Last Wednesday a High Court battle kicked off between HMRC and the Football League over the football creditor rule.
When a football club enters into a formal insolvency procedure, usually administration, its league status is suspended and the club is ineligible to participate in league football until certain “football creditors” are paid in full. These creditors include such things as full payment of transfer fees, players and managers' salaries. Any remaining cash is then divided amongst the unsecured creditors, whose number includes HMRC, as the department lost its preferential creditor status around nine years ago. This ring-fencing of cash is known as the “football creditor rule”.
HMRC has been tenacious in its attempts to dislodge the football creditor rule arguing that it has been invented by the Football and Premier Leagues. The department argues that the rule flies in the face of the principle that all unsecured creditors should share equally in the assets of the company in proportion to the debts owed to them. Gregory Mitchell QC, for HMRC, told the court “It is not a rule created by parliament…As far as we know there is no similar rule operating in any other country or industry.” He also points out that there has been 36 Football League insolvencies since 2002.
The inequity of the football creditor rule is highlighted by a number of well publicised examples. In 2002, following the collapse of Bradford City, players' high salaries had to be in full, which included Benito Carbone's £40,000 p.w. In direct contrast, 36 workers in club shops were made redundant and local authority and St John Ambulance debts remained outstanding.
In 2007, Leeds United fell into difficulties. More than £7M was owed to HMRC, yet it was only in line to receive £77,000 whereas the club's football creditors were paid in full.
In February 2010, Portsmouth descended into insolvency with a nine figure debt, whilst it was Premier League club. In September of the same year, HMRC unsuccessfully challenged Portsmouth's creditor-approved company voluntary arrangement. Although the High Court challenge was on the basis of unfair prejudice and material irregularity, the real underlying reason was the Revenue's opposition to the football creditor rule.
Both the Football and Premier League argue that the rule is actually fair and that it ensures that competition is maintained. Football clubs are viewed as a community of businesses and whose survival can only be preserved as a community. League members have a duty of good faith to one another and, as such, must honour their debts to one another. Lifting the rule could give rise to more insolvencies than rescues, leaving even less in the pot for creditors.
There is however another side to this story as some of Football Regulations do benefit HMRC. For instance, where a club falls into PAYE arrears of at least one month, the League effectively imposes a transfer embargo on those clubs. Other insolvency deterrents have been introduced, such as lower league salary caps, points deductions for insolvent clubs and quarterly accounting reporting to the League.
Support for HMRC does exist within the game. Senior player representatives have admitted, in private, their embarrassment by a rule that protects players ahead of groups such as St John Ambulance. David Gill, the Manchester United chief executive, stated in front of a parliamentary select committee that the rule was indefensible. Others believe the rule encourage reckless financial behaviour.
It is expected that the case will continue into next week.
Leave a Reply