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

Posts Tagged ‘Law’

The great governance debate

Posted by John Beech on May 13, 2011

The House of Commons Select Committee on Football Governance certainly finished their hearings with a bang.

First up was Mike Lee, ‘strategist behind the 2022 Qatar World Cup bid’, and late of the London 2012 Olympics bid.  His appearance was bound to be confrontational given the submission of new evidence by The Sunday Times (1) regarding the awarding of the World Cup to Qatar.  He was given a bit of a hard time, and, unusually, received an apology for this (2).  Qatar has become such an issue that even the International Olympic Committee have ordered a Qatari bribery investigation (3).

Next up, and the final witness, was Lord Triesman.  His allegations about the bidding process for 2022 were made under parliamentary privilege, and have caused a considerable, and appropriate furore.

Important though the governance of the national is, I was disappointed that the Committee had drifted off what I saw as the main topic – the governance of leagues and clubs.  Judging by the written submissions, this seems to have been the topic that was generally seen as more important.

There is perhaps a different reality, one in which the reform of club and league governance remains centre stage.  On Wednesday Supporters Direct an launched two special briefings put together by Supporters Direct and Substance.  Both concern encouraging supporter community ownership in football; the first is on Developing Public Policy and the second is on Developing Football Regulation.  (I should admit a vested interest at this point – some of my research is quoted in the latter.)  Both are downloadable pdfs, but note their length before you rush to print them.

Dave Boyle (Supporters Direct) and Adam Brown (Substance) at the launch

Far from simply being an advocation of fan ownership, they set out clearly how the current financial model for running football clubs is broken, the specific ways in which it fails, and how a sustainable alternative model would work.  As well as fan ownership, a strong case is made for club licensing along the lines of the systems practised in Germany and in Northern Ireland.  The briefing papers also spell out the role that government should take in driving reform through effective changes in legislation rather than through some more direct intervention.

I found it particularly encouraging at the launch that there were 3 MPs present.  Governance reform is definitely still on the political agenda.  As Dave Boyle of Supporters Direct pointed out, a pile of all the official reports on football is now over a foot high, yet their recommendations have, on the whole, not been implemented.  Such is the current state of football governance that the failure to take action cannot be justified.  In real life, doing nothing is always an option whatever anyone might claim, but doing nothing would have a culpability to the disintegration of professional football attached to it.

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Posted in Governance, Law, Politics, Uncategorized | Tagged: , , , | 6 Comments »

The Portsmouth verdict…

Posted by John Beech on August 6, 2010

… or the Great Escape thanks to an own goal.

As a Pompey fan, not surprisingly my first reaction to the verdict of Mr Justice Mann was one of relief, a feeling no doubt shared by all Pompey fans, and especially by those members of the club’s non-playing staff for whom the threat of further redundancies will have been eased.  Creditors, I would argue, should at least been not displeased with the result, as the real threat of liquidation would have left them with even less.

The judgment was based, of course, on narrow but precise points of law, the full details of which have yet to be published.  Matt Slater, who was in court, provides an excellent account of the proceedings on the final day here.  He writes of Mr Justice Mann’s pronouncement:

So HMRC’s arguments about the iniquity of football’s millionaires-first repayment rules, the general iffiness of clubs making “tax efficient” image rights payments to players with dubious “brand value” and the serial nature of Pompey’s antics were irrelevant. This case, in Mann’s opinion, boiled down to one key question.

Was the vote to decide how Pompey get out of this mess (with an agreement to pay creditors a reduced amount of the monies they are owed) organised correctly?

The judgement was an unequivocal ‘Yes’.  Mr Justice Mann found that “none of the five heads of attack by HMRC amount to unfair prejudice nor have they been materially affected.  In my view, HMRC will not be worse off by the situation left by the CVA bearing in mind what the alternatives could be for the club… There is no worthwhile way of money coming into the club other than by the CVA (1).  The reasons for his ruling were “This case turned on commercial validity and not the football creditors rule. This is not the right place to decide whether creditors rules are fair or not. There is no way in which any worthwhile solvency can flow into the club other than the CVA” (2).

One way of viewing this is that HMRC’s fight to get the Football Creditors Rule overthrown scored an own goal yesterday.  I had argued a few weeks ago (3) that HMRC were making a tactical mistake in pursuing this line, but it gives me little pleasure to see them beaten.  The Football Creditors Rule is an absurdity.  If I had a pound for every occasion over the last couple of weeks that I’ve been asked to explain it to non-football followers, well, I wouldn’t have been able to make any impact on Pompey’s tax bill, but I could dine out modestly.  Invariably the reaction has been one of shock, disgust and almost disbelief.  ‘Why should football clubs and players not have to pay their taxes like any other business and its employees?’ is the inevitable question that follows.

The argument the leagues put up, and it is of course their rule, not Portsmouth’s, is that without it the integrity of the transfer market could not be sustained.  Without it, it is suggested that the financial collapse of Portsmouth might have brought down Watford.  I have to say that I just do not think this argument stands up to scrutiny.  It is tantamount to saying that as a club you should be guaranteed payment for a when selling a player whether your customer, the club buying your player,  can afford it or not, that the simple expediency of checking credit ratings is not for you.  What it allows is an unnaturally high level of transfer fee, and this at the expense of HMRC.  Of course normal taxpayers can’t see the sense in this!  As for the ‘Watford argument’, I would argue that, had they collapsed as a result of Portsmouth’s collapse, there would have been significant other factors contributing to that collapse.

There is too the issue of image rights, which now have added legitimisation as a means of tax avoidance,  i.e. within the law, as opposed to illegal tax evasion.  Hardly a good result for HMRC.  (Incidentally, an interesting story on image rights here.)

In a nutshell, a good result for Portsmouth, and a bad result for HMRC.  Hurray and boo respectively!  It was, in the bigger football picture, also a bad result for football.  There seems to a creeping myopia that the specificity of sport should somehow place its participants in a special category which avoids paying the taxes which everyone else pays.  Sam Allardyce’s call yesterday, “If Cameron is listening, drop the tax bracket will you? Then we can get the best players in the world to play in the best league in the world.” (x) seems to me to be singularly ill-timed and out of step with public opinion.

The leagues are beginning to address the reform agenda, but I fear it is ‘too little, too late’.  Given that a consultation process is taking place about the collection of taxes from companies (see Bubbling away in the background), and in the context of the ‘Great Deficit’, the leagues are moving towards their last chance to scrap the Football Creditors Rule before they too face HMRC in court.  Let’s hope they have not been buoyed in their intransigence by yesterday’s ruling.

Posted in Debts, Football League, Governance, HMRC, Insolvency, Law, Premier League | Tagged: , , , , , , | 9 Comments »

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:

  1. The Crown
  2. Football creditors (e.g. other clubs, players)
  3. 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:

  1. 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.
  2. 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.

Posted in Debts, Football League, Governance, HMRC, Insolvency, Law, Premier League | Tagged: , , , , , , | 17 Comments »

 
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