Published: 29th September 2015
When a football club goes into administration, the players become preferential creditors and receive a payout ahead of unsecured trade creditors. This system has been strongly criticised by parties including HMRC, with questions being asked as to why this rule still exists.
After all, other insolvent businesses are required to treat employees as non-preferential creditors in the main, so why should football clubs be any different?
The original intention of the rule was to provide protection for clubs in the lower leagues. It was also intended to prevent a knock-on effect of other clubs not getting paid, and having to enter administration themselves.
This ‘domino effect’ was a real risk, and the threat was there that the sport could destabilise if the issue was not addressed. Defenders of the football creditors rule claim that some recognition should be given to the fact that the sport as a whole pays a huge amount in tax, and that some allowances should be made when clubs begin to struggle financially.
If a football club enters a Company Voluntary Arrangement, for example, as a way out of administration, the terms of their CVA mean that players’ wages, plus transfer fees between clubs, form part of the priority payout in administration.
These payments must be made in full before the club is allowed to play again in the football league. So who falls into the category of a football creditor?
HMRC argues that these creditors should not receive a full payout, leaving other unsecured creditors out-of-pocket. In fact, HMRC attempted to have the rule abolished in 2012 by taking court action. They cited unfairness in the system that denies trade creditors an equal opportunity to recoup what is owed.
The Insolvency Act 1986 incorporates the ‘pari passu’ principle, which states that all unsecured creditors should be treated equally if a business becomes insolvent. In short, HMRC believes that the football creditors rule goes against this important principle.
The High Court ruled in 2012 that the football creditors rule was not a deliberate evasion of the laws of insolvency, however. HMRC has the power to move quickly against clubs in regard to tax arrears, and can potentially issue a winding-up petition early if they want to limit their losses.
HMRC has also reported losing millions of pounds in tax because of the football league’s use of the rule. Due to the introduction of the Enterprise Act in 2002, plus the effect of the football creditors rule, HMRC lost its place as a priority creditor in these cases of insolvency.
A ‘fit and proper persons’ test was introduced to prevent directors and managers moving between clubs, and potentially becoming a ‘common denominator’ in insolvency. This is how it works:
A director would not be able to be a controlling shareholder of a club in the Football League if:
Measures were also put in place to prevent football clubs remaining in administration for 18 months or more, or for two consecutive seasons.
Trade creditors lie further down the priority list for payment. Once the football creditors rule has been applied, players are entitled to receive 100% of monies owed to them. When all transfer fees have also been paid in full, there may be little money remaining to pay other unsecured creditors.
Suppliers, local businesses that have dealings with the club, charities such as St John’s Ambulance, and HMRC, are among those who lose out because of the rule - generally due to the high salaries paid to players. Unfortunately for unsecured creditors dealing with football clubs, it seems that a change in the law would be required before this rule can be amended or removed.
The rule has been defended by some, who say that football league clubs are a stand-alone group of businesses operating in a unique environment when compared with other organisations. Insolvency in this scenario brings with it unusual circumstances that require special measures.
There is a feeling within the football world that if one club is struggling financially, there is a high probability that not fulfilling its financial obligations to other clubs in the league would result in a catastrophic collapse of one or more leagues.
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