THE HALF DECENT FOOTBALL MAGAZINE

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

Comments (10)
Comment by Red Adder 2011-12-21 10:46:49

There is nothing wrong with the FA having the rule, as long as it accepted that this rule does not have precedence over the laws of the land. Basically this means that HMRC (and hopefully all creditors) would have to be paid if full before a club could continue.

Draconian - yes - but eventually, after a lot of pain, football will finally learn it is only a game and has no right to leach off local suppliers (and charities) as it has increasingly done over the past twenty years. (A period when there has never been more money in the game). All clubs, at all levels, are going to have to face living within their means or face pretty certain extinction. Why should they be any different from the rest of us ?

Comment by jertzeeAFCW 2011-12-21 13:12:36

This probably won't come across as a popular view but the FCR must be banned.

If it does result int he nightmare, scaremongering scenario that the Premier League threaten then good.

What the game needs to clear up the ongoing mess is a big club to fall and a domino effect to follow.

People might start living within their means and the fear of failure will no longer fester within our game.

Will that happen though...not a chance in hell.

Just as Pompey were protected and others high up that went into administration, such as Leeds and Cardiff, it will continue.
The only clubs that truly go out of business are the non league clubs that no one in the public eye cares about.

The game is riddled with corruption and self protectionism.
Roll on the collapse of the modern game!

Comment by geobra 2011-12-21 13:42:50

Maybe there should be a rule that after a transfer the player can't start playing for his new club until the fee has been paid in full. Atalanta once played Lazio with Japp Stam in the visitors' team a year after his move from Old Trafford, at which point Lazio had not even started paying off his fee. Lazio won, and I thought, and still do, that it was grossly unfair.

Comment by David Agnew 2011-12-22 00:19:31

Football is pretty unique in a business in that you directly trade with your creditors, so there needs to be some mechanism in place to protect clubs.

"There is nothing wrong with the FA having the rule, as long as it accepted that this rule does not have precedence over the laws of the land. Basically this means that HMRC (and hopefully all creditors) would have to be paid if full before a club could continue."

It doesn't have precedence over the laws of the land. The Football Creditors rule is decades old, and essentially gives a list of parties (including all employees of the club concernced - including all non-playing staff, but excluding clubs outside the English pyramid) Supercreditor status. The Taxman used to have Supercreditor status by law, but this was removed by the Labour Government in 2003, and therefore is a problem that they created.

The main people this protects are the employees at the clubs - and this protects the non-playing staff much more than it protects the playing staff (most of whom would easily find employment at other clubs). Also, consider that most clubs that have entered administration have been in League One or lower, where they players aren't paid thousands a week, and have mortgages and bills like the rest of us. The fact that football looks after all it's employees in this regard is something that other industries should follow, not demand that football outlaw.


However, there is nothing stopping the FA adding the Taxman to the list of Football Creditors list. Nothing at all.

"Maybe there should be a rule that after a transfer the player can't start playing for his new club until the fee has been paid in full."

At the moment, Clubs are allowed to pay over three years (within UEFA) or over the length of the player's contract (within England). The rules are the same for everyone, and even your club will generally pay in instalments. In that respect it's a level playing field. If clubs did have to pay up front for players, then that would hugely reduce the amount clubs owe, and mean that all the football creditors rule would really cover would be the wages and pensions of any staff .

Comment by donedmundo 2011-12-22 11:35:37

Why should HMRC subsidise otherwise bankrupt football clubs? The money owed to the Revenue is not tax on the club's profits. It is PAYE and National Insurance that the club has deducted from the wages of players and other staff. Failing to pass this money on to the Revenue is little more than theft. The FA argues that having the football creditors rule keeps a level playing field. Nonsense! A club living within its means could (say) pay a player £10,000 per week. One living beyond its means could pay the same player £20,000 a week but not pay the tax etc over to the Revenue. Both clubs end up paying out £10,000 a week. The second club has a very clear advantage. This is just a cosy 'old pals act' and the sooner it goes the better for everyone.

Comment by jertzeeAFCW 2011-12-22 13:32:05

"However, there is nothing stopping the FA adding the Taxman to the list of Football Creditors list. Nothing at all." - no, except for the fact that smaller creditors, such as St John Ambulance and other local companies would get an even smaller share of any money that may be left over.

"Also, consider that most clubs that have entered administration have been in League One or lower, where they players aren't paid thousands a week, and have mortgages and bills like the rest of us. The fact that football looks after all it's employees in this regard is something that other industries should follow, not demand that football outlaw." - that would be wonderful, wouldn't it? Except with the 80/20 rule it would once again mean that the dirtectors of a company, generally the ones who are to blame for the mess in the first place, would get their massive pay given to them, while the workers get not much of not much in the first place.

Comment by The Harrier 2011-12-22 15:02:20

Surely the fairest thing would be for the government to legislate that all creditors must be paid equally (in proportion to the debt owed). This way, in imposing the Football Creditors Rule, the Football League would effectively be requiring that all creditors, including St John Ambulance and the like, must be paid in full.

It is then up to the Football League to balance the danger of clubs going into liquidation with the need to maintain the integrity of the competition and make their own decision whether to maintain/amend/revoke the FCR.

Comment by JimDavis 2011-12-22 15:22:15

HMRC don't want the rule abolished, they just want in on the action.

Comment by David Agnew 2011-12-23 03:09:08

""However, there is nothing stopping the FA adding the Taxman to the list of Football Creditors list. Nothing at all." - no, except for the fact that smaller creditors, such as St John Ambulance and other local companies would get an even smaller share of any money that may be left over."

In most cases, this is unlikely, because most new buyers offer what they think creditors will accept, rather than what they can afford to offer. Abolishing the Football Creditors rule isn't going to see other creditors get paid more, instead new owners will just acquire the clubs more cheaply.

Comment by mjfarrow 2011-12-29 22:49:49

I've long since said that football has this the wrong way around. They should punish these clubs severely and not essentially enable them to keep doing business in such a poor manner. I always take Belgium as an example. In Belgium, if you are not solvent, you lose your professional license and are relegated to the semi-professional leagues. These clubs usually go into liquidation and with their grounds protected by the local council, a new club, formed by the fans, will take their place in the amateur leagues.

If we protected local sports stadiums, I would advocate the same rules. Portsmouth shouldn't be allowed to continue when they were run in such an unethical manner. They should have been packed off to the non-league and had to start from scratch in the Wessex League. If AFC Wimbledon had to start over at step 5, so should these clubs who rip off the public purse.

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