What is the football creditors rule?
When a football club from the league faces an insolvency process such as a winding up petition, the directors tend 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 a sale of its shares or assets to a new buyer. An alternative option is to exit by a CVA.
Players become preferential creditors and receive a payout in advance that for unsecured trade creditors. This is quite the opposite to the usual process where employees (players, in this case) are paid as non-preferential creditors, meaning trade creditors and other parties will be paid first. Now you can understand why there is such criticism over the rule.
Why was the football creditors rule applied to begin with?
The aim of this rule was always to:
- Provide protection for clubs in the lower leagues
- To prevent a domino effect whereby other clubs would not be paid, sparking them also into administration - oh how this could impact the football industry!
How does it work?
When the club proposes a CVA in order to exit administration, the club are suspended from the league until certain "football creditors" are prioritized and paid in full. This includes transfer fees and players wages. Any remaining monies are paid to all other creditors such as trade creditors. Ultimately, due to the high wages paid to players, the non-preferential, unsecured creditors tend to miss out.
Who is classed as a football creditor?
- Other clubs
- The Premier League
***But HMRC are only a new addition.
Since December 2020, HMRC regained preferential status as a creditor. Before this, HMRC ranked as an unsecure creditor, down the bottom end of the 'to pay' list.
Pre 2020, HMRC's argument was that this rule goes against the established principle that "unsecured creditors" should all be treated equally as originally envisaged in the Insolvency Act. The whole ‘pari passu’ principle is ignored. In the past, action has been taken, for example in 2012, HMRC took the case to court regarding Exeter City, however they lost. Football Leagues, including the Premier League, fight back in defence and say that they are a closed community of businesses whom have liabilities to each other (i.e. transfer fees) which must be paid, or else detriments can occur to the whole league.
This does give some explanation to why HMRC are being tough towards football clubs at the moment – ensuring they do not build up large tax liabilities, to avoid the issuing of winding up petitions. However, the high court have given HMRC the power to act fast on clubs regarding tax arrears, allowing them to issue a winding up petition early, if needed, to limit their losses.
Are there measures in place to protect the interests of unsecured creditors?
Surprisingly, yes. There has been the introduction of a ‘fit and proper persons’ test to stop directors and managers moving around clubs. If they did move, then they would potentially become a common denominator in insolvency. Therefore, directors are unable to be a controlling shareholder of a club in the league if:
- A club enters administration twice in the period of five years
- A director has been involved with two clubs that have both entered administration within the period of 5 years
There have also been measures in place to stop football clubs being in administration for 18 months of more, or for two consecutive seasons,
So far, the court have ruled in favour of the Football Creditors Rule, meaning it is unlikely to be further challenged, especially since HMRC (the ones who created all the fuss initally!) gained preferential status as of December 2020.