THE HALF DECENT FOOTBALL MAGAZINE

21 May ~ This winter should see the end of one of football's longest unbeaten runs. November 28 has been set as the date for the High Court to hear HM Revenue & Customs' case against the so-called "football creditors rule", and there is a good chance it will succeed. HMRC mounted a challenge to the rule at the time of Wimbledon's insolvency in 2004 and has objected to it in virtually all of the insolvencies since, but so far without success. The way the rule works when football clubs become insolvent was summed up as: "If a club is owed money for a player [it] has a higher claim than a local supplier of meat pies."

Or, to put it another way, if Plymouth Argyle are able to strike a deal with their creditors, players wages, outstanding transfer or agents fees will be paid in full, while Plympton's Friary Mill bakery (owed just over £2,000) will get just a few pence in the pound. St John Ambulance has regularly come out on the wrong side of the rule. The charity does not charge a fee for its services, but clubs make a regular donation. One estimate, a few years old now, is that the organisation was owed more than £35,000 from football insolvencies and had been compensated at 10p in the pound.

Just seven years after so many supporters had perished in the Valley Parade fire it was a bitter irony that Bradford City's list of creditors included just over £5,000 owed to St John. More recently, Portsmouth owed £2,700 and Plymouth had outstanding donations in excess of £8,000. In both cases reports suggest that fans covered the clubs' debts with direct donations to the charity.

In normal cases of insolvency, the law expects a company going bust to treat its creditors equally. But football has tried to make itself a special case. When a club leaves administration it has to follow the Football League or Premier League's rules. One part of those rules is that clubs must pay football creditors in full before they can rejoin the League. The cost of meeting these creditors falls on the incoming owners and can act as a serious barrier. When Bradford City were looking for new owners in 2002, the local paper reported that there were as many as nine groups interested – but all had serious concerns about the scale of the football creditor liabilities.

It is the League rules that HMRC now plans to challenge. It argues that there is no legal basis for giving football creditors a "super creditor" status and that forcing clubs to adopt the Leagues' insolvency rules is a restrictive practice. But the Leagues think that they too have a strong case. Although Manchester United's David Gill believes the rule has "had its day", Premier League chief executive Richard Scudamore, never one for understatement, predicts "chaos" if the rule is overturned.

Their arguments go something like this. The rule protects fair competition by ensuring that clubs cannot just build up huge debts in unpaid transfer fees or player wages and then continue playing in the league, if they become insolvent, without paying those debts in full. And because, as Scudamore puts it, "[football] is a closed system, we trade on a closed basis between each other", to abandon the rule could create a domino effect. The Premier League argues that the existence of the rule protects the smaller clubs. With leveraged buyouts and unsustainable levels of investment from the back pockets of some clubs owners, it is a bit rich to use an argument based on fair competition, but it's easy to see how in the skewed morality of football the argument has some supporters. There are better ways to protect fair competition.

For the rest of us, it seems hard to justify rules that allow clubs to default on the full payment of debts to local charities and small businesses, at the same time that millions of pounds owed in transfer fees and inflated wages are paid in full. Brian Simpson

 

Comments (13)
Comment by Dalef65 2011-05-21 11:31:30

I usually struggle to agree with Peter Scudamore on anything,but in this case he does have a point.
If this "Football Creditors Rule" were to be succesfully challenged by HMRC and then discontinued,what would stop clubs from going out and buying players that they cant neccesarily afford,putting those players on weighty contracts,and then,if footballing success is not forthcoming,simply go into administration and default on the debts incurred......?

I dont know if that would create a domino effect within the game,but I would like the author to directly address this point.
Maybe outline some "better ways to protect fair competition"...!?

As for the Bradford City example,Of course the proposed new owners had serious concerns about the scale of the football creditor liabilities.As a group of businessmen you could hardly expect them to say anything else,could you......?
Ultimately Bradford,and most other clubs that have gone into administration,have found new owners within the rules as they stand.

As I see it this rule DOES protect small clubs and/or clubs that display some sort of financial prudence.

I suppose now we are going to get all the silly arguments along the lines of "Ah yes but footballers get paid too much anyway so why should their contracts be protected....?"

Comment by t.j.vickerman 2011-05-21 11:41:20

I certainly hope the rule gets overturned. It's curious that supporters are told they don't know anything and that football is a business now yet it's a very closed business that doesn't operate along normal lines.

Normal business can't keep churning out a substandard product, put prices up, continually ignore the wishes of its 'customers' and still have people loyally splashing out on their 'product'. Small football. With David Conn's typically excellent article the other day on the state of Premier League finances showing how the vast majority of clubs are spending a sickening proportion of their massive income on obscene player wages, the fact is these are appallingly badly-run 'businesses'.

Anything that might force this closed and unregulated system to consider the responsibilities of the real world now and again can only be a good thing.

Comment by Kev7 2011-05-21 11:43:12

Thanks for this article, Brian. I shall circle November 28th on my calendar with a big red pen…

I do hope HMRC get their way and blast this most iniquitous and cynical rule that was crafted by footballers for the sole benefit of footballers and introduced in September in 2003, much to the ire of HMRC.

For those amongst you who can read French, I’ve often written about the Football Creditors rule in Les Cahiers, especially in relation to the Portsmouth saga last year. Recently, I’ve published this (see item dated Mercredi 23 février, in relation to the dire Plymouth situation):

« La Football Creditors Rule, où comment entuber joyeusement tout son monde » :

http://cahiersdufootball.net/blogs/teenage-kicks/2011/03/07/

And here too, on the HMRC v Football clubs run-in. Last item, Mercredi 19 janvier, titled « Le Fisc anglais veut sévir contre Rio Ferdinand et ses potes » :

http://cahiersdufootball.net/blogs/teenage-kicks/2011/02/02/




Comment by t.j.vickerman 2011-05-21 11:44:03

Don't know how the term 'small football' got left in there. Should have properly checked though before posting...

Comment by Janik 2011-05-21 11:53:13

Dale, I'm sure there are ways.
For instance "what would stop clubs from going out and buying players that they cant neccesarily afford", well, they need someone willing to sell to them in the first place. It might mean clubs start demanding the full fee paid up front instead of in stages, especially if other clubs are suspicious of the finances of the buying club.
"putting those players on weighty contracts", this is more difficult, but one possible answer would be for the entire squad to be free to move as soon as the settlement of pennies in the pound is made, whilst still retaining their rights as creditors.

Comment by Kev7 2011-05-21 11:58:19

There seems to be a few glitches with some of my text (typed on Word), and all these ? that should read '. Never mind.

I remember reading, in full (80 pages), the Andronikou report last April (2010) on the Portsmouth situation, with the complete list of creditors and the whole shebang, it was astounding, the club owed money to just every other business in the Pompey area, from local florists to schools, the Student's association, even to small charity shops or organisations...

Money which of course, in accordance with the Football creditor rule, was never fully reimbursed (or not at all, or at a pitiful rate, 10p to the £ or similar), except for the "secured debts", natch! which, as you can imagine, are all ultra ultra protected and safeguarded into the "football-related" category.

The Andronikou report also listed all the salaries and monies owed to players (Utaka, Piquionne, David James, etc.), including the controversial image rights and various "minor" other bits. Again, it made for very unpleasant reading, when put in parallel with the unpaid sums due to a host of small business, many of whom depending on that money to survive. One particular school in Portsmouth was owed between 40 and 60 grand.

Comment by David Agnew 2011-05-21 15:29:07

"I do hope HMRC get their way and blast this most iniquitous and cynical rule that was crafted by footballers for the sole benefit of footballers and introduced in September in 2003, much to the ire of HMRC."

Really? Are you sure of that? The rule is in the FA, Premier League and Football League regulations. Those rules are not voted on by the footballers (the footballers have no representatives on any of the committees that make the rules within those regulations.

Those rules and regulations were made and voted for by club chairmen and chief executives, and their elected representatives.

The Football Creditors rule also protects the wages of non-playing staff (by that I mean ticket office staff, stewards, cleaning staff, catering staff and the like), and their pensions - but it does not protect debts of foreign clubs. Essentially the "Football Creditors" are a defined list within each organisation that could easily be amended over the summer to include HMRC, charities and any other classification of individual or business that the clubs choose to see fit to include.

Apart from anything else, anyone who thinks that the removal of the "Football Creditors" rule will suddenly see other creditors suddenly get more of their debt back when new buyers comes in is in cloud cuckoo land. It will just lead to proposed buyers short changing football creditors as well as everyone else. After all, exactly how many clubs have come out of administration paying their debts in full, or even 50p or 25p in the pound?

Comment by David Agnew 2011-05-21 15:36:34

Oh, and this rule has been in existance a lot longer than September 2003.

Comment by Barnstoneworth 2011-05-21 21:06:57

If the idea is to protect small clubs there are better ways of doing it. How about passing a rule saying that, when a player is transferred for money, 50% of the fee must be paid immediately with the balance due not more than twelve months afterwards. Payments should be made monthly or they'll attract interest. That might make transfer fees realistic and discourage clubs from splashing out more than they can afford. There can be no doubt that a lot of clubs need saving from themslves.

Comment by frontier psychiatrist 2011-05-22 18:26:25

It was seventeen years between the Bradford fire and their CVA.

Comment by JimDavis 2011-05-23 13:47:17

Are the West ham owners backing HMRC on this one?

As pointed out by others, the removal of the rule would just lead to less being paid back to all creditors.

I support a widening of the scope of who comes under the "football credit rule" to those who have no option but the deal with football clubs, such as HMRC and Health and Safety providers who clubs must have in place to be able to put on a game. Get the rule in place. Publish it. Then anyone who falls outside this and trades with a football club (eg the pie and drink man) does it with known risk.

Comment by notsinginganymore 2011-05-24 10:15:38

I can see the argument on both sides and I think it probably would be best to take a little from both sides - there should be no special treatment for football creditors but at the same time we should do away with "part payment" transfers (if you haven't got the cash in the bank on the day then tough). The key really is proper policing of club finances, which nobody seems to want to do.

The problem now is that clubs that are forced into insolvency (and some cases have been more to do with internal club politics and shenanigans) find themselves forced to take points deductions simply because of the showdown between FA/FL and HMRC.

Comment by Kev7 2011-05-24 20:32:17

(sorry for this late reply, this is about the sixth time since Monday I am trying to post a reply, have had to get rid of all the links, for some reason, otherwise it won’t accept my posts).

I’ll keep it short.

To me, this FCR is iniquitous and cynical. HMRC were not best pleased when it was created, hence the 28th November trial date (and to this excerpt from the wiki on Football administration: “This legality of the football creditors rule was challenged in 2004 in Inland Revenue Commissioners v The Wimbledon Football Club Ltd.”)

About the date: wikipedia.org/wiki/Administration_(British_football)

This rule creates two categories of debts, which would seem to be in breach of the insolvency rules; some debts (football-related) are “secured”, which means that they will be reimbursed in priority, no matter what). Even debts to foreign clubs, unlike what you write (debts to foreign clubs are firmly in the “secured” category, and as such, must be paid back, please refer back to the Pompey case, Pompey had to pay back to Lens what they were owed).
The rest (non football-related, including HMRC’s debts, i.e your money) is “unsecured”. Which means in practice that they are likely never to see their money again, or at a pitiful rate (e.g Plymouth case, 0,7 p to the £). How fair is that?

As far as the legislation is concerned, have a look at this (it was in the link I provided in my first post, part of my article): accountancyage.com/IMG/346/164346/graph-hmrc-premier-league.jpg?1299072845 ; and this: thelawyer.com/paying-by-the-rules/1003055.article

We need to give more of a comprehensive protection to all the stake-holders. At the moment, one group (football-related) gets 100% protection and the rest, very little.

In its present form, the Football Creditor rule is not the answer. It is too lop-sided and heavily weighted in favour of footballers, taken in its wider sense (players, clubs, agents, etc.).
A solution to partially remedy these dreadful situations we’ve had in the past that have affected whole communities, would be the creation of a French DNGC-type of organisation (Direction Nationale de Contrôle de Gestion, a body that oversees and controls the way club spend their money), or a variation of it.

I am not of course suggesting it would put an end to the endless streams of club placed in administration but it would help to regulate this business, which, like all businesses, needs to be regulated, otherwise whole communities suffer, as we’ve seen in so many cases.

This watchdog (hopefully, not a toothless one) would audit and work with clubs in crisis before they pile on the debts in the way Pompey did, or Cardiff, or Plymouth, or the dozens of other clubs who have been placed in administration since 1990 (about 60 altogether, some twice).
However, every time the idea of a DNGC type of organisation is broached, Scudamore, Richards and the like are up in arms. Yet, it has become crystal clear in the last decade or so that more financial control is necessary.

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