The current coronavirus pandemic has thrown into light a number of issues and has caused us all to ask some difficult questions about how we live our lives, and may fundamentally change humanity in a number of ways such as how we work, interact with others, how the economy works, and also how the world of sport operates. Professional football clubs have not been immune to the economic effects of the pandemic and many clubs below the Premier League in the English Football League (EFL) have been hardest hit due to their heavy reliance on matchday revenues from ticket sales and hospitality and catering income. Some within the industry predict a doomsday scenario of 50-60 clubs facing insolvency or administration of some kind. This poses some really pertinent questions about what regulators and government can do to help clubs stay afloat and become more sustainable. In this piece, I briefly explore a couple of proposals which could help clubs in the long run over a couple of blog posts.
Football Creditors Rule
A part of the football regulatory landscape that has caused a fair bit of controversy over the years (particularly with the taxman), is the Football Creditors Rule. In summary, this ensures that when a football club goes into administration or insolvency that all football-related creditors are given priority over non-football creditors such as HMRC, suppliers, and small businesses before the club can be readmitted into the league. One of the most notable examples of this rule in action was when Portsmouth went into administration during the 2009/10 season when the likes of St Johns Ambulance saw its £2,702 debt unpaid while the club settled its football-related debts to other clubs and former players totalling more than £20 million.
Such instances have also seen HMRC lose out large sums of unpaid tax from football clubs who have gone into administration as a result of the football creditors rule, and as a result, have taken a much more aggressive approach to the tax debts of football clubs such as adopting a much more litigious approach by taking clubs to court to try and recoup their debts. The most high-profile case being that of Glasgow Rangers FC whose tax evasion strategies led to HMRC winning a notable victory against the club in the Supreme Court in 2017. Other clubs such as Bolton Wanderers, Macclesfield Town, and Southend United have been subject to winding up petitions issued by HMRC in more recent times.
HMRC also issued a legal challenge to the Football Creditors Rule in 2012 arguing that it encourages deliberate evasion of taxes by clubs, however, the High Court ruled that the football creditors rule was not a deliberate evasion of the laws of insolvency, however. HMRC has the power to move quickly against clubs in regard to tax arrears, and can potentially issue a winding-up petition early if they want to limit their losses. Richards J, in his judgment, pointed to two examples which showed the benefits of being a football creditor when a club becomes insolvent. When Crystal Palace went into administration in January 2010, the football creditors were paid in full and the other creditors received less than 2p in the pound. When Plymouth Argyle went into administration in March 2011, the football creditors were also paid in full while the other creditors received a dividend of 0.77p in the pound. The Crystal Palace example fully demonstrates the unfairness of the rule in very stark terms.
Previous attempts by HMRC to challenge the football creditor rule in specific instances involving clubs failed because the Football League or the Premier League was not a party to the proceedings. HMRC, therefore, brought 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 states the assets of an insolvent company/person to be distributed among the creditors equally meaning all creditors receive the same percentage of their debts out of what is available. Parties cannot contract out of this principle and any attempt to do so is voided.
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.
In 2015, the football authorities have made some changes while keeping the substance of the rule in place. They increased the points sanction for insolvency events from 10 points to 12, and also required clubs to ensure that other creditors receive a minimum of 25 pence in the pound (or 35 pence in the pound if paid over three years). A failure to meet this obligation could result in a further 15-point deduction for the club. This falls well short of what most would consider to acceptable in that it still ensures that football creditors get paid first, but it does at least make the system slightly fairer to non-football creditors.
Arguably, all it does is increase the total amount that a club must find to satisfy its creditors and may decrease the attractiveness of investment into a football club. So for the ultra-wealthy who can fund a purchase without external finance, the net effect may be an increased risk. For those using commercial debt or investment to bear the load, deals may become that much harder.
In my opinion, the easiest way would be to abolish the rule in its entirety to allow for a much fairer distribution of available funds to non-football creditors and to ensure that any tax revenue is given priority, especially in these financially straitened times. It is also a more morally justifiable approach to wider society and the communities that clubs are supposed to represent. As the Culture, Media and Sport Select Committee 2011 Report on Football Governance felt that:
"the moral argument against it—that it harms the communities that football is supposed to serve—is persuasive on its own. There is, though, also a compelling systemic argument against it, namely that it positively encourages excessive financial risk-taking, in a system that already offers other inducements to so do, by offering a safety net to those who seek to benefit from such practices".
In my view, it is wrong that football should place itself on a pedestal above society and should encourage reckless and risky financial management, due in part to regulation such as the Football Creditors Rule. It is time for it to be sent from the field of play.