HM Revenue and Customs (Claimant) The Football League Ltd (Defendant) The Football Association Premier League Ltd (Intervenor)
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE DAVID RICHARDS,Mr Justice David Richards |
| Judgment Date | 25 May 2012 |
| Neutral Citation | [2012] EWHC 1372 (Ch) |
| Docket Number | Case No: HC11C00557 |
| Court | Chancery Division |
| Date | 25 May 2012 |
[2012] EWHC 1372 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building
Royal Courts of Justice
Fetter Lane
London EC4A 1NL
Mr Justice David Richards
Case No: HC11C00557
Mr Gregory Mitchell QC and Ms Catherine Gibaud (instructed by Solicitor for HM Revenue & Customs) for the Claimant
Mr Mark Phillips QC & Mr Daniel Bayfield (instructed by Chadbourne & Parke (London) LLP) for the Defendant
Mr Gabriel Moss QC & Mr Daniel Bayfield (instructed by McCormicks) for the Intervenor
Hearing dates: 28 November, 1, 2, 5 and 6 December 2011
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
THE HONOURABLE MR JUSTICE DAVID RICHARDS
Introduction
These proceedings concern the so called "football creditor rule" operated by The Football League Limited (the FL). Its purpose and effect is to ensure that in the event of a member club becoming insolvent particular classes of creditors, such as other clubs in the FL, the club's players, managers and other employees and the FL itself, are paid in full in priority to any other creditors. These preferred creditors are called "football creditors" by the FL. It means, the FL acknowledges in its evidence, that football creditors will be paid in full before, for example, the St John Ambulance which provides first aid at many clubs' grounds during matches.
The football creditor rule has been subject to a good deal of criticism, in Parliament and in the courts as well as from commentators. It was heavily criticised in a report of the Culture, Media and Sport Committee of the House of Commons dated 29 July 2011 which recommended that it should be abolished, by legislation if necessary. In his recent judgment on an application for an administration order in relation to Portsmouth Football Club (2010) Ltd (17 February 2012), Norris J said:
"I understand the disquiet from the creditors. The general body of taxpayers, and the ordinary consumers who do pay their energy bills, and the ordinary traders and professionals who provide services such as, from the creditor list, coach hire, catering, medical services, ground care and maintenance, must wonder why they should subsidise the club's wage bill, why it is that they are involuntarily lenders to the club of their outstanding bills and why they will only get back pence in the pound for the services they have provided."
These proceedings are not concerned with whether giving priority to football creditors is socially or morally justified. The issue is one purely of law, whether the provisions which together accord this priority are void and of no effect on the grounds that they are contrary to insolvency law. The challenge is brought by The Commissioners for Her Majesty's Revenue and Customs (HMRC) who submit that the relevant provisions conflict with two fundamental principles of insolvency law.
The first principle in issue is the pari passu principle, which requires the assets of an insolvent person to be distributed among the creditors on a pari passu basis, subject only to such exceptions as the general law may permit. The pari passu basis of distribution means that all creditors will receive the same percentage of their debts out of the available assets. Parties are not free to contract out of the operation of this principle, except by the creation and, when required, registration of security over the debtor's assets. It is not suggested that security is created by the provisions in issue in these proceedings.
The second principle is what is now known as the anti-deprivation rule, but which used to be called fraud on the bankruptcy law. This principle renders void any provision by which a debtor is deprived of assets by reason of insolvency with the effect that they are not available in the insolvency proceeding. The purpose of the deprivation may, but need not, be to ensure priority payment to a particular creditor or creditors. This principle is subject to a number of specific exceptions and general qualifications which will need to be considered.
As is well known, football finances have been transformed by competitive bidding for television rights for matches and by the resulting high level of fees paid by media companies for those rights. The FL's income from these sources may not compare to that of The Football Association Premier League Limited (FAPL) but it is substantial nonetheless. The broadcasting agreements running for the three seasons from 2009/10 are worth a total of £264 million. In addition, the FL has made agreements for commercial sponsorship of the Football League, the Football League Cup and the Football League Trophy competitions.
Notwithstanding the strong cash flow, or perhaps because of it, there has been what appears to be a high incidence of insolvencies among football clubs. In the last ten years there have been 36 insolvencies among clubs which are or were members of the FL, some of which resulted from the collapse in 2002 of a lucrative broadcasting contract.
The effects of the provisions enabling priority to be given to football creditors in these insolvencies have been striking. Two examples illustrate this. Crystal Palace FC went into administration on 26 January 2010, HMRC having presented a winding up petition on 2 December 2009. Total unsecured liabilities were approximately £27 million of which debts to football creditors amounted to about £1,925,000. A total of £2,415,552 was paid to unsecured creditors. The football creditors were paid in full and the other creditors received a dividend of less than 2p in the pound. Plymouth Argyle FC went into administration in March 2011. The football creditors were paid in full while the other unsecured creditors received a dividend of 0.77p in the pound.
It must be noted that in both these cases the funds to pay the non-football creditors came from third party purchasers of the clubs and that they would have received nothing if the FL had treated the clubs' insolvencies as terminating their membership of the FL rather than allowing them to continue in the business, thereby allowing the clubs' businesses to be sold.
The proceedings
The present proceedings were commenced by HMRC as a Part 8 claim on 10 March 2011. Previous attempts by HMRC to challenge the relevant provisions in the context of particular insolvency proceedings had failed because the FL, or, as appropriate, the FAPL was not a party: see In re Portsmouth City FC Limited [2010] EWHC 2013 (Ch). There is no challenge to the jurisdiction of the court to deal with the issues in the present proceedings.
The FAPL also has provisions which are intended to have a similar effect. HMRC is challenging those provisions on substantially the same grounds in proceedings which were commenced as Part 8 proceedings on 18 May 2010, which have subsequently been reconstituted as proceedings under Part 7 because of issues of disputed fact. FAPL has applied to strike out the proceedings against it, but for reasons which need not be recited it has yet to be heard. Because of an overlap of issues, FAPL applied to intervene in the present proceedings and Newey J granted permission for FAPL to do so. It has appeared by Mr Moss QC and Mr Bayfield who have confined their submissions to ones of principle and law. I have not been concerned with the FAPL's own provisions as regards priority for football creditors.
The Football League
The FL is a company limited by shares with a share capital of £5 divided into 100 shares of 5p each, of which 72 shares have been issued. The shares are held by the clubs which play in the League Competition, each club holding one share. A member club itself must be a limited company incorporated under the Companies Acts. Clause 8 of the Memorandum of Association of the FL provides:
"The income and property of The League shall be applied only for the promotion of the objects of The League as set out in clause 3 above. No Member Club shall receive any dividend or share of profit."
The objects of the FL as set out in clause 3 of its Memorandum of Association are:
"3.1 To be a governing body for Member Clubs and to represent and further the interests of the game of association football, The League and Member Clubs.
3.2 To organise an annual League competition for Member Clubs and annual cup competitions, inter-league competitions or matches and small-sided games.
3.3 To regulate the activities of Member Clubs and their respective officers, employees, registered players and agents.
3.4 To provide registration, pension scheme (which include insurance and benefits of any kind) and other administrative functions for association football clubs and players of association football.
3.5 To carry on or participate in any business or other activity which, in the opinion of the Board may conveniently be carried on in connection with any of the other objects of The League."
As well as its function in organising the League and other competitions and regulating the activities of member clubs and their registered players, the FL has substantial commercial functions. Television rights in respect of matches in FL competitions are negotiated by it and the contracts with media companies are made by it. To the extent that member clubs would otherwise be entitled to negotiate terms for the broadcasting of matches played by their teams or at their grounds, they cede those rights to the FL. The FL in substance acts on behalf of all its member clubs as a collective body for negotiating and making these...
To continue reading
Request your trial
-
Sova Capital
...creditors of assets available in an insolvent estate should be equal: see Revenue and Customs Commissioners v Football League Ltd [2012] EWHC 1372 (Ch) at 202 The principle is reflected for present purposes in rule 149 of the Investment Bank Special Administration (England and Wales) Rules......
-
Re Lehman Brothers International (Europe) ((in Administration))
...the company in administration, albeit that their beneficial ownership is or may well be in suspense: HMRC v The Football League Ltd [2012] EWHC 1372 (Ch), [2012] Bus LR 1539 at [101]–[102]. The effect of the direction in rule 2.88(7) is to create a right in favour of creditors to have the ......
-
Fuglers LLP (in association with David Berens&Co) and Others v Solicitors Regulatory Authority
...in this appeal, the Football Creditor Rule was considered in a judgment of David Richards J in HMRC v The Football League and Others [2012] EWHC 1372 (Ch), in which a challenge was brought by HMRC. In rejecting such challenge, David Richards J described the rule in the following terms: "1. ......
-
Hackney Empire Ltd v Aviva Insurance Uk Ltd (Formerly Trading as Norwich Union Insurance Ltd)
... ... : Hackney Empire Limited Claimant and Aviva Insurance Uk Limited ... Union Insurance Limited) Defendant ... Mr David Thomas QC ... that I anticipate that claims for loss of revenue arising solely out of STC's delays might face ... ...
-
Anti-Deprivation Rule Did Not Prevent 'Football Creditors' Of A Football Club Being Paid In Full Before Other Unsecured Creditors
...& Customs Commissioners v Football League Limited & Football Association Premier League Limited [2012] EWHC 1372 (Ch) The Football League is a company limited by shares held by the football clubs which played in the league. Its articles required a member club to give a transfer noti......