What is the football creditors rule and how does it work?
If a League football club faces an insolvency process such as a winding up petition it may be essential for the directors to protect themselves and place the company into administration. Given that, in law, administration is generally a temporary state there must be an exit - either by way of a sale of the equity (its shares) or business assets to a new buyer, or by way of a CVA. Interestingly the CVA must pay the football creditors (players and leagues) 100p in 1 BEFORE any creditors like HMRC! Otherwise the CVA is not valid and further points can be deducted or the licence to play in the relevant league withdrawn the ultimate sanction. This so called football creditors rule is being challenged by HMRC in the Courts at the time of writing. HMRC has already lost similar action, with the court saying the power of the leagues to control who can play in them is in effect a super priority creditor.
So what is the thinking behind the football creditors rule and how does it work?
Assuming the club proposes a CVA to exit administration the club is suspended from the league until certain "football creditors" are paid in full through the CVA. This includes transfer fees and players wages. Any remaining monies are paid to the other creditors such as HMRC and trade creditors. Funnily enough, HMRC is not particularly happy that wealthy footballers receive all their money whereas the tax payer loses out.
HMRC also argues that it goes against the established principal that "unsecured creditors" should all be treated equally as originally envisaged in the Insolvency Act.
The argument by the Football Leagues in England and Scotland and both the Premier Leagues is that they are a closed community of businesses and they have liabilities to each other (ie transfer fees) and if one can start shedding these then the knock on effects to other clubs will be to the detriment of the league as a whole. The whole league structure would suffer if clubs started spending money on players that they didn't have. There is some merit in this argument as the clubs do not operate like normal businesses, in our view they are all loss making, bar a few super clubs. Also the Leagues argue that there are further rules in their regulations that benefit HMRC. Frankly this is in effect creating super creditors, who often least need the money the players.
In fact, HMRC took this argument to the High Court over Exeter City and lost. This does go some way to explain why they are playing tough with the football clubs at the moment and they will not allow them to build up large tax liabilities. If they do then they are likely to proceed quickly to issuing winding up petitions. Meanwhile the High Court may rule in favour of the super creditors or football creditors rule, the interesting question this poses is will HMRC stand idly by and allow debts to be built up or will it issue winding up petitions as soon as a football club has ANY arrears of tax debts?
If the court throws out the so called football creditors rule, this would be more equitable for ordinary trade creditors, HMRC and the Leagues alike. Frankly isn't it arrogant to assume that the world of football and footballers are above the law?