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  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 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.
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  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.