HM Revenue and Customs v Portsmouth City Football Club Ltd ((in Administration)) and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Mann |
| Judgment Date | 05 August 2010 |
| Neutral Citation | [2010] EWHC 2013 (Ch) |
| Docket Number | Case No: 1554/2010 |
| Court | Chancery Division |
| Date | 05 August 2010 |
[2010] EWHC 2013 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Before: Mr Justice Mann
Case No: 1554/2010
IN THE MATTER OF PORTSMOUTH CITY FOOTBALL CLUB LTD
(IN ADMINISTRATION) AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Gregory Mitchell QC (instructed by the Solicitor for HMRC) for the Applicant
Richard Sheldon QC and Hilary Stonefrost (instructed by Walker Morris Solicitors) for the Respondents
Hearing dates: 3 rd, 4 th August 2010
Mr Justice Mann:
Introduction
This is an application and appeal by HMRC in relation to a company voluntary arrangement (“CVA”) involving the company which trades as Portsmouth City Football Club (Portsmouth City Football Club Ltd –“the club”) and which the creditors approved on 17 th June 2010. The challenge to the CVA is on the grounds of material irregularity and unfair prejudice. It is related to, but does not itself arise directly out of, the rules of the Premier League and the Football League under which those leagues insist that football creditors (essentially the other clubs and the players) have their debts paid in full as the price of being able to carry on playing in the league, or at least playing without a significant points penalty. At the time of the insolvency events which are referred to in this judgment the club was playing in the Premier League, but at the end of the 2009–10 season it was relegated to the Championship, the top division of the Football League. There is also an appeal from the chairman's decision on the amount of the HMRC debt to be allowed for voting purposes at the CVA meeting, brought under Rule 1.17 of the Insolvency Rules 1986.
The hearing of this application and appeal has been expedited because it is said that a decision is required by the beginning of the new football season (on 7 th August). It was therefore heard over 2 days on 3 rd and 4 th August. While the Football League is believed to be sympathetic to tolerating the present uncertainty for a short time beyond then, the only potential purchaser of the club is said to intend to pull out if the matter is not resolved (in favour of the CVA) by that date. The application was heard over two full days, and was supported by full skeleton arguments. The urgency with which this judgment is required means that at one or two points I have not set out the full detail of statutory provisions, and some documentary material, that I would otherwise have set out. That is simply in the interests of saving time. I have at all times had the relevant provisions and/or documents in mind.
Initial Factual background
The club has been in financial difficulty for some time. In recent times its owner (through a BVI company called Portpin Ltd) has been a Mr Chainrai. By mid-2009 it had accumulated tax liabilities and on 1 st October 2009 HMRC petitioned to wind it up. On 3 rd November an agreement was reached which enabled the petition to be dismissed on payment of the outstanding tax, and it was also agreed that a £4m bank guarantee would be provided in respect of subsequent tax liabilities. The club more or less immediately went into arrears again in respect of PAYE, National Insurance Contributions (“NIC”) and VAT, and on 23 rd December 2009 a new winding up petition was presented on the basis of a debt of £11,464,169 (ignoring pence). On 10 th February it was heard by Registrar Derrett who adjourned it and directed that a statement of affairs be produced. A statement of affairs was produced which showed the club was insolvent on both balance sheet and cashflow bases. The possibility of an administration was referred to. On 26 th February administrators were appointed by Portpin Ltd under a charge. HMRC had doubts about the validity of the charge under which they had been appointed, but in the end did not pursue the challenge in that respect.
The petition was heard again on 2 nd March 2010 by Norris J. The effect of the supervening administration was that the petition was suspended under Schedule B1 para. 40 of the Insolvency Act 1986. He gave directions for the determination of the challenge to the appointment of the administrators but after the exchange of some evidence HMRC decided not to pursue the challenge and on 16 th March Lewison J made an order confirming the suspension of the petition.
A creditors' committee was appointed (on which HMRC had a representative) and the administrators prepared proposals which proposed an exit from the administration via a CVA. This proposal was worked up and resulted in the CVA which is now challenged on this application. The challenge is mounted under section 6 of the 1986 Act. In order to understand the basis of the CVA, and of the challenge to it, it is first necessary to step back and consider the nature and effect of some of the rules under which the club operated in the Premier League, and under which it will operate after relegation in the Football League.
The Premier League and Football League rules operating on insolvency
The rules of the two leagues are similar in the manner of operation, and for present purposes there is no material distinction between them. This general description of how the relevant provisions work can be applied to each of them.
In the case of each league, teams that play in them do so through entitlements conferred by membership of the company which carries on the business of each league, and pursuant to obligations imposed by inter alia the Articles of Association, rules and an Insolvency Policy. Each participating club is entitled to a “golden share”, which entitles it to play in the league. The clubs are also entitled to moneys collected by the leagues (from, for example, television and broadcasting rights) and distributed down to the clubs. The amount of moneys payable depends, inter alia, on the final position of the club in the league – the higher the position the greater the rewards. If a team is relegated from the Premiership it has to surrender its golden share in that league, but it is also entitled to a considerable sum to ease the stress of relegation – a “parachute payment”. In the case of Portsmouth its golden parachute would be in the order of £48m.
Each league has strict provisions which operate in the event of an insolvency event. If an insolvency event such as an administration occurs, the golden share (or the rights under it) are suspended, though that suspension can itself be suspended on terms. The written Insolvency Policy of the Football League provides that if a club company enters administration it must exit via a CVA approved by the requisite majority of creditors. Furthermore (and this is central to the dispute in the present case) all football creditor debts must be paid in full or fully secured. Football creditors are, in outline, other clubs (to whom sums may be due for transfer fees), players (for remuneration) and various football authorities and organisations. If the club's playing activities are to be transferred to another company then the League may impose conditions which require, inter alia, that the football creditors are paid or secured in the same manner.
If an insolvent club cannot fulfil these conditions then it can only carry on playing under “special circumstances” conditions. As part of those conditions the League is likely to impose a serious points penalty on the club (perhaps as many as 20), leaving it at a very significant disadvantage in relation to the other clubs and quite possibly making relegation fairly inevitable.
If the club goes into winding up the golden share is cancelled and the right to play in the Premier or Football League is lost. Player registrations are cancelled, so the liquidator has no players to sell. The leagues' rules provide that moneys owing to the club by the league are to be applied to pay football creditors. The result is likely to be a financial disaster. The means of earning further money are lost, the assets are seriously devalued and moneys formerly due are not paid. Moneys from the league are a very significant part of a club's income.
The rules of the Premier League also provide for payment of football creditors by that league during the period of administration (I was not shown any equivalent rules of the Football League – they may exist, but it does not matter for present purposes). Rule 55 provides that while a club is suspended (which it will be if there is an insolvency proceeding such as an administration) the Premier League may make such payments as it thinks fit to football creditors out of the moneys that the League would otherwise pay to the club. Thus the administrator is deprived of a significant source of fund (millions of pounds) and a group of creditors is de facto preferred.
The rules which prefer football creditors have become known as the football creditor rules. The justification for this preference is set out in the witness statement of one of the club's Administrators. It is said to be that it is not tenable for a club to remain a member of the League if it is playing other clubs while owing them money. That is said to put it at a financial and footballing advantage. So the football creditors are paid and the ordinary creditors are commensurately disadvantaged.
The rules have been criticised from time to time (including criticism by a House of Commons Select Committee) but they still stand as rules. However, HMRC takes the view that they are impeachable as being in contravention of insolvency principles (principally the pari passu distribution principle) and what has become described as the anti-deprivation...
To continue reading
Request your trial
-
HM Revenue and Customs (Claimant) The Football League Ltd (Defendant) The Football Association Premier League Ltd (Intervenor)
...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. 11 The FAPL also has provisi......
-
Moises Gertner v CFL Finance Ltd
...of the club were used to pay the preferential creditors in accordance with s.4(4)(a). 77 In HMRC v Portsmouth City Football Club Ltd [2010] EWHC 2013 (Ch) Mann J heard a s.6 application by HMRC in which the Premier League rules requiring the payment of football creditors in full were challe......
-
Moises Gertner v CFL Finance Ltd
...cases The decisions in IRC v. Wimbledon Football Club Ltd, [2004] EWCA Civ 655 and HMRC v. Portsmouth City Football Club Ltd, [2010] EWHC 2013 (Ch). §95(3)((d)(ii) IA1986 The Insolvency Act 1986 §1 fn 2 IR2016 The Insolvency (England and Wales) Rules 2016. §16 Kaupthing Kaupthing hf, an I......
-
Re Portsmouth City Football Club Ltd; Neumans LLP v Andronikou and Others
...of voting by the creditors. That challenge was rejected by Mann J on 5 th August 2010. The neutral citation of his judgment is [2010] EWHC 2013 (Ch). 8 On 26 th November 2010, the administrators made revised proposals. In particular they proposed a meeting to consider ending the administrat......