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Upheld football creditors' rule "becoming increasingly outdated", expert says

Out-Law News | 28 May 2012 | 10:11 am | 3 min. read

The controversial rule allowing the Football League and Premier League to insist that football players, managers and other clubs get paid before other creditors if a football club enters administration will "likely become an irrelevance" as penalties against insolvent teams become more sophisticated, according to an expert.

Sports lawyer Trevor Watkins of Pinsent Masons, the law firm behind Out-Law.com, was speaking as the High Court dismissed a challenge by HM Revenue and Customs (HMRC) against the so-called 'football creditors' rule'.

"The principle of protecting other clubs under the rules of membership has survived whilst other measures have been implemented tightening the rules to prevent on club getting competitive advantage over others by playing the system," he said. "A new era where we are now seeing substantial and significant changes as a result of the forthcoming financial fair play rules will mean clubs become increasingly constrained in the amount of debt they can take on."

World football governing body FIFA has introduced the rules, which will assess a club's efforts to 'break even' financially over three seasons including the one currently being contested. Clubs will be subject to sanctions, including potential bans from European competition the following season, from 2013-14 if they fail to meet the new standards.

As the High Court, Mr Justice Richards was careful not to endorse the application of the rule when he stated that it did not breach two principles of insolvency law, intended to prevent debtors from holding back assets from consideration as part of the insolvency process and to ensure that all creditors receive the same percentage of their debts when assets are distributed.

"These proceedings are not concerned with whether giving priority to football creditors is socially or morally justified," said, opening his leading judgment. "The issue is one purely of law, whether the provisions which together accord this priority are void and of no effect on the grounds that they are contrary to insolvency law."

"The judgment itself is unsurprising," said Watkins. "In the absence of a specific challenge on a specific matter by HMRC, it does no more than maintain the current position that the law is not offended by the way football goes about its business between member clubs. Although the acceptance of a process that sees the settlement of football creditors' debts in full outside of the insolvency process is a subtle and arguably artificial process to get the desired end result, it is for the member clubs through their representative body the Football League to decide what conditions they will impose. So long as they are separate and distinct it will be allowed."

HMRC had argued that the rule was unlawful as, by ensuring debts to football creditors were settled in full before other creditors could be paid, the Football League was artificially giving those creditors preferential status. Changes to insolvency law introduced in 2003 abolished HMRC's own status as a preferential creditor, meaning that unpaid taxes are now treated in the same as other unsecured debts when a football club or other company goes into administration.

In a statement, the tax authority said that it was "naturally disappointed" with the judgment. There have been 36 insolvencies among clubs which are or were members of the Football League over the last ten years.

"Our view remains that the Football Creditor Rule is unfair to all other unsecured creditors who are forced to make do with much smaller returns – if anything – on monies owed to them by football clubs which enter administration," it said. "We will carefully consider the detail of the judgment before deciding whether an appeal is in the public interest.

Restructuring law expert Alastair Lomax of Pinsent Masons agreed. "As matters stand football continues to live in a 'bubble' where member clubs do not always need to face up to the financial consequences of their actions and those of their fellow members. A rule set up to protect the other 'solvent' members of the league does little to promote financial discipline among all member clubs and a culture of living within their means," he said.

"Much is made of the importance of clubs in their local community but the football creditor rule ensures that it is often small local suppliers who are picking up the tab when their clubs fail.  Hopefully, the changes introduced by FIFA will be good for all concerned," said Lomax.

Sports law expert Watson said that as an immediate consequence of the ruling football would be "more likely to come under pressure from the Government, as well as the taxman, to change the way it does business". In a report on football governance last year, the House of Commons Culture Media and Sport Committee suggested that the Government should step in to legislate against the rule if HMRC was unsuccessful.

"The concept of 'paying off' clubs and players whilst small businesses suffer is anathema to the parliamentary committee and those who see the game from afar rather than from the perspective of those trying to balance and ensure fair competition," Watkins said. "Austerity times lend themselves to such rules being attacked."

However, along with other changes the absence of the rule could ultimately improve governance and financial prudence within football clubs, he said.

"It is now a growing reality that we might finally see solid business models based on lower wage expectations and balanced books," he said. "Whilst it might ensure that insolvency practitioners and lawyers get less business, it will make football a far more healthy and attractive proposition for investors, sponsors and those local businesses that will always want to be involved with clubs but have often suffered as clubs go bust."