21 December ~ When Darren Ambrose struck for Crystal Palace to send Manchester United tumbling out of the Carling Cup, most of us were happy to see it as just another cup upset. But Mark Phillips QC saw the result as an illustration of the "national interest" served by the football creditors' rule (FCR). Palace had been days away from insolvency less than 18 months ago, but the operation of the League's insolvency procedure, including the FCR, had enabled them to survive. Phillips is representing the Football League as it attempts to defend the rule in the High Court against a challenge from HM Revenue and Customs.
The way the rule works is well known. When a football club comes out of administration it must agree to pay in full any debts it owes to "football creditors" – other clubs, players and football "entities" – before it can resume participation in the league. Other creditors, often small businesses, and HMRC, receive only a fraction of what they are owed.
The court was given stark, if slightly dated, illustrations of the way the rule operates by Gregory Mitchell QC, who is acting for HMRC. In these cases well-remunerated players were paid in full while other club employees faced redundancy and charities went unpaid. The current arrangements always result in a loss to the taxpayer. The sole motivation in bringing the action was to prevent similar losses in the future.
To put some flesh on the case, HMRC has instigated 25 winding up orders against football clubs for unpaid taxes in the last two years. Some clubs have been what Mitchell called "repeat offenders". Since 2002 there have been 36 Football League insolvencies and one Premier League case, with future insolvencies "a very real hazard of football".
Mitchell argued that the rule is unique, with no other country or industry adopting similar arrangements. Describing the rule as the "ugly side" of the game, he was clear it had been "invented" by the football authorities. He contests that the central legal point in the case is that the FCR is counter to normal insolvency law.
Just as predictably, the League has argued the rule is there to maintain the "integrity" of the football competition, by ensuring that clubs who run up debts to other clubs will, eventually, have to pay those debts in full. The effect of the rule was to prevent a "domino effect" that would draw otherwise solvent clubs into potential insolvency if they did not receive money to which they were entitled.
A view of a world without the FCR came from Professor Gabriel Moss QC, who represented the Premier League. In his view, victory for HMRC would amount to an "own goal" against themselves and other unsecured creditors, and would probably lead to more clubs being liquidated. He argued that leagues must have some means of responding to insolvency and that there are few effective alternatives to the current arrangements.
The most obvious option is for leagues to expel insolvent clubs, with the consequence that finding a buyer would be that much harder. With more clubs liquidated, any hope of future tax revenues would be cut off and for the small business, who may take a hit under the current rules but often carry on doing business with the club when it escapes insolvency, the compensation in liquidation would likely be zero. From a football perspective, many well-known clubs would disappear.
The case is now complete. Mr Justice Richards' final verdict is unlikely to appear before late February. HMRC has asked for the judgement to come in a form that will establish a clear precedent. The worry for the leagues is that they see the FCR as just one part of the work they have done to prevent insolvencies. If the FCR falls, they have few alternatives.
If the challenge from HMRC is rejected, the government may step in. It could legislate or, more likely, as part of its response to what a parliamentary committee described as the distorted priorities of football and "endemic" financial recklessness, push the FA into a more active regulatory role. Whatever the result, there could well be a replay, with the losers looking for a right of appeal. Brian Simpson