The Importance Of Retaining The Football Creditors Rule
With the club season completed with Swansea City’s victory in the Championship Play-Off final, and only a handful of European Championship qualifiers to go on the continent this evening, the focus for football over the next few weeks will be off the pitch. And, while the majority of news may come from the fallout of the FA v FIFA crisis, as well as the comings and goings of the transfer market, the most important fixtures of the next month will not be anything to do with Sepp Blatter, nor will they be the European Under 21 Championships or any of the opening games in the Women’s World Cup – in fact, these fixtures may not get any sort of coverage whatsoever, and certainly will not be televised. That is because the most important fixtures in June will be the Annual General Meetings (AGMs) of the various football authorities.
The reason that the AGMs of the football authorities are so crucial this season, is because of HM Revenue & Custom’s (HMRC) challenge of the Football Creditors Rule in the High court in November. Should HMRC be successful, then the transfer system within England becomes fragile in a way that could affect any club. My club. Your club. Clubs that have always had to sell players to pay their bills – and have always paid their bills – in order to ensure that they survive. The Football Creditors Rule is a long standing rule within football, yet it is only recently that it has come in for such a bad press. In fact, it has only come in for a bad press since Portsmouth became the first Premier League club to enter administration in 2010, with players on tens of thousands of pounds a week all receiving their salaries in full, whilst local businesses and charities only received 20 pence for each pound that they were owed.
However, such a highly placed club ending up in administration is rare, most clubs that have ended up in administration have been in the third tier of English football. For these clubs, clubs like Stockport County, Chester City, Darlington and Bournemouth, the salaries paid out to the players are much more modest, and in a lot of cases the players are earning a similar amount, and in many cases less than the people cheering them on. In fact, since April 2003, only five clubs in the top two flights have gone into administration – Bradford City in 2004, Rotherham United in 2006, Leeds United in 2007, Southampton in 2009, and Crystal Palace and Portsmouth in 2010. Of those, Southampton’s new owner Markus Liebherr paid the club’s existing creditors off in full, and Rotherham United have never been the kind of club to pay massive wages.
April 2003 may seem like a strange cut-off point, but it was a significant date in terms of the way the Taxman was treated when any company (not just football clubs) went into administration. Until April 2003, the Taxman (then split into Inland Revenue, and Customs and Excise) was given supercreditor status by law. In other words, when any company went into administration, the Taxman was guaranteed to get everything that was owed in full, while other creditors had to settle for a small percentage. This legal protection was removed by the 2003 Companies Act, which mean that in all cases, the Taxman would be treated like any other standard creditor. This change in the law upset the Taxman, especially when it comes to certain industries (football being one), where certain creditors are still given supercreditor status. One of these industries is football, where Football Association rules state that a club can only continue, or pass control to another company after an “Insolvency Event” (including receivership, as well as administration), if a club has satisfied all football creditors in full. In other words, if a Football Creditor is not paid off in full, then a club cannot continue to play in FA competitions – and if a club cannot play in any FA competitions, it cannot continue to trade. And it a club cannot trade, then who is going to come in and buy it, and pay off any of the creditors?
The Taxman has challenged the Football Creditors rule before, and that was in 2003, just after the Companies Act came in. The first football club to go into administration after the act came into law was a Buckinghamshire-based franchise. That franchise paid off their Football Creditors in full, but managed to convince its other creditors to accept a single pence in the pound. The Taxman, unhappy at being paid less than certain other creditors for the first time in its history, went to court to challenge the decision, but lost the case. In at attempt to gain public support for their case later in the year, the Taxman has claimed that the action is being taken in order to protect all creditors from the imbalance from the way that they were treated – but if that were the case, where was the legal action when the imbalance favoured the Taxman as well as the football clubs?
So who exactly are Football Creditors? Well, to listen to some in the media, its just the FA, clubs, players and agents, but its not as simple as that. For a start, agents are not Football Creditors. Aalborg, Stade Rennais and Lens all found out that foreign clubs (including Scottish and Irish clubs, and those Welsh clubs who play in the Welsh pyramid) are not Football Creditors either. In fact, the list of Football Creditors, according to the Football Association is:
• The Football Association
• The Premier League
• The Football League
• The Football Conference
• The Northern Premier League
• The Southern League
• The Isthmian League
• Any member club of the above
• Any employee or former employee of a member club of the above, in terms of their salary or expenses. Regardless of whether they are full-time or part time or part of the playing staff or not.
• The Professional Footballers Association
• The Football Foundation
• Any affiliated Association
• Any pension scheme or plan administered by, or on behalf of the FA or any league that the club is a member of.
So, why should the Football Creditors Rule stay? As well as the fact that most clubs in administration are lower down the leagues, and those employees affected need their incomes to pay their bills like the rest of us (be they players, coaches, or even ticket office or cleaning staff), as this is their only source of income – after all, full time Conference clubs do not do a great deal in image rights. There is also the notion of financial fair play. Football is also a rare business in that major financial transactions take place between competitors. As long time readers of the site will be aware, football clubs have attracted more than its fair share of dodgy owners down the years, whether the owners are basing clubs off-shore, asset strippers or deceiving opposition clubs of revenues through manipulation of the number of fans entering the ground through the away turnstiles. Even where clubs have not been run by those that have eventually proven themselves to be unfit and improper, they have taken every advantage to avoid paying monies where they have to, for one reason or another. As an example, Nathan Ellington has spent the last eighteen months on loan at Skoda Xanthi and Preston North End, because if he had played another game for Watford, it would have triggered a £1million payment to West Bromwich Albion, that the Hornets could not afford. Portsmouth stopped playing Michael Brown and Richard Hughes after the turn of the year, because an extra appearance for the club would have triggered a clause in their contracts, automatically renewing them for an extra year. And with FA rules allowing a transfer fee to be paid over the length of the initial contract, it would not take a suspension of disbelief for a club to buy players in a desperate attempt to gain promotion, or avoid relegation, only to subsequently enter administration and end up paying a fraction of the initially agreed fee, retaining the services of the player, or having already used the player to secure promotion, or avoid relegation. That would have a knock-on effect to the selling club, who would have budgeted to receive money (that could be tens, or hundreds of thousands of pounds, or more) that now would be unlikely to materialize, and could cause a knock-on effect in terms of pushing the selling club into administration, especially if it is a club who rely on selling players to keep their heads above water.
Let’s be honest, if the Football Creditors Rule is removed, most new owners of clubs in administration will not suddenly decide to pay extra to other creditors, just because they would not have to pay their Football Creditors in full. When it comes to acquiring a business in administration, an investor will look at it as they would be buying any other business. And that means trying to acquire a business for as little as possible. An investor is not suddenly going to offer non-football creditors an extra 1p, 10p, 20p in the pound, just because they will no longer have to cover a football clubs cost in full. They are going to offer the same rate as they would now.
So where do the AGMs come into this? Well, this is where the clubs, and their representatives get the chance to add, remove and modify their existing rules. They can choose to get rid of the Football Creditors Rule – which would cause concern for everyone that works for a football club in an operational capacity, not to mention allowing the scenario of “buying” and using players, and subsequently not paying for them. They can modify the rules, so that all clubs have to pay transfer fees up front – which would be unlikely, as it has been less than a decade since the clubs were pushing to extend the amount of time that transfers can be paid from two years to either three years (the limit between European clubs) or longer. And then there is a third option – modifying the list of people that are considered Football Creditors. After all, if the catering staff at the training ground can be considered Football Creditors, why not the Taxman? If pension contributions are protected by the Football Creditor’s Rule, what is stopping the football authorities going for the good publicity of adding the St. John Ambulance, and other charities to the list? Admittedly, this may be a fanciful idea, considering how many clubs appear to use HMRC as a bank – and that the clubs have voted Southend United’s Ron Martin (who has publicly referred to the Taxman as HMRC Bank plc) onto the Football League board. However, if the clubs choose to ignore the issue, then the High Court may take the decision out of their hands.
The only argument against that could be against adding the Taxman to the list of Football Creditors is that it is increasing the minimum amount that a investor would have to bring to the table to invest in the club in the first place – but if a potential new investor wants to make his first action as a club owner an act of cheating the public purse and the charity sector, then maybe they should not be considered fit and proper to own, or run a club in the first place.