Monday, 14 February 2011

A Taxing Challenge: Is The Football Creditor Rule Unlawful?


Back in May 2010, Her Majesty Revenue and Customs (HMRC) commenced proceedings against the Premier League seeking a declaration that the controversial “Football Creditor” rule, enshrined in the Premier League rules, is unlawful. If successful, HMRC will seek an injunction preventing the rule to continue to be in force.

The Premier League has said that it will “robustly defend its position” and it is believed that they have applied to strike out HMRC’s claim with the hearing taking place this Tuesday 15th February 2011. At the hearing, a High Court Judge will decide whether HMRC’s case will proceed to trial or whether the Premier League will succeed in striking out the claim.


Understandably, the many recent examples of football clubs failing to pay their tax bills, has angered HMRC. To combat this, HMRC’s tactic has been to serve winding up petitions on clubs in an attempt to recoup the monies owed to them. One such example was the case of Portsmouth FC where HMRC served the club with a winding up petition In order to recover millions of pounds of worth of tax owed to them. Portsmouth subsequently became the first Premier League club to enter into administration and the winding up petition was suspended as a result.

However, since the introduction of the Enterprise Act in 2002, HMRC are no longer considered to be a preferential creditor when a company enters an insolvency situation such as administration. HMRC were therefore forced to accept only 4.8 million of the 24 million owed to them after a Company Voluntary Arrangement was agreed by a majority of Portsmouth’s unsecured creditors. However, in accordance to the Premier League rules, the so called football creditors were paid in full, much to HMRC’s annoyance. HMRC attempted to challenge the football creditor rule in a High Court action last year, but failed due to this current pending action.

Football Creditor Rule

The football creditor rule arises when a club suffers an insolvency event such as administration. Once a club suffers an event of insolvency, its membership of the league, or its share in The Football Association Premier League Limited, is suspended (Rule C57) until the Premier League board is “reasonably satisfied that a suspended Club’s liabilities to its Football Creditors have been settled.” (Rule C64).

Whilst a club is suspended, the Premier League board are empowered by Rule C62 to ”make such payments as it may think fit to the Club’s Football Creditors out of:

62.1 any UK Broadcasting Money payable to the suspended Club under the provisions of Rule C36; and

62.2 any Overseas Broadcasting Money payable to the suspended Club under the provisions of Rule C38; and

62.3 any Title Sponsorship Money payable to the suspended Club under the provisions of Rule C40; and

62.4 any Commercial Contract Money payable to the suspended Club under the provisions of Rule C42; and

62.5 any Radio Contract Money payable to the suspended Club under the provisions of Rule C45.”

Football creditors are defined by Rule C63 as being:

63.1 The Football Association and clubs in full or associate membership thereof; and

63.2 Affiliated Associations (as defined by the articles of association of the Football Association); and

63.3 The Company and any subsidiary of it; and

63.4 The Football League, the Football Conference, the Northern Premier League, the Southern Premier League and the Isthmian Football  League; and

63.5 The Professional Footballers’ Association; and

63.6 The Football Foundation; and

63.7 Any employee or former employee of the suspended Club to whom arrears of wages or salary are due, to the extent of such arrears; and

63.8 Any pension provider to which a pension contribution payable by the  suspended Club in respect of its employees or former employees is due, to the extent of such contribution.”

The Premier League’s justification of the rule is that it preserves the integrity of the competition by ensuring that money remains in the game. It is felt that the rule helps maintain the stability of the game as the collapse of one club could lead to a domino effect whereby other clubs that rely heavily on monies owed to them could suffer a similar fate. A Premier League source outlined their stance in an article published by the Guardian in November 2010:

"Of course clubs should pay their taxes and of course it isn't fair when small businesses don't get paid in full. But it's absolutely right that professional football is defending the football creditors rule as it contains the impact of a club going into administration."

However, many feel that the rule is improper as it has the effect of diminishing the assets of the club leading to unsecured creditors not recovering the full amounts owed to them. HMRC strongly contend that the football creditor rule is “unlawful, unfair and unacceptable” and, as mentioned above, has sought a court order to this effect. According to HMRC “There is no legal basis for the football creditor rule. Non-football creditors are being seriously short-changed and enough is enough.”

Pari Passu

Pari Passu is one of the most fundamental principles of insolvency law and simply means that all unsecured creditors of a company must equally share the available assets of a company in proportion to the debt due to them.

It is argued that the football creditor rule offends this fundamental principle as the football creditors are preferred and ranked higher than other unsecured creditors (Section 239 Insolvency Act 1986). HMRC clearly believe that this is the case:

“HMRC’s view is that there is nothing in insolvency legislation that provides for unsecured debts due to ‘football creditors’ to be paid in preference to other unsecured creditors,”

It will certainly be interesting to see what defence the Premier League comes up with in response to this point.

Anti-Deprivation Principle

One of the primary requirements under the Insolvency Act 1986 is that all assets of a company suffering an insolvent event must be made available for distribution amongst all creditors. Parties have attempted to draft contractual provisions in order to avoid these statutory obligations, which have led to courts setting aside these provisions and ruling that they are unlawful. The anti-deprivation principle prevents a contractual term from depriving creditors of an asset that a company would have had before the insolvency event occurred. Lord Neuberger previously summarised the rule in a bankruptcy context:

“there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and, on the happening of that event, go over to someone else, and be taken away from his creditors”.

As the Premier League rules provide for various broadcasting and sponsorship monies to be paid directly to football creditors once a club suffers an insolvency event, it is felt that the rule breaches the anti-deprivation principle as it deprives other unsecured creditors of an asset. HMRC will certainly argue this point and will no doubt rely on the leading House of Lords case of British Eagle International Airlines Ltd v Compagnie Nationale Air France in support. However, it is felt that the Premier League will argue that a club who fails to comply with the regulatory rules should not be entitled to those monies.


The Premier League has clearly acknowledged peoples concerns regarding not only the football creditor rule but also the financial position of football clubs in general. The Premier League has therefore implemented provisions within their rules in order to control the finances of football clubs and appease parties such as HMRC.

If clubs fail to:

· Submit annual accounts (as required by Rule C78)

· Submit interim accounts (as required by Rule C81 or Rule C88)

· Submit Future Financial Information (as required by Rule C86 or Rule C87)

· Submit further documentary evidence (as required by Rule C80, Rule C83 or Rule C88)

· Satisfy the Premier League Board that no sums are due in respect of compensation fees, loan   fees, employment sums and transfer fees (Pursuant to Rule C84)

· Prove to the Board that they can pay its liabilities to football creditors and employees (Rule C53) and fulfil its contractual obligations (Rule C22)

then the Premier League Board can exercise the powers pursuant to Rule C90 (Rule C89).

This includes:

“90.1 to require the Club to submit, agree and adhere to a budget…

90.2 to require the Club to provide such further information as the Board shall determine and for such period as it shall determine;

90.3 to refuse any application by that Club to register any Player or any new contract of an existing Player of that Club”

There are also specific obligations concerning HMRC. Each club must provide quarterly confirmation “that its liabilities to HMRC in respect of PAYE and NIC are up to date” (Rule C93). Also, if requested by the Premier League Board, clubs must confirm, “whether it has any outstanding liabilities to HMRC” (Rule C94). If the Premier League Board “reasonably believes that a club’s liabilities in respect of PAYE and NIC are not up to date” (Rule C95) they can exercise the powers listed under Rule C90 mentioned above.


Despite the implementation of tighter controls concerning the settlement of tax bills and financial reporting, HMRC feel that this does not alter the fact that the football creditor rule is, according to them, unlawful. It should be noted that HMRC also attempted to challenge the football creditor rule in 2004 when the Inland Revenue (now HMRC) challenged the rule in the context of Wimbledon FC when the Inland Revenue only recovered 30p in the pound when they were owed circa £520,000. The Inland Revenue lost that case due to the fact that it was the buyer of Wimbledon who paid the football creditors and not Wimbledon FC itself.

The position in this current action is clearly different, as HMRC have taken direct action in relation to the football creditor rule rather than attempting to challenge it with particular insolvencies such as Portsmouth and Wimbledon. If successful, the case will have a major impact on football. It would certainly lead to a more uncertain and cautious transfer market as selling clubs will clearly have to assess the credit worthiness of potential purchasers. Clubs who appear to be less credit worthy will find it difficult to purchase players and certain guarantees or securities may have to be provided in order to do so. Many say it’s about time football becomes like any other business in the country and those people will certainly be hoping for an HMRC victory.

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