Football Management

Commentary on the management of over 160 English football clubs by Dr John Beech, winner of the FSF Writer of the Year Award 2009/10 Twitter: @JohnBeech Curator of Scoop.it! Football Finance

Portsmouth’s continuing purgatory

Posted by John Beech on July 16, 2010

To no-one’s, I suspect, great surprise, HMRC has waited until the last minute to object to the proposed CVA (12 , and 3).

The grounds on which HMRC are appealing are twofold:

(a) The interests of HMRC have been or will be unfairly prejudiced by the taking of that decision;

and (b) There were material irregularities in the way in which the votes of creditors were counted at that meeting.

My thoughts on the two grounds differ, but, before I start banging on, it should be declared for the benefit of any reader unfamiliar with this blog, that I am a Pompey fan, although I hope that this is in no way relevant to my views.

The first objection is a statement that HMRC have had enough of the football creditors’ rule, and do not see why the Exchequer should get a lesser percentage than the 100% which football creditors – clubs owed transfer fees, players on contract, etc. – are entitled to.  Frankly, I have no problem with this view.  The defence that football is somehow special and needs to maintain the integrity of its transfer market cuts no ice with me.  I can see no valid reason that HMRC is de facto an unpreferred creditor.

However, I am uncomfortable with the fact that they are challenging this through the courts against one club.  The circumstances are exceptional, at least with respect to the sum owed (whichever you happen to believe the right sum is) granted, although the rate – 20p in the £ – is unexceptional.  Other recent cases include Darlington, where creditors accepted a reported 0.9p in the £, Crystal Palace with a reported 1.9p in the £, Salisbury City with a reported 27p in the £, and Northwich Victoria with a reported 42p in the £.

It strikes me that whether the football creditors in the case of a football club’s insolvency should or should not have a preferential status over an agency of government, HMRC, is a matter for parliament to decide rather than by the establishment of legal precedent in a particular court case, pursued by a particular agency of government.  For very many years they enjoyed this status, until it was taken away by the provisions of the Enterprise Act 2002.  This was an act of unbelievable folly, and that status needs to be restored by Parliament, by amendment of that Act.

In short, I entirely sympathise with what HMRC see as in injustice, but I think they are going entirely the wrong way about resolving that injustice.  They should be lobbying Westminster rather than pursuing a court case.  It is surely the role of Parliament to ‘reverse’ legislation rather than one of its agencies and a court.

The second ground of HMRC’s appeal – the ‘material irregularities’ argument is more complex.  My understanding of what they claim are material irregularities is centred on two distinct aspects of what has happened: a) that the Administrator ruled that their claims regarding image rights were invalid and b) the Administrator should not be in the position where he can make such rulings.

On the latter, I tend to agree, but again this strikes me as more appropriately tackled through Parliament and legislation rather than through the courts.  The courts might be the right place to deal with the former, but why bundle it in a dispute with Portsmouth?  This issue first, in my reckoning, raised its ugly head with respect to Sol Campbell at Notts County – why didn’t they take Notts County to court to resolve the issue?

HMRC seem intent on bringing all the issues to a single head against Portsmouth, which strikes me as tactically naive from their own perspective.  No doubt their motivation is pour encourager les autres.  Why Portsmouth?  Well, we keep coming back to the massive and exceptional size of the debt (even at the lower, Andronikou level) – the highest previously I find in my records is the reported £7.7m due to HMRC by Leeds United in 2007.

A mess, rapidly turning into a dog’s breakfast, and one which, in the worst case scenario, could see Portsmouth liquidated, and HMRC ending up with much less than the 20p in the £ they are rejecting.  No-one’s a winner if that happens, except of course the lawyers.

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15 Responses to “Portsmouth’s continuing purgatory”

  1. Simon said

    I recall reading somewhere at the time that the incoming 2020 consortium at Luton Town offered HMRC 100% of what they were owed during our last insolvency, but HMRC rejected it out of hand (purely to make a point to the Football League, I think). I’m ready to stand corrected if I’m wrong, mind you!

  2. Ernest Howlett said

    I hope you don’t mind me problematizing your reasoning somewhat.
    – With regard to the first point: it would be appropriate to work via legislation rather than via a test case in court if it were a matter of reversing the law on HMRC not being a preferred creditor.
    While I am sure that HMRC would like this to happen, I think that in this case something different is at stake, namely that given the present law, according to which both HMRC and football creditors are unsecured, the football creditors nevertheless de facto can be sure of getting 100% of their claims back. This is because if they are not paid, the club will not be allowed by the football authorities to play in a league and will therefore go out of business. But since these creditors can be sure of getting 100% back, they are likely to vote for a CVA at any percentage in the pound, because it doesn’t matter to them. However, this can be taken to mean that materially they have a lien on the company, and as such should be excluded under the existing law from voting for (or against) the CVA. Yet Andronikou let them vote, which gave him his 75% majority.
    This, as I said, is a different point from the one which you (correctly) believe should be settled by statute; and it is just the kind of point that can be dealt with in a test court case. So HMRC are perfectly right to proceed in the way they have announced.
    – On the second point too I would think that HMRC is right to choose this appeal route. Again the exact formulation is crucial. As far as I know, HMRC is not arguing in this particular case (against PCFC) that generally image rights are not valid, but rather that the particular image rights payments made by PCFC to particular players did not in reality cover the added value of the use of their images (in merchandising etc.) but can be shown by the facts to be disguised remuneration and therefore taxable (at the higher level). Not only is this claim by HMRC something that is properly tested in court: it could not be a matter of legislation, because it concerns specific factual matters regarding a specific club and its actions.
    In conclusion, I would say that HMRC has chosen the correct legal approach in respect to both of its (formally standard) objections to the CVA.

    • John Beech said

      Many thanks for this alternative view Ernest.
      My thought with respect to pursuing this through the courts is that HMRC will lumber themselves, assuming they win, which strikes me as likely but not certain, with a precedent where every other club they subsequently pursue will cry ‘Ah, but the Portsmouth case was different from our situation because…’, an outcome which they will have brought on themselves by bundling the different issues into one case.

      • But since these creditors can be sure of getting 100% back, they are likely to vote for a CVA at any percentage in the pound, because it doesn’t matter to them. However, this can be taken to mean that materially they have a lien on the company, and as such should be excluded under the existing law from voting for (or against) the CVA. Yet Andronikou let them vote, which gave him his 75% majority.” [Ernest Howlett above]

        I think that’s more a misreading of who has, and has not been allowed to vote. English clubs are covered by the Football Creditors rule, and are therefore Supercreditors, and therefore do not get a vote on the CVA (because it does not affect them) – however, non-English clubs (such as Olympique Lyonnais, RC Lens, Stade Rennais and Udinese – all Portsmouth creditors, and owed £8.7m between them) are not covered by the football creditors rule, are treated as standard creditors and therefore get a vote in the CVA.

        Personally, I feel that the FA should add HMRC to the list of Football Creditors (after all it is merely a label – it does not cover foreign football clubs, but it does cover the tealady’s pension contributions), but for some reason the FA Committee that has the power to change that rule is comprised 66% of Premier and Football League officials, who would clearly prefer to be subject to 15 point deductions for failing to exit administration with a CVA, rather than pay the HMRC in full.

      • John Beech said

        The FA adding HMRC to their list of football creditors would certainly be a quick and dirty step in the right direction, but I suspect that HMRC are looking for an outcome that is not at least theoretically reversible by the FA, in other words, they want either a change in the law or a legal precedent.

  3. HMRC are right on both aspects, I only wish as a Leeds fan they had done this 3 years ago….which brings me to a point about supporters, I never fail to be amazed at what behaviour and by whom fans will justify, defend, promote when they thier club is involved. Its very bizarre and a sad inditment of the lack of perspective out there. As you say your a Pompay fan and like the PST I’m taking all your comments on the disgrace that is Fratton Park 2001-present day with a mines worth of salt.

    • John Beech said

      An interesting point re Leeds United. But, as you are a Leeds United fan, are we to take “all your comments … with a mines worth of salt”? ;-) If you can distinguish between supporting a club and not supporting the actions of its, I’m not sure why you imagine I can’t.

      At the Supporters Direct Conference recently I spoke about the ambiguity of the term ‘club’. I would argue that it is used in three different ways: 1) the construct: The ‘till I die’ element; what invokes people to get tattoos; the heritage, culture, mentality and mythology; the fans’ construct; it doesn’t physically exist, yet it’s the most permanent dimension; 2) the company: the owner(s); the board of directors; the Chief Executive Officer; the business element; those directly responsible for making a profit or at least not making a loss; 3) the crew: the ever-changing squad of players, who, over time, can reappear at rival clubs. In the case of Portsmouth and myself, my loyalty is to the construct, and most certainly not to the company.

      I find your suggestion that I cannot make this distinction rather offensive, but have published it nonetheless. Michael publishes his own blog as ClarkeOneNil which makes more than clear that he can distinguish construct and company. I’m disappointed that he does not recognise that I too readily and happily make that distinction.

      That said, I agree with everything he says, until his final sentence! It is both sad and bizarre that so many fans refuse to make the distinction.

  4. Quoting Rob Freeman (wasn’t able to post a reply inline for some reason):

    I think that’s more a misreading of who has, and has not been allowed to vote. English clubs are covered by the Football Creditors rule, and are therefore Supercreditors, and therefore do not get a vote on the CVA (because it does not affect them) – however, non-English clubs (such as Olympique Lyonnais, RC Lens, Stade Rennais and Udinese – all Portsmouth creditors, and owed £8.7m between them) are not covered by the football creditors rule, are treated as standard creditors and therefore get a vote in the CVA.

    As far as I’m aware, all those covered by the football creditors rule (which includes English clubs, players, managers and I think agents as well) were entitled to vote on the CVA acceptance. Paul Hart was listed as one of the handful of creditors who rejected it.

    The idea that those who are guaranteed a full payout regardless of the proposed dividend can still vote on a CVA is absolutely insane, so HMRC are, IMO, perfectly entitled to appeal on that basis.

    Also, regarding the amount of tax due, has there actually been any official confirmation that the £13m disallowed by Andronikou is connected to image rights? (btw, I don’t take a quote from Andronikou as “official confirmation”, particularly after his “the debt will bottom out at £78m” comments)

    I was under the impression that the tax system was essentially “pay now, dispute later”, so you pay what HMRC are asking for and then you appeal against the amount at a later date with supporting evidence, and if you win, you get a rebate.

    With all Southampton-tinted spectacles hopefully removed, it seems to me that Andronikou is just trying to blag his way through it but has been caught bang to rights, just like he was with the IVA case of the man who founded the Joe Bloggs jeans company which has striking similarities to this case.

    • John Beech said

      Worth a look here, and also here on another HMRC target in the football sector.

      As to Pompey and image rights, the problem is that HMRC refuse, as a matter of policy, to comment on individual cases. I would be fairly sure that the £13m is mainly image rights, although it might in part be for other disputed sums such as those in the second link.

    • As far as I’m aware, all those covered by the football creditors rule (which includes English clubs, players, managers and I think agents as well) were entitled to vote on the CVA acceptance.

      You are wrong.

      If you look at the FA Rules, it lists Football Creditors on page 1, under “Definitions and Interpretations”. For brevity, it covers: The FA, The Premier & Football Leagues, The Football Conference, The Northern, Southern and Isthmian Leagues, their clubs, and any renumeration or expenses of current or previous employees. It also covers the PFA and The Football Foundation.

      It does not (and never will) cover agents.

      There is a difference in the way that ex-players and ex-managers are treated (because of the PFA’s battles with the FA in the 1960s). When a player leaves a club, he must be paid in full as he leaves, if he isn’t, any money owing in terms of salary, owed signing on fees and loyalty bonuses (paid when a player leaves a club even if he leaves before the end of a contract, unless he has submitted a written transfer request) is considered renumeration, the only exception to this is image rights. In terms of sacked managers, when they leave a club, their payoff is not considered as renumeration, instead it is considered compensation.

      That is the reason that agents and Paul Hart had a vote in the CVA – they are standard creditors as neither were covered by the Football Creditors rule. Clubs such as Tottenham (owed money for the likes of Kevin Prince Boateng) are covered by the Football Creditors rule, and therefore did not have a vote in the CVA, because as you say, that would be insane, and would have been challenged should it ever have happened.

      • You are wrong

        How do you explain how the following appear in the list of creditors present within the Creditors Meeting report available from the UHY website all being documented as having been allowed to vote and having voted in favour?

        Aaron Mokoena
        Angelos Basinas
        Anthony Vanden Borre
        Aruna Dindane
        Asmir Begovic
        Chelsea FC
        Daniel Subotic
        Danny Webber
        David James
        David Nugent
        Dusko Tosic
        Eugen Bopp
        Frederic Piquionne
        Gael Nlundulu
        Glen Johnson
        Hassan Yebda
        Hayden Mullins
        Hermann Hreidarsson
        Jamie Ashdown
        Jamie O’Hara
        Joel Ward
        John Utaka
        Kevin Prince Boateng
        Liam O’Brien
        Linvoy Primus
        Luke Wilkinson
        Marc Wilson
        Mark Smith
        Marlon Pack
        Matt Ritchie
        Michael Brown
        Nadir Belhadj
        Nwankwo Kanu
        Papa Bouba Diop
        Quincy Owusu-Abeiye
        Ricardo Rocha
        Richard Hughes
        Steve Finnan
        Tal Ben Haim
        Tommy Smith
        Tottenham Hotspur FC
        Watford FC
        West Bromwich Albion FC
        Younes Kaboul

  5. Steve (for some reason it won’t allow me to reply to your post):

    I’d not seen that document before – very interesting. I would have expected the players to have to vote based on the image rights, (which as I said above aren’t covered by the Football Creditors rule). The clubs being there is odd. The Insolvency Act is less than vague in terms of who can and cannot attend CVA meetings. Clubs in administration generally haven’t owed transfer fees very often, so it’s appears that’s a call made by the administrator – as creditors the clubs would have an interest in the meeting, but allowing them to vote only seems to suit those in favour of the CVA (and without the FC votes, the CVA would have failed). It seems a decision aimed at getting the CVA through, and looking after the interests of the majority of creditors, rather than looking after the interests of all the creditors.

    Another thing I find odd though, is that the administrator is pushing through a CVA, seemingly with no buyer on the horizon, and any existing owners seemingly trying to distance themselves as far as possible. The CVA document states that the Football Creditors will be paid through the parachute payments, leaving Portsmouth with a Championship budget. However, the club have nine players at the club who would still be on Premiership wages (or very high end Championship wages at the least), crowds will probably dip to 16k (based on fewer away fans and the drop most clubs experience upon relegation) and effectively no parachute payments. As a result, Pompey will need to find an extra £3.375m compared to other Championship clubs to pay off their CVA. Now, there have been suggestions (I don’t recall where from) that Pompey will be able to sustain a wage bill of £10m. However, when my club Ipswich were rid of their CVA, their wage bill was £7-8m a season, their gates around 22k, yet they were still losing £3m a year – how are Portsmouth going to be able to pay that CVA at it’s current with lower attendances, and a projected higher wage bill, without a major cash injection?

  6. Rob,

    My understanding of the situation is that the Football Creditors rule is a rule specific to the Premier League and Football League, clearly it is not legislation that has been through Parliament. As a result, the Insolvency Act does not recognise “Football Creditors” as a separate entity to other unsecured creditors.

    Because of this, as far as the administrator is concerned, all Football Creditors are deemed unsecured creditors for a CVA vote, and therefore are entitled to vote as such. The problem there, as has been identified, is that the vote gets skewed as the Football Creditors have no incentive to vote against the CVA because they know they’ll get paid in full anyway.

    Adding up all the money owed to players (not including the companies listed on the original report to creditors which refer to players image rights) and English clubs, there’s £33.78m that has been voted on (and even that figure’s substantially less than the amount claimed!) but which the owed creditors knew they were getting full payment for anyway.

    The official vote result saw 81.2% in favour of the proposals (£106.7m out of £131.3m), but if we assume that football creditors are – in all but name – secured creditors (and I suspect this will be an aspect challenged by HMRC), that then leaves a “for” vote of £72.9m out of £97.5m, which would be 74.7%, not enough to get the CVA passed, and that’s not even taking into account the £13m written down by the administrator from HMRC’s claimed debt.

    For legal reasons, I will keep my conclusions/conspiracy theory to myself at this stage ;-)

    • Steve,

      The Football Creditors rule is a FA one, but without paying them off, a club cannot continue in the league, and therefore might as well cease trading, so as a result Football Creditors are considered preferential creditors, and are treated differently under the Insolvency Act – but because the Insolvency Act only refers to preferential creditors in general, and there are cases outside football where preferential creditors don’t receive 100%, they make no distinction on who actually is entitled to vote at the meeting.

      At which point, I find your last sentence very useful.

  7. [...] Portsmouth’s continuing purgatory [...]

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