In the complex landscape of football club administration, the contentious issue of player treatment as preferential creditors takes center stage, eliciting a flurry of criticism from various stakeholders, including HMRC.
When a football club faces financial distress and enters administration, players find themselves in a unique position, granted preferential status, which entitles them to receive a payout ahead of unsecured trade creditors.
This distinctive system has come under intense scrutiny, prompting pertinent questions regarding its continued existence. While other insolvent businesses are obliged to treat employees as non-preferential creditors primarily, the special treatment of football players raises concerns about fairness and equity.
As the debate rages on, it becomes imperative to assess the rationale behind this preferential treatment and explore potential alternatives that address the complex financial realities of football clubs without compromising the principles of economic justice
Why was the football creditors rule introduced?
The genesis of the football creditors rule was rooted in the noble aim of safeguarding lower-league clubs and averting a potential domino effect that could jeopardize the stability of the entire sport. By granting preferential creditor status to players, the rule sought to shield these clubs from financial collapse, ensuring they could meet their payment obligations and prevent a ripple effect of non-payment that might force other clubs into administration.
Proponents of this contentious rule argue that it recognizes the substantial contribution the sport makes in terms of tax payments, warranting certain allowances when clubs face financial adversity.
The complex interplay between financial responsibility and the health of football as a whole has fueled the ongoing debate, with defenders of the rule contending that it strikes a delicate balance between the interests of the clubs and the broader sport, emphasizing the need for pragmatic considerations in challenging financial times.
How this rule is applied within the football and premier leagues
The rules of a football club’s Company Voluntary Arrangement, for instance, state that player salaries and transfer fees between teams will be included in the priority payout in the event of an administration.
Before the club is permitted to play once more in the football league, these fees must be made in full. Therefore, who qualifies as a football creditor?
- Other clubs
- The Premier League
HMRC has taken action previously
HMRC has been embroiled in a compelling battle against the football creditors rule, asserting that these favored creditors should not enjoy a full payout at the expense of other unsecured creditors left out-of-pocket. Armed with the belief that all unsecured creditors must be treated equally in times of insolvency, HMRC waged a valiant court battle in 2012 to have the rule abolished, contending that it inherently disregards the cherished ‘pari passu’ principle enshrined in the Insolvency Act 1986.
Despite the High Court’s ruling that the football creditors rule did not deliberately evade insolvency laws, HMRC remains steadfast in its conviction. Empowered with the ability to act swiftly against clubs with tax arrears, HMRC can wield the formidable weapon of a winding-up petition to mitigate their losses effectively.
Alas, HMRC has bemoaned the loss of millions of pounds in tax revenues owing to the football league’s unwavering use of the rule. The introduction of the Enterprise Act in 2002 further compounded HMRC’s predicament, as the football creditors rule knocked them off their perch as a priority creditor in cases of insolvency.
The ramifications of these developments have set the stage for an enthralling tussle between football’s financial landscape and the pursuit of economic justice. In the ever-evolving arena of finance, the stakes remain high as HMRC continues its impassioned quest to level the playing field for all unsecured creditors.
Are there any measures in place to safeguard unsecured creditor interests?
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.