Introduction
Justice Richards’ eagerly
awaited Judgment in respect of the football creditor rule, which was handed
down on Friday following HMRC’s challenge of the rule, provided much needed clarification
as to whether the rule was contrary to insolvency law.
The football creditor rule ensures
that in the event of a club becoming insolvent, football creditors such as
other clubs, players and managers are paid in full in priority to other
unsecured creditors. However, the rule has been heavily criticised
by various parties including the Courts and Parliament due to its nature of preferring
one class of creditors over another. The Culture, Media and Sport Committee of
the House of Commons report dated 29 July 2011 recommended that it should be
abolished, by legislation if necessary, and in the case of Portsmouth Football
Club, Norris J summarised the reasons for the criticisms:
"I
understand the disquiet from the creditors. The general body of taxpayers, and
the ordinary consumers who do pay their energy bills, and the ordinary traders
and professionals who provide services such as, from the creditor list, coach
hire, catering, medical services, ground care and maintenance, must wonder why
they should subsidise the club's wage bill, why it is that they are
involuntarily lenders to the club of their outstanding bills and why they will
only get back pence in the pound for the services they have provided."
Richards J, in this recent
case, referred to two examples which illustrated the benefits of being a
football creditor when a football club becomes insolvent. When Crystal Palace
FC went into administration in January 2010, the football creditors were paid
in full and the other creditors received a return of less than 2p in the pound.
When Plymouth Argyle FC went into administration in March 2011, the football
creditors were also paid in full while the other unsecured creditors received a
dividend of 0.77p in the pound.
Previous attempts by HMRC to
challenge the football creditor rule in specific insolvencies involving clubs had
failed because the Football League or the Premier League was not a party to
such proceedings. HMRC, therefore, brought a separate a separate action for a declaration
that the football creditor rule was contrary to two fundamental principles of
insolvency law, namely the pari passu principle and anti-deprivation rules.
The pari passu principle requires
the assets of an insolvent company or person to be distributed among the
creditors on an equal basis meaning all creditors will receive the same
percentage of their debts out of the available assets. Parties are not free to
contract out of the operation of this principle and any attempt to do so is
void (See British Eagle International
Airways Ltd v. Cie National Air France [1975] 1 WLR 758).
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”.
Lord Collins in Belmont referred
to the anti-deprivation rule as "aimed
at attempts to withdraw an asset on bankruptcy or liquidation or
administration, thereby reducing the value of the insolvent estate to the
detriment of creditors". The principle only applies if the deprivation
is triggered by an insolvency and the deprivation must be of an asset of the
debtor which would otherwise be available to creditors.
HMRC'S
CASE
HMRC sought a declaration
from the Court that the following provisions contained within the Football
League’s Articles of Association were void and unenforceable:
a)
Articles
72.3 and 77.3
Pursuant to a contract
between the Football League and the clubs, clubs are entitled to receive
payments from a pool account for the various television rights and sponsorship
deals, which are negotiated by the league on behalf of the clubs. Such
payments, called the 'basic award', are
allocated as follows:
·
£ £620.000 for each Club of the Championship;
·
£300,000 for each Club of League 1; and
·
£210,000 for each Club of League 2.
Article 77.1 provides for
the Board of the Football League to “make
interim payments from the pool account to any Member Club. These will be based
upon the sums likely to be paid to Member Clubs under these Articles and will
be paid on account.” Article 77.3, however, states that:
"Payments
to Member Clubs under the Articles only become a legal liability of The League
to a Member Club, if the Member Club completes all of its fixture obligations
to The League for the relevant Season. This means that any interim payments
under this Article 77 are repayable to The League on demand if the Member Club
does not complete all of its fixture obligations."
Completion of all fixtures
for the season is therefore a condition precedent to any right to payment out
of the pool account so, a club which suffers an insolvency event and, as a
result, loses its share during a season is unable to complete its fixtures and cannot
comply with the condition precedent to receive any payments from the pool account
and must repay any interim payments already received.
Clubs are also entitled to
receive a ladder payment under Article 72 which is dependent on the clubs
position at the end of the season, however, such payments are not made because
the basic award has been set at a level which absorbs all available funds so
the relevance of this provision is minimal. However Article 72.3 does provide
for "Any Member Club which ceases to
be a member or fails to fulfil its fixtures during a season shall not be
counted in determining the number of places on the ladder and shall not receive
any payment under the ladder principle."
HMRC, therefore, challenged both
rules on the basis that their intended effect is that property of the company
i.e. the right of the Club to payment is removed when a club suffers an
insolvency event.
b)
Article
80.2
Article 80 applies where a
club defaults in making any payment due to any of the football creditors. If
such an event occurs, Article 80.1 states that the club shall be subject to
Article 80.2 which provides that "the
Board shall apply any sums standing to the credit of the pool account which
would otherwise be payable to a Defaulting Club, in discharging the creditors
in article 80.1".
HMRC, therefore, challenged this
provision on the basis that Football Creditors receive payment direct out of monies
due to the Club from the pool account and thus is the pari passu rule as monies
falling due to an insolvent club should be held for the benefit of all
unsecured creditors
c)
Article
4.7.4
The Football League is a
company limited by shares with a share capital of £5 divided into 100 shares of
5p each, of which 72 shares have been issued. The shares are held by the clubs
who each hold one share.
However, Article 4.5 of the
Football League's articles of association provides that the board of the
Football League may, in certain circumstances, give a club written notice to
transfer its share. One such circumstance is "if any Member Club shall become subject to or suffer an
Insolvency Event" i.e. administration or liquidation, which is laid
down by Article 4.7.4.
If a club loses its share,
it will be unable to fulfil its fixtures and, therefore, lose the ability to
generate revenue, its entitlement to payment from the pool account and the
possibility of selling players as all registrations with a club terminate if it
ceases to be a member of the league (See regulation 61). HMRC, therefore,
challenged this rule on the basis that the club’s share in the Football League
is property of the club and is purportedly removed from the company on the
onset of insolvency.
HMRC's case is summarised in
paragraph 3 of its Particulars of Claim:
"The
Football League have, by way of certain provisions of their articles,
Regulations and Insolvency Policy, constructed a device under which, on
insolvency, " football
creditors" are paid in full whilst ordinary unsecured creditors of
the same class receive a very modest dividend. Great skill has been used in the
drafting of the device, and also in making a challenge to the device difficult.
HMRC contend that the rules under which the device is operated are against
public policy and void – in offending both the anti-deprivation rule and also
the pari passu principle. In essence, on insolvency the Football League causes
the transfer from the insolvent club of the share which each club has in the
company owning the Football League (this is termed the "golden share"
in the remainder of these submissions – a term which is widely used in the football
world). Absent the "golden share" the club loses its assets (players'
contracts and registrations, income – both for the current Season and for the
future). Income that would otherwise be paid to the club is paid direct to “football
creditors". The "golden share" is only returned on condition that
football creditors are paid in full.In
summary certain of the Football League's rules are expressly designed so that
in the event of the insolvency of one of its member football
clubs a particular class of creditors known as " Football Creditors" receive preferential
treatment over ordinary creditors in breach of fundamental principles of
insolvency law. This effect is achieved as set out below through contractual
machinery under which on insolvency a football club is deprived of valuable
assets. As a result of the operation of these rules HMRC has suffered loss and
will continue to do so."
The Football League
disagreed with HMRC’s interpretation and claimed that none of the provisions
challenged by HMRC offends either the pari passu or anti-deprivation rule.
Firstly, in respect of
Article 77, the Football League claimed that a club has no right to the payment
of any sum derived from television and other commercial contracts unless and
until it has completed all its fixture obligations for the relevant season. If
the club ceases to be a member before the end of the season, it is, therefore,
not deprived of any debt or right to payment.
Secondly, in respect of
Article 80, payments to football
creditors are not triggered by an insolvency event such as
administration or liquidation but by a default in the payment of any football creditors and are, therefore,
outside the scope of the pari passu principle and the anti-deprivation
rule.
Finally, in respect of
Articles 4.5 and 4.4.7, the share in the Football League owned by a club in
administration or liquidation has no value and, therefore, neither the pari
passu principle nor the anti-deprivation rule can apply to the compulsory
transfer.
Judgment
When giving his judgment, Richards
J addressed all three provisions which HMRC alleged were contrary to the pari
passu and the anti-deprivation rule.
Richards J pointed out that
if there is no asset vested in a club at or after the date of administration or
liquidation, then the club has not been deprived of an asset and so the
anti-deprivation rule cannot apply. Equally, if there is no asset vested in the
club at or after the date of notice by an administrator to make a distribution
to creditors or the date of any liquidation, there is no asset to distribute to
creditors and so the pari passu principle cannot apply.
In respect of both Articles
77.3 and 80.2, Richards J felt the problem for HMRC was that “there can be no doubt as a matter simply of
construction of article 77.3, that any legal entitlement to payments is
conditional upon completion of all fixture obligations. Completion of all
fixture obligations is a condition precedent to the debt arising in favour of
the club.” If a club, therefore, is unable to complete its fixtures, no debt
becomes due to it in which case both rules will not apply. The point was
summarised by the Judge at paragraph 136:
“If
an individual member club has no legal entitlement to payments from the Pool
Account until it has completed its fixture obligations for the relevant season,
it is not deprived of an asset if, as a result of going into administration or
liquidation, it cannot or is not permitted to complete the season. Likewise, if
sums from the Pool Account which would have been paid to a club if it completed
the season are paid instead to football creditors following an administration
or liquidation occurring before the end of the season and preventing the club
from completing its fixtures, there is no asset of the club to which the pari
passu principle can be applied.”
However, because the
Football League suspends the share transfer on the onset of any insolvency, insolvent
clubs have, so far, always completed their fixtures for the season and so on
completion of the season a debt would become due and payable to the club under
Article 77.3. However, despite a debt becoming due to the club, the majority of
the monies due to the club would have been used to pay football creditors under
Article 80.2.
In terms of Article 80.2, therefore,
Richards J felt it was vital to determine whether the payment of sums under
Article 80.2 from the pool account to discharge a defaulting club’s football
creditors, applies during a season or at the end of it. If the operation of
Article 80.2 applied during a season Richards J held that the
club is not deprived of an asset and, therefore, pari passu or anti deprivation
cannot apply.
In determining whether
Article 80.2 applies during the season or at the end, Richards J looked at the
length of the season and the likelihood of sums falling due from clubs to such
creditors throughout that period. Richards J, therefore, held that it was “commercially implausible that it was
intended that no payments should be made under article 80.2 until what may well
be many months after the default has occurred.” Richards J also looked at
the fact the funds paid into the pool
account are the Football League's own funds and, despite the articles providing
for payment to clubs out of the pool account, that does not mean, according to Richards
J, that “sums in the Pool Account are
held to the credit of clubs before the debts are due.”
Richards J, therefore, held
that Article 80.2 applies during a season so when there is a default in the payment
of debts to football creditors during the season, the Football League is “obliged to pay such debts out of the Pool
Account to the extent of the amount which would otherwise become due to the
defaulting club at the end of the season”. As a result, the only sum due to
a defaulting club which completes the season is the balance, if any, after the
Football League has paid football creditors during the season. The defaulting
club is, therefore, not deprived of an asset “because in these circumstances there never was a debt due to it.”
Also, Richards J referred to
the case of Belmont Park Investments Pty
Ltd v. BNY Corporate Trustee Services Ltd [2012] 1 AC 383 where Lord
Collins concluded that the anti-deprivation rule "is intended to operate only where the provision is made for deprivation
on bankruptcy". As Richards J concluded that Article 80.2 applied
prior to the end of the season, Richards J held that the anti-deprivation rule does
not apply to Article 80.2.
In summary, Richards J held
that the anti-deprivation and the pari passu rule did not apply to Articles 77
and 80.2 because, in respect of Article 77, clubs cannot be deprived of an
asset unless they complete the season but, even if the clubs did complete the
season, the payments under Article 80.2 applied during the season so the club
was not deprived of an asset meaning there could be no distribution of funds at
the onset of insolvency.
Finally, in respect of
Article 4.7.4, it follows from what Richards J concluded about Articles 77 and 80.2 that by removing
the club’s share it is not deprived of any existing right to receive any
payments from the Football League. At most the club is deprived of a right to
continue to play in the competitions. However, Richards J explained that insolvency
law does not compel a party to continue to deal with an insolvent company “nor does it prohibit a party from
stipulating that all future dealings shall be on terms that not only future
debts but also existing debts are paid in full.” The Football League’s
Articles of Association, permitting the Football League an insolvent club to
participate in its competitions on terms that the football creditors are paid
in full, “is no more than the exercise by
the member clubs through the Football League of their right to refuse to
participate further with the insolvent club save on these terms.”
The Football League was understandably
pleased with the judgment:
"The
judgment confirms that The Football League's rules and insolvency policy do not
breach the principles of existing insolvency law,"
The Football League recognises
that their rules are imperfect. However, according to the Football League, their
rules "remain an essential part of
football's approach to handling insolvent clubs within the wider context of
competitive league football."
However, Richards J was keen
to stress that “The Football League
should not regard the result of this case as an endorsement of its approach to
football creditors. It
is, as I said at the start, a decision on a challenge brought on a particular
legal basis” which seems to open up the possibility of a further
challenge by HMRC on perhaps another legal basis. HMRC confirmed that they were
“naturally disappointed with the judgment”
and that they "will carefully
consider the detail of the judgment before deciding whether an appeal is in the
public interest." I, therefore, doubt whether this will be the final challenge
to the Football Creditor Rule.