Out-Law News 3 min. read

Courts to decide on legality of 'football creditors' rule this week


The Football League will find out this week whether it is lawful for it to insist that football players, managers and other clubs get paid before other creditors if a football club enters administration.

HM Revenue & Customs (HMRC) is challenging the so-called 'football creditor rule', which requires football-related debts such as money owed to players, staff and other clubs to be paid in full before a club is eligible to compete again in the league.

Restructuring expert Nick Gavin-Brown of Pinsent Masons, the law firm behind Out-Law.com, said that if the longstanding dispute was not resolved by the High Court the Government could do so using legislation.

Insolvency law dictates the order in which different debts are settled when a company goes into administration. Secured creditors, who hold fixed charges indicating that a specified asset can be used to satisfy a particular debt, are normally paid first. Any surplus is then made available alongside the proceeds of the sale of other assets to settle the expenses of the administration, employee claims and other debts. This means that in the majority of insolvencies unsecuredd creditors will remain unpaid or only receive a small percentage of the debt.

Changes to insolvency law introduced in 2003 abolished HMRC's status as a preferential creditor, meaning that unpaid taxes are now treated in the same way as other unsecured debts. HMRC has argued that the football creditor rule gives those creditors preferential status, and that all creditors who are considered unsecured creditors under insolvency laws should be treated the same way.

The UK tax authority challenged the legality of the football creditor rule in a case in 2004 when Wimbledon became the first football club to enter administration after its preferential status was abolished. The then Inland Revenue challenged an arrangement that saw it receive 30 pence in the pound in respect of a debt of £525,000. However it was unsuccessful in this case, as the money paid to the football creditors came directly from the buyer of the club rather than from the club's own finances.

"So far, the courts have refused to condemn the football creditor rule - not least because the rule has been implemented with the approval of the majority of creditors and is funded by purchasers," said restructuring expert Nick Gavin-Brown.

"If the High Court does not support HMRC and local non-football creditors, they may still be able to rely on the Government's own determination to reign in financial mismanagement in football."

Earlier this year an influential committee of MPs suggested that if HMRC was unsuccessful in its case the Government should instead step in to legislate against the football creditor rule. In its report on football governance, the Culture, Media and Sport Committee said that the rule "epitomises the extent to which financial priorities are being distorted", as it meant that the tax authorities got proportionately less than they were due while smaller creditors, such as St John's Ambulance and local tradesmen, were unlikely to get paid at all.

The rule may have been justifiable in the past by the need to protect clubs which managed their businesses reasonably effectively from the odd exceptional reckless behaviour, the report suggested. However, such reckless practices are now "absolutely endemic". The Committee received evidence that when Portsmouth FC became the first Premier League club to enter administration last year its players and other football creditors were paid in full in the region of £30 million, while other creditors received approximately 16 pence in the pound, it said.

However the Football League told the Committee that the rule was a "much maligned and misunderstood area of policy within the game", which protected the integrity of the competition by preventing individual clubs from gaining an unfair sporting advantage by entering administration to avoid paying their debts.

Trevor Watkins, a sports law expert with Pinsent Masons, said that although the rule left ordinary creditors with very few pennies paid out of every pound owed, it had a part to play in maintaining the integrity of the Football League.

"Removing the football creditor rule without rebalancing the rest of the game's regulations is likely to lead to considerable club instability," he said. "Clubs will default on their debts to other members and creditors, restructure and play on. Creditors will continue to go unpaid and many lower-league clubs will be at risk. Change needs to come with a basket of measures and not just the abolition of one."

Nick Gavin-Brown said that if the football creditor rule was abolished either by the High Court or through legislation, football clubs could face expulsion from the Football League on insolvency.

"The Premier League and Football League may have to re-assess whether there are other ways they can look after their own," he said.

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