Samantha Yardley and Michael Savva examine the implications for receivables finance in the "football creditors" rule judgement.
There continues to be a steady market involving the finance by banks and other institutions of the various receivables (including player transfer, broadcasting and season ticket revenues) payable to football clubs. Regardless of the structure by which the financier has acquired the benefit of such receivables from its football club debtor, the financier will have a keen interest in the "football creditors" of the club.
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A "football creditor" is one of a defined class of persons set out in the Football League Articles of Association (the "Rules") and includes other football clubs, players, club employees and other football bodies. If a club becomes insolvent – an increasingly frequent scenario with some recent high profile victims – football creditors are, contrary to normal insolvency rules, paid prior to other unsecured creditors of the club.
Having lost its legal status as a preferential creditor of an insolvent company following the enactment of the Enterprise Act in 2002, HMRC, often a significant creditor of football clubs, ranks behind football creditors and receives only a much reduced percentage of its owings on an insolvency.
It was against this background that HMRC brought a case last year against the Football League for a declaration that the football creditors rule was void. The rules of the Premier League are substantially the same as the Football League ("FL") on this point and so the Premier League intervened in the case.
In short the Rules provide that a club has no legal entitlement to a share of broadcast or other fees arising from certain commercial contracts unless it completes all its fixtures (which it will be unable to do if it is insolvent) (Article 77). In practice the FL pays a proportion of such fees to participating clubs over the season, with a proviso that such amounts are repayable to the FL (and therefore fall back into the "pool" of distributable fees) should a club fail to complete all of its fixtures. Furthermore, amounts in the pool which would have otherwise been paid to a club that failed to pay its football creditors are to be paid to football creditors and before any distribution to the club (Article 80).
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By GlobalDataHMRC argued that the above rules breached two established insolvency rules: the anti-deprivation principle (being that an insolvent body cannot deprive its creditors of property which would otherwise form part of its assets) and the pari-passu principle (being that all unsecured creditors are treated equally). The FL argued, and the High Court held, that, firstly, the anti-deprivation principle did not apply, given that the fees payable under Article 77 never became part of the insolvent club’s assets (as the FL had no obligation to pay such fees until all the fixtures were completed) and, secondly, Article 80 was not triggered by insolvency, but by non-payment by the club.
It is obvious that the High Court had sympathy with HMRC and 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" but rather as a decision on a challenge brought on a particular legal basis. While HMRC may still seek to change the rule by means of new legislation, the new financial fair play regulations being discussed and implemented at European and national levels may give HMRC greater comfort that its interests as a creditor will be protected. In any case, football financiers should keep an eye open for further developments.
? Samantha Yardley is a partner and Michael Savva is an associate at Watson, Farley & Williams
