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Unfair football creditors rule?

Portsmouth FC's administrators' proposals to creditors make fascinating reading. Their accessibility highlights the Football Association's football creditors rule, which requires players, clubs and agents to be paid often very large sums in full, while non-football creditors including charities such as St John Ambulance, ordinary business suppliers and HM Revenue & Customs, receive only pence in the £ through a Company Voluntary Arrangement (CVA).

HMRC lost its legal argument against the football creditors rule in 2004 in the High Court and the Court of Appeal in the Wimbledon FC case. There, HMRC was a preferential creditor, but analogous arguments applied. The problem was that it was not the company but the buyer of the business who paid the football creditors. The courts found, perhaps surprisingly, that the amount paid by the buyer to the company was not reduced by the amount the buyer paid to the football creditors. In effect, payment to the football creditors was an entirely separate issue from the insolvency and distribution of the company's assets. The payment was a condition required by the football authorities to allow the purchaser to have the club continue to play in the Football League.

More recently in the Lehmans and Woolworths insolvencies, the courts have considered the deprivation principle ("an anti avoidance principle designed to prevent parties agreeing in advance provisions which better [a] party's position in the event of insolvency" according to the Woolworths judgement). One could imagine HMRC running an argument that the football creditors rule puts the football authorities in a better position than they would otherwise have been (namely that the participants in the football authorities' league competitions, and their associates, are protected financially when a club becomes insolvent).

Of course, in cases such as Portsmouth, where HMRC may be a sufficiently large creditor to vote down the CVA and force the club into liquidation, the point may not be argued in court. It will however be of great concern to Pompey fans, who want to see the club's business continue beyond the FA Cup Final. Many commentators (from CRITique via The Lawyer and accountingweb to The Daily Mail and The Telegraph) are now questioning whether the football creditors rule can survive, especially as its abolition has been proposed by the All Party Parliamentary Group on Football and questioned in parliament.

 

 

Date: 27th April, 2010
Author: Chris Laughton

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