HMRC v. The Football Creditors Rule
Posted by John Beech on June 2, 2010
It has emerged that HMRC are to mount a legal challenge against the Premier League and the Football League in an attempt to overthrow the Football Creditors Rule (1).
Until September 2003, the Crown, and hence the Internal Revenue (IR) and Customs & Excise (C&E) who subsequently merged to form Her Majesty’s Revenue and Customs (HMRC), enjoyed the legal status of ‘preferred creditor’ – they got paid in full before any remaining money was divided between the remaining creditors. Because of football’s Football Creditors rule, there was a clear priority on who had claims against an insolvent company:
- The Crown
- Football creditors (e.g. other clubs, players)
- The rest
With the loss of its legally-enshrined preferred status, the Crown then fell behind football creditors in the pecking order.
Accountancy Age summarises the current situation well:
Currently if a club enters administration they are bound by the football creditors rule, meaning some creditors such as players and managers will be paid in full from the administration and the remaining payments divided between the unsecured creditors including HMRC.
The rationale for having the rule is that football clubs need the certainty that they will receive funds for the sale of a player to another club – without the rule, the transfer market would collapse, with selling clubs losing out to defaulting buying clubs.
You can see their point, but there are plenty of other situations in which failing to pay debts in full is problematic. An obvious example is St John’s Ambulance, who recently got worse treatment than football creditors from Portsmouth and Crystal Palace (in both cases, fans, to their credit, rallied round and paid the debts). Small businesses who end up being offered 20p in the pound(at Portsmouth) or even 1p in the pound (at Crystal Palace) by Adminstrators find it hard to stomach that clubs such as Chelsea or Manchester City are guaranteed priority in receiving a full pound in the pound.
According to legal expert David Roberts as reported on the Sporting Intelligence website, HMRC have a good chance of having the Football Creditors rule declared unlawful, citing two principles of insolvency law:
- The pari passu principle
This is the principle is that creditors should be treated on an equal basis, being paid pro rata what they are owed.
- The anti-deprivation principle
This is the principle that a legal entity should not be deprived of its assets by reason of insolvency.
This seems to my unqualified legal eye to be particularly pertinent in the case of VAT, which already belongs to Crown, having been collected on the Crown’s behalf by the club.
If the case is strong, why has HMRC not tried before? Back in 2004 they did try, but took action against a club, Wimbledon, rather than the League. The situation was a complex one, with Wimbledon in Administration and in the process of morphing mysteriously into ‘the Franchise’ (aka MK Dons). Indeed in his judgement Lord Justice Neuberger in the Court of Appeal refers to “the very unusual facts of this case” (2).
To me this suggests why HMRC should now take action against the Leagues rather than against, say, Portsmouth. Each club’s CVA might be seen as a unique set of circumstances, requiring HMRC to fight each case individually. If they can succeed in getting the Leagues’ Football Creditors rule declared unlawful – end of story.
If they do turn out to be successful, it will have a major impact on the way transfers are conducted. Clubs will actually have to consider whether other clubs they are selling players to are credit-worthy. Clubs seen as credit risks will find it hard to buy new players. A bit like every other business sector really. Now there’s radical.