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?
- Players
- Management
- 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?
In a determined bid to safeguard the sport’s integrity and curtail the risks of insolvency, the visionary ‘Fit and Proper Persons’ test emerged as a transformative shield. How does it work, you may ask? Picture this insightful scenario:
Within the Football League, a director’s path to becoming a controlling shareholder of a club is guided by stringent parameters. The test stands resolute against the backdrop of certain triggers: a club facing the tribulations of administration twice within a five-year timeframe or a director entangled with two clubs that have both journeyed down the path of administration during this pivotal span. A deliberate move to thwart potential ‘common denominators’ in insolvency, this test forms a formidable fortress against any lurking threats to the financial health of football clubs.
But there’s more to this compelling tale! Foreseeing the perils of prolonged financial distress, steadfast measures were laid to ensure that football clubs do not languish in administration for 18 months or longer, or endure the burdensome weight of consecutive seasons in this precarious state. A resolute stand against the unruly forces of insolvency, these measures channel the collective will to preserve the spirit of the game and nurture a landscape of resilience and fiscal responsibility
What about the trade creditors?
The priority list for payment can lead to an uneven distribution of funds, leaving trade creditors at a disadvantage. Once the esteemed football creditors rule takes precedence, players rightfully claim 100% of the monies owed to them, setting the stage for a triumphant celebration of their unwavering commitment to the sport. The exuberant transfer fees, in turn, command their share of the spotlight, paving the way for an electrifying football landscape.
However, within this financial tapestry, other unsecured creditors find themselves treading a challenging path. Suppliers, local businesses that share deep-rooted ties with the club, benevolent charities like St. John’s Ambulance, and the esteemed HMRC, all face a precarious fate, often caught in the shadows of the rule’s profound impact, which can be attributed, in part, to the substantial salaries paid to players.
Regrettably, for these creditors, it seems that a change in the legal framework is a requisite for any amendment or removal of the rule. As the dance between financial prudence and football passion ensues, the quest for a harmonious resolution continues. In the labyrinth of football finance, one thing remains certain—the need for thoughtful deliberation and a holistic approach to address the concerns of all stakeholders, and to create a future where the sport’s essence flourishes alongside a fair and equitable financial landscape
Should the football creditors rule stay?
Amidst the fervent debate surrounding the football creditors rule, defenders passionately advocate for its preservation, highlighting the distinct character of football league clubs as stand-alone businesses operating within an extraordinary environment. Indeed, insolvency in this realm ushers in a unique set of circumstances, calling for specialized measures that cater to the sport’s exceptional nature.
Within the vibrant tapestry of football, a sense of solidarity prevails, where the financial struggles of one club reverberate across the league, intertwining the destinies of all. The football world collectively acknowledges that a domino effect looms large, with the failure of one club to meet its financial commitments potentially cascading into a catastrophic collapse of one or more leagues. In this interconnected ecosystem, the preservation of financial equilibrium through the football creditors rule stands as an essential pillar of stability.
Embracing this distinctive perspective, defenders champion the rule as a safeguard against the perils of financial adversity, fostering an environment where football clubs can navigate the challenges unique to their world. Amidst the fervor of differing opinions, the football community finds unity in its shared vision for resilience and prosperity, ensuring that the heart of the beautiful game beats strongly, fortified by the principles of solidarity and prudent financial management.
Frequently asked questions
The football creditor rule for HMRC is a controversial policy that grants preferential treatment to football clubs in the UK when they face financial insolvency. Under this rule, football clubs are considered privileged creditors in the event of the club's liquidation or administration. This means that they have priority over other creditors, including HMRC, when it comes to receiving payments owed to them. The rule has been a subject of debate as it prioritizes football clubs over other businesses and institutions, which some argue is unfair and can have negative implications on public finance
The insolvency policy of EFL is no insolvent Club has an absolute right to continue in membership, and on entering insolvency a Club is served with a Notice of Withdrawal of the membership (currently suspended). What is the football creditor rule for HMRC?
What is the insolvency policy of EFL?
Conclusion
In conclusion, the Football Creditors Rule remains at the epicenter of a passionate discourse, drawing both staunch defenders and ardent critics to the table. Advocates of the rule emphasize the distinct nature of football league clubs as standalone entities operating in a unique environment, necessitating special measures to address insolvency’s exceptional circumstances.
They stress the crucial role of this rule in preserving financial stability and preventing a catastrophic domino effect that could potentially collapse one or more leagues if clubs fail to meet their financial obligations. Contrarily, critics, represented prominently by HMRC, argue for a more equitable treatment of all unsecured creditors and point out the rule’s adverse impact on suppliers, local businesses, charities, and the collector of taxes in the UK.
The fate of the Football Creditors Rule hinges on striking a delicate balance between the sport’s unparalleled intricacies and the principles of economic justice, as the football world remains steadfast in its pursuit of financial integrity and sustainability.
The ongoing debate signifies a pivotal moment in football’s financial landscape, calling for thoughtful consideration, collaboration, and a shared commitment to fostering an environment where the essence of the game thrives in harmony with fair financial practices.
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.