reeve, said it is unusual for the Supreme Court to hear cases of this nature, but welcome. The court would not normally discuss an old principle and how it is interpreted into modern day business, but its clarification is important on such a fundamental insolvency issue.

The Lehman Brothers Special Financing V Belmont Park Investments case is due to begin this week and last three days. There is no set time for when a decision is to be reached but spectators are expecting one before the end of March.

A source at HMRC said the taxman is keeping a close eye on the arguments, with members of the legal team attending the Lehman hearing.

Both HMRC and the Premier League (FAPL) were expected to put forward their arguments to the High Court on 15 February on the “lawfulness” of the football creditor rules. The residing judge would then decide if a trial should take place and allocate the time for proceedings to continue. The taxman hopes to continue on this path following judgment on the Lehman case.