Sunday, 20 February 2011

A Summary Of The Latest Court Action Surrounding The Sale Of Liverpool Football Club

Mr Justice Floyd this week gave his judgment on the latest set of proceedings following the sale of Liverpool Football Club back in October last year.

It is clear that Tom Hicks and George Gillett are still aggrieved about how the club was taken away from them and have previously threatened to commence proceedings in order to recover the millions of pounds that they have claimed to have lost following the sale to New England Sport Ventures (“NESV”). Unsurprisingly, the former owners would prefer to commence any such claim in the United States but, currently cannot do so due to an anti-suit injunction being in place that prevents them from commencing proceedings relating to the sale of the football club in the any other jurisdiction.

This latest action involved a total of six applications made by various parties but the application that was believed to be the most significant was the one by the former owners. Their application was to discharge the anti-suit injunction granted in October, which, if successful, would have enabled them to bring a claim for damages in the United States.

Events Surrounding the Sale of Liverpool Football Club

If you cast your mind back to October last year you will remember that the former owners attempted to remove directors Christian Purslow and Ian Ayre from the board in order to block the approval of any sale to NESV. This was in clear breach of the various agreements with Royal Bank of Scotland (“RBS”), which clearly stipulated that the former owners were to have no involvement in the sale of the football club.

Sir Martin Broughton, who was appointed by RBS as independent Chairman in order to facilitate the sale process, did not believe that this was a valid decision by the former owners and so proceeded to accept the offer made by NESV.

RBS subsequently obtained an interim injunction preventing the former owners from taking further steps in breach of those agreements and later applied for a mandatory injunction reversing the changes to the board. RBS also issued a claim against the former owners and their corporate entities seeking a declaration that the removal of Christian Purslow and Ian Ayre was invalid or, if valid, was in breach of the agreements with the former owners.

In response, the former owners sought an injunction preventing the sale to NESV from proceeding and also issued a claim against Sir Martin Broughton, RBS, the corporate entities that owned the club, and the directors seeking a declaration that the decision to enter into the sale contract with NESV and the sale contract itself was not binding.

Finally, Sir Martin Broughton, and the corporate entities that owned the club, issued a claim against the former owners seeking a declaration that the reconstitution of the board by the former owners was invalid and that the decision to accept NESV’s offer was binding.

Mr Justice Floyd heard RBS’ application for a mandatory injunction and the former owners application for an injunction preventing the sale on 12th October 2010. In support of the former owners application, they claimed that RBS had acted in repudiatory breach of the agreement by excluding the former owners from the sale process and refusing to consider other offers. Justice Floyd held that the former owners claim based on repudiatory breach had “no realistic prospects of success” and refused to grant their injunction. Justice Floyd, however, granted RBS’ mandatory injunction and ordered that the board be restored.

This should have enabled the sale to NESV to proceed however, the former owners obtained a Temporary Restraining Order (“TRO”) in Texas against Sir Martin Broughton, the other directors, RBS and NESV. The TRO sought a declaration that Ian Ayre and Christian Purslow had been removed as directors and that they had no authority to approve the sale to NESV. The TRO was therefore clearly aimed at preventing the sale to NESV taking place and also included serious allegations against the club’s directors calling it “an epic swindle at the hands of rogue corporate directors” with Sir Martin Broughton accused of “constructive fraud”.

After becoming aware of the TRO, RBS, Sir Martin Broughton and NESV were forced to make an application for an anti-suit injunction. An anti-suit injunction prevents a party from commencing or continuing proceedings in another jurisdiction. Justice Floyd granted the injunction due to “the unconscionable conduct of the former owners in seeking to undermine the English proceedings”. The injunction required the former owners to discharge the TRO and prevented further claims by them against the parties to the proceedings taking place in the US. The specific order was as follows:

“The Defendants shall not, without the prior consent of this Court, commence or pursue, or procure or assist the commencement or pursuit of, any further proceedings relating to the Disputes in any Court or Tribunal other than the High Court of England and Wales or the courts of the member states of the European Union.”

As a result, the TRO was discharged and the sale to NESV was finally completed.

Latest Action

Currently, there are two sets of proceedings that remain:

1. RBS’ claim seeking a declaration that the removal of Christian Purslow and Ian Ayre was invalid or, if valid, was in breach of the agreements with the former owners; and
2. Sir Martin Broughton’s claim seeking a declaration that the reconstitution of the board by the former owners was invalid and that the decision to accept NESV’s offer was binding.

The claim by the former owners seeking a declaration that the sale to NESV was not binding has since been discontinued due to Justice Floyd dismissing the repudiatory breach argument.

This latest action involved the following six applications, which were heard by Mr Justice Floyd last week:

1. Application by the former owners seeking to discharge or vary the anti suit injunction; and
2. Application by Sir Martin Broughton seeking to amend his claim;
3. Application by Royal Bank of Scotland seeking to amend their claim;
4. Application by the former owners seeking to strike out or dismiss Sir Martin Broughton’s claim;
5. Application by NESV seeking an order joining themselves as a defendant to Sir Martin Broughton’s claim; and
6. Application by Sir Martin Broughton seeking permission to serve Kop Investment LLC out of the jurisdiction;

1. An application by the former owners seeking to discharge or vary the anti suit injunction

Following the anti-suit injunction being granted and the sale to NESV taking place, the former owners have since applied for the anti-suit injunction to be discharged or at least varied in order to incorporate a statutory provision provided by US law. The former owners argued that there are “no foreign proceedings immediately in prospect” meaning that the continued operation of the anti-suit injunction is not justified. As an alternative, the former owners proposed agreeing to provide an undertaking that they would give notice of any intended proceedings brought abroad.

RBS challenged this application on behalf of Sir Martin Broughton and NESV. They contended that the anti-suit injunction was necessary to protect the threatened proceedings by the former owners and should therefore not be discharged. RBS also referred to the contractual provisions contained within the various documents, which specified the jurisdiction to be England and Wales.

Mr Justice Floyd was “satisfied that the former owners have not shown any good reason why the injunction should be discharged.” In respect of the former owner’s contention that there is no immediate threat of any foreign proceedings, Justice Floyd believed that “they will undoubtedly start more proceedings if allowed to do so” and that “there is a real threat that those proceedings will be in the United States.” Justice Floyd felt that the form of any future proceedings was clear

“it is a claim … that there has been an unlawful means conspiracy by RBS, Sir Martin Broughton, the directors and NESV to exclude the former owners from the sale process and to sell Liverpool Football Club at an undervalue to NESV…The objective includes the recovery of sums by way of punitive damages against RBS, NESV and Sir Martin Broughton, amongst others.”

In respect of the jurisdiction clauses, Justice Floyd was satisfied that any proceedings brought in the US against Sir Martin Broughton would amount to a breach of the jurisdiction clause in his letter of appointment. However, the judge was less certain about any proceedings brought against RBS due to one of the agreements, namely the Corporate Governance Side Letter, specified the jurisdiction of England & Wales to be “non-exclusive”, although the judge did feel that any foreign proceedings against RBS would be covered by the exclusive jurisdiction clauses in the RBS side letter.

Interestingly, Justice Floyd failed to comprehend how any claim will have a connection with the US: 

“this dispute concerns an English asset (Liverpool Football Club), duties owed by English directors under English law to English companies and corporate governance arrangements governed by English law.” 

Justice Floyd was also still clearly perturbed by the TRO as he did not feel that he was provided with “a satisfactory explanation of the conduct which led to the application being made in Texas”. The former owners conduct back in October was obviously a relevant factor, which Justice Floyd considered:

“Given what has happened in the past, I think the court is justified in seeing what those proceedings are before releasing the injunction.”

As a result of the above, Justice Floyd concluded that the former owners application was dismissed although he did permit a variation of the anti-suit injunction allowing the former owners to seek assistance from a US court if any proceedings are subsequently commenced in this country.

2. Application by Sir Martin Broughton seeking to amend his claim

As stated above, Sir Martin Broughton’s claim remains active and he continues to seek declaratory relief. However, as the sale to NESV has taken place, the claim requires amending. The application heard last week was therefore to seek permission to make amendments to this claim.

Firstly, Kop Football (Holdings) Limited and Kop Football Limited were previously the corporate entities that had immediate control and ownership of the football club. However, because the sale to NESV has taken place, they are now under the control of the former owners. Sir Martin Broughton therefore applied to make these companies Defendants rather than Claimants in the action. Sir Martin Broughton’s previous claims for declarations remained. The further amendments sought were as follows;

a. That he is not liable to the former owners or any of their entities for breach of any duty in respect of his conduct as a director. In particular, with regard to his involvement in the sale of Liverpool Football Club to NESV.

b. Alternatively, a declaration or order pursuant to Section 1157 of the Companies Act 2006 relieving him of any liability in respect of the same matters, on the ground that he acted honestly and reasonably and ought fairly to be excused.

Counsel on behalf of the former owners felt it was wrong to allow the requested amendments as it had the effect of forcing the former owners into proceedings before they were ready to do so. Secondly, the former owners felt that the declaration sought was too wide as it relates to Sir Martin Broughton’s whole tenure as Chairman and not just the events during the sale process. Finally, the former owners argued that there was not a sufficient threat of proceedings from them to justify declaratory relief sought.

Mr Justice Floyd was “not persuaded by these submissions.” The judge felt that declaratory relief was suitable in this case due to the former owners’ threats of bringing a claim. Justice Floyd referred to an interview with Sky on 15th October 2010 where Tom Hicks said:

“this was an organised conspiracy, it went on over months, and it consisted of the Royal Bank of Scotland, Martin Broughton, who wanted to have a good PR event in his life…”

Further, Justice Floyd referred to a report in the Times on 16th October where Tom Hicks’ lawyer said that he would pursue “every legal avenue possible.”

The judge also referred to the TRO and the serious allegations made against Sir Martin Broughton contained within those proceedings:

“The proceedings were only withdrawn because of my order: the allegations made in it have never been.”

The judge therefore felt that nothing had changed and that Sir Martin Broughton’s “conduct of the sale process continued to be subject to attack by the former owners.” As a result, Mr Justice Floyd believed “Sir Martin Broughton has established that it would be useful for him to have the negative declaration sought”.

3. Application by Royal Bank of Scotland seeking to amend their claim

RBS’ claim also remains active and they continue to seek declaratory relief. Once again, the application heard this week decided whether RBS were permitted to make the following amendments to their claim:

a. A declaration that RBS did not act in repudiatory breach of the terms of the agreements with the former owners;

b. A declaration that RBS’ conduct did not deprive it of equitable relief in relation to the enforcement of those letters;

c. A declaration that RBS’ conduct in relation to the sale process of Liverpool Football Club did not involve it in dishonestly assisting any breach of fiduciary duty by the directors in relation to the sale;

d. A declaration that RBS’ conduct in relation to the sale process did not involve an actionable conspiracy;

e. A declaration that RBS is not prevented from enforcing its rights under the Security Agreement in respect of outstanding liabilities owed to RBS; and

f. A declaration that RBS is not prevented from enforcing its rights under the Guarantees from the former owners in respect of outstanding liabilities owed to RBS

Counsel for the former owners chose not to separately address the application to amend RBS’ claim as it was his intention to rely on his previous submissions concerning the application to amend Sir Martin Broughton’s claim. Accordingly, Mr Justice Floyd allowed RBS’ application.

4. Application by the former owners seeking to strike out or dismiss Sir Martin Broughton’s claim

As the judge permitted Sir Martin Broughton to make the requested amendments to his claim, the former owner’s application to strike out the claim was dismissed.

5. Application by NESV seeking an order joining themselves as a party to Sir Martin Broughton’s claim

This was granted by the Justice Floyd.

6. Application by Sir Martin Broughton seeking permission to serve Kop Investment LLC out of the jurisdiction

As Kop Investment LLC is a company incorporated in the United States, Martin Broughton sought permission to serve his claim outside the jurisdiction of England and Wales. This was granted by Mr Justice Floyd.


The outcome of these latest proceedings is undoubtedly a good result for all those involved with the sale of the Liverpool Football Club. The prospect of defending an action for damages by Tom Hicks and George Gillett in the United States would certainly have been unwelcome not to mention uncertain. For now, the former owners continue to be barred from bringing an action in the United States but it remains to be seen whether any further challenge to the anti-suit injunction will be forthcoming or if the former owners decide to instigate proceedings here. In the meantime, Sir Martin Broughton’s and RBS’ claims remain ongoing so expect further rulings relating to the sale in the future.

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.