The rule means that football players, managers and other clubs are paid before other creditors if a football club enters administration in England and Wales. The rule means that football-related debts must be paid in full before a club is eligible to compete again in the league. HM Revenue and Customs (HMRC) is challenging the rule, which does not apply in Scotland, in the High Court.
The Football (Financial Transparency) Bill, a private members' bill sponsored by Conservative MP Damien Collins, would also require professional clubs playing in the top four tiers of English or Scottish football to disclose their owners' identities and the identities of others with a "significant stake" in the club. Collins is a member of the House of Commons Culture, Media and Sport Committee, which threatened Government intervention in the way football clubs manage their finances if football authorities did not act voluntarily to reform the sport.
Writing for the Huffington Post, Collins said that a "radical new approach" was needed to prevent potential abuse from investors who are "not fit to be part of our game".
"We have seen too many high profile clubs, like Leeds United, Glasgow Rangers and Portsmouth, run into the ground by bad financial management. The consequences of this are not just damage to the reputation of the game and heartache to fans, but millions of pounds of taxpayers' money lost in unpaid taxes and local businesses who work with the club facing big losses from unpaid bills," he said.
In the past month, Portsmouth and Rangers Football Clubs have entered administration as a result of unpaid tax debts and allegations of financial mismanagement - in Portsmouth's case, for the second time in two years. Collins has also been vocal about the ownership of Leeds United, which from 2005 was owned by a company registered in the Cayman Islands and administered in Switzerland. The club's chairman, Ken Bates, purchased the club himself in April last year.
Insolvency law dictates the order in which different debts are settled when a company, such as a football club, 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 unsecured creditors will remain unpaid or only receive a small percentage of the debt. HMRC lost its 'preferential creditor' status in 2003.
Last month a sports law expert told Out-Law.com that football clubs should face automatic relegation if they engage in repeated overspending. Trevor Watkins of Pinsent Masons, the law firm behind Out-Law.com, said that heavier sanctions, more stringent ownership controls and financial monitoring are needed to prevent more football clubs from entering into administration.
"We have seen case after case of football clubs experiencing financial difficulty but for a long time now clubs have been easily acquired and subsequently resisted severe restrictions to deter them from spending vast percentages of turnover on player wages. FIFA's Financial Fair Play rules will hopefully tighten clubs' spending to reflect only what they generate in revenue but the real question is whether or not clubs are going to act with long-term stability in mind," he said.
World football governing body FIFA has introduced new 'financial fair play' rules that assess a club's efforts to 'break even' financially over three seasons, including the one currently being contested. From 2013-14 UEFA will be able to ban clubs from playing in European competitions the following season.