The Importance Of Retaining The Football Creditors Rule

By on Jun 7, 2011 in Latest | 9 comments

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.

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    9 Comments

  1. It’s sad that football clubs and players should be put at risk by arrogant businessmen seeking their five minutes of local fame by over-investing in clubs – but you still don’t give any reason as to why footballing debts should be credited before either HMRC or any other services. After all, for every lower league footballer who might lose out when Tinpot FC goes bust, there’s also the local electrician and plumber who worked on the ground the previous summer, complete with family etc. Why should they lose out and not the footballers?

    I can see that it might undermine the transfer system, but perhaps it will make clubs a little more cautious about selling. After all, if a club in peril starts spending recklessly, players, agents and clubs selling to them will quickly become aware that they risk not getting their money if the buying club goes bust.

    Rob (2)

    June 7, 2011

  2. No, no, no, no, no and NO!!!!

    The football creditors rule MUST be abolished.

    Let’s tackle “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”….
    Surely this is a club that is living beyond its means. Any club that HAS to sell players in order to survive is surviving by gambling on the hope that the clubs’ system produces a couple of golden nuggets that they can flog off to pay the remaining players who are not so good. How can this be right? What happens in the years when the whole team is a bit pants and no player can be sold….oh yes…that’s right….they go into administration.

    And what happens when they go into administration?

    You and I, i.e. the taxpayer, has to bail them out. Quite frankly I am sick and tired of paying for the success (or failure) of other teams through my taxes. And if that means that the players of a Premier League club (as was) (e.g. Pompey) or a League 2 side (e.g. Stockport) can’t afford to pay their players then tough. That’s how it works in the rest of the world and why should they be any different.

    If a club cannot afford to pay for a player out of GUARANTEED future earnings then they should no buy that player. It is called “living beyond your means” or “cheating”.

    It’s got nothing to do with whether the other creditors get an extra penny…it is to do with knowing what income can be sourced from gate money, merchandise etc. Most clubs have a handle on what that income is, plus the variables of player sales or TV appearance money on top.

    Anyone spending on salaries that “variable” money, that may or may not come in, is a fool and gambling with the goodwill of its creditors..which include me, as a taxpayer.

    The removal of the football creditors rule will have the effect of seeing fewer clubs in debt.
    If they are living beyond their means now, then they have to reign in the extra spend by slashing the size of the squad or any means other than doing the same for 3 years and then going into administration.
    We are doing them a favour by removing the football creditors rule.

    Will a player be more or less likely to sign for a club that is “splashing the cash” if he knows that his salary is not protected? I would guess less likely, therefore we will see less of the clubs who are buying their way up the leagues.

    If we still want to protect the salaries of the lower league players well why not set up some sort of benevolent fund whereby a tiny percentage of EVERY players salary or part of the TV money, is taken each month and when a club goes tits up they get paid out of that amount.

    The football creditors rule is unjust and it only results in YOU, the taxpayer, funding footballers, whether it is the overpaid ponces of the Premier League or the lesser paid players of League 2 sides such as Crawley…..cough….

    If your club is run well then the players and taxman both get paid – why is there a need for the rule??

    STOP THE FOOTBALL CREDITORS RULE NOW!!

    Jertzeedon

    June 7, 2011

  3. Mixed bag article that undermined itself with a strange comment about the controversy being only since Portsmouth…I’m afraid that shows a lack of understanding that flaws the whole article. When in 2007 Ken Bates robbed 1000′s of small businesses in Leeds the football creditors rule had been a cause for concern and well argued about for years. His version of the scam was simply an extreme, it was nothing new or eye-opening.

    Perhaps a more interesting approach would be to expose the idiocies that is the administration system as it effects all forms of business and then to extrapulate that to the end degree with the unique footy rules. Some exposure of the fast and loose examples like KPMG would be also welcome.

    Whilst I’m inclined towards abolition of the rule my prefered option would be that new enterties expecting the “golden share” after administration are informed anything less than 90% payment results in relegation at a scale of 1 division per 10% below that (and yes that would have put Leeds United somewhere in the West Yorkshire League but it would have been fair and right).

    MG

    June 7, 2011

  4. You haven’t really offered a strong case for why the Football Creditors Rule should stay. Your argument is based around the fact that lower league footballers don’t earn too much, and that there could be a knock on effect on other clubs if transfer fees are not paid.

    But frankly, this is the real world in which all other businesses have to operate. Employees do run the risk of not being paid if their company goes bust, and suppliers rarely get much from an Administration, and even less from a liquidation.

    If the rule is abolished then clubs will just have to operate smarter and have better credit control procedures. It can’t be too hard to write into a transfer agreement that if a club goes bust owing transfer fees, then the player reverts back to the selling club.

    Unless someone can come up with a sound legal reason why the Rule should stay (and your article is far from doing this) then I suspect the Revenue will win in November.

    Paul

    June 8, 2011

  5. @Rob 2 – “but you still don’t give any reason as to why footballing debts should be credited before either HMRC or any other services”"

    Well, I haven’t given any reason as to why footballing debts should be credited before HMRC, because – as I said in the article – I believe HMRC should be included in the list of “Football Creditors” and treated as such. In other words, paid in full after administration.

    As for other services, well, most of the money owed as part of footballing debts is either owed to competitors (therefore allowing a cheat’s charter as suggested in the article) or to employees (whose main – even sole income comes from the club).

    “Why should [local businesses] lose out and not the footballers?”

    Local businesses can always refuse to take the club’s custom (and if they did a credit check on football clubb before they dealt with them, they’d be unlikely to give them credit in the first place). Why should ticket office staff go unpaid because the owner of Tinpot FC cannot pay their other bills?

    @Jertzeedon – “Surely this is a club that is living beyond its means. Any club that HAS to sell players in order to survive is surviving by gambling on the hope that the clubs’ system produces a couple of golden nuggets that they can flog off to pay the remaining players who are not so good. How can this be right? What happens in the years when the whole team is a bit pants and no player can be sold….oh yes…that’s right….they go into administration.”

    You’re a WImbledon fan, yes? This is the model that served Wimbledon well for years in the top flight, isn’t it? And it wasn’t a lack of income from selling players that caused Wimbledon’s problems, was it?
    At the end of the day, players are assets of the club – usually the most valuable ones, and if companies in other sectors can raise money by selling assets, why shouldn’t football clubs? Many clubs (Crewe are the greatest example of this) don’t live beyond their means, yet invest the money they bring in, into their academy. When they don’t produce good players, they don’t go into administration, they go to crap on the pitch and get relegated, and still live within their means.

    “And what happens when they go into administration? You and I, i.e. the taxpayer, has to bail them out. Quite frankly I am sick and tired of paying for the success (or failure) of other teams through my taxes. ”

    Yes – me too. Hence the suggestion of including HMRC as a Football Creditor, so that HMRC always gets paid in full. If you believe that removing the Football Creditors rule is going to stop clubs in administration paying HMRC 10 pence in the pound, then you have a faith in human nature that human nature really does not deserve.

    “And if that means that the players of a Premier League club (as was) (e.g. Pompey) or a League 2 side (e.g. Stockport) can’t afford to pay their players then tough. That’s how it works in the rest of the world and why should they be any different.”

    You see, I totally disagree with this. The rest of business screw their employees out of money when they have insolvency events – so football should do the same. There are very few commendable things that the Football Association do, and this is one of them. Admittedly, it’s more thanks to the PFA being a strong union (and having the FA over a barrell at a time when unions could look out for people who weren’t in their union, or even eligible to join their union), but more governing bodies and regulators should force their companies to pay their staff in full, in the process of exiting administration, before they can carry on as a going concern.

    “If a club cannot afford to pay for a player out of GUARANTEED future earnings then they should no buy that player. It is called “living beyond your means” or “cheating”.”

    Well, not really, because clubs can spread their transfer payments over the length of the initial contract. The longest contract allowed is six years. No-one knows what their income is in four, five or six years time (let’s be honest, football is unpredictable enough that no-one knows what their income will be in two years time). It’s like saying you shouldn’t ever buy anything on hire purchase, or using a loan because you can’t guarantee you won’t be sacked or made redundant over the length of the loan.

    “The removal of the football creditors rule will have the effect of seeing fewer clubs in debt.”

    You think so? I couldn’t disagree more. If you remove the protection of having to pay the largest part of a club’s debt in full through administration, you remove a level of risk of incurring that debt in the first place. At the moment clubs know that they have to pay transfer fees in full, so will draw the line at what they can pay out in risky situations. Give clubs the chance of only having to pay 1%, 5%, 10% of potentially 83% of a transfer fee if everything goes tits up, and all of a sudden it becomes an easier risk to take.

    “Will a player be more or less likely to sign for a club that is “splashing the cash” if he knows that his salary is not protected? I would guess less likely, therefore we will see less of the clubs who are buying their way up the leagues.”

    Yet, agents aren’t protected by the rules, yet still happily deal with those sort of clubs in the first place – and there are more than enough agents prepared to deal with those clubs on a regular basis as it stands.

    “If we still want to protect the salaries of the lower league players well why not set up some sort of benevolent fund whereby a tiny percentage of EVERY players salary or part of the TV money, is taken each month and when a club goes tits up they get paid out of that amount.”

    This benevolent fund already exists – the PFA loan the club the money to pay the players (and were close to striking to retain the money that they receive back in 2000 when the FA tried to cut it), but it has to be paid back (so as to stop owners relying on the PFA), because the PFA are protected through the creditors rule.

    “The football creditors rule is unjust and it only results in YOU, the taxpayer, funding footballers”

    and tea ladies, and stewards, and ticket office staff, and all the other staff that keep the club running. But of course, that wouldn’t happen if HMRC was added to the list of football creditors.

    “Mixed bag article that undermined itself with a strange comment about the controversy being only since Portsmouth…I’m afraid that shows a lack of understanding that flaws the whole article. When in 2007 Ken Bates robbed 1000′s of small businesses in Leeds the football creditors rule had been a cause for concern and well argued about for years. His version of the scam was simply an extreme, it was nothing new or eye-opening.”

    The Football Creditors rule has only come in for a bad press since Portsmouth went into administration. People like you and me, may have been aware of it for longer (I was aware of it when my own club – Ipswich – went into administration in 2003), but apart from David Conn, most of the press barely acknowledged the existance of the Football Creditors Rule until Portsmouth went into administration (which was a much, much bigger story than even Leeds’ administration). Conn apart, most of the papers barely mixed football and finance (because most football hacks didn’t/don’t understand the financial sidea), the level of blogging was nowhere near what it was today (200% had only just started,), even When Saturday Comes’ articles on Leeds focused on why Leeds hadn’t protested against the situation, and ways that they could protest.

    There was a lot more fury and concern over the amount owed to Krato and Astor Holdings than there was over money owed to Burnley and Preston (Leeds’ two biggest Football Creditors at the time), and while there was mention of the money being paid to the likes of Viduka and Fowler, this was more treated with mirth that Leeds were still paying the contracts of players that had left years before (because at that point it wasn’t a debt, it was still considered a wage, because they had been paid on time, with the other players, and were until their contracts expired a few weeks after Leeds entered administration.)

    “Unless someone can come up with a sound legal reason why the Rule should stay (and your article is far from doing this) then I suspect the Revenue will win in November.”

    Unless the judge takes the view that as the HM Government removed the super creditor status from HM Revenue & Customs (or at least their previous forms), then it should be down to HM’s various departments to resolve the situation. After all, the Football Creditors rule has been in place long before the 2003 Companies Act took the Taxman’s equality away. The 2003 challenge against the Franchise was exceptionally low profile, but that was thrown out, and nothing has changed in terms of the way that Football has demanded creditors are paid in the meantime.

    Rob

    June 9, 2011

  6. What’s the seller’s equivalent of cavaet emptor?

    Football’s finances have got to such a ludricrous state that the removal of the football creditors rule is probably just about the only thing that will stop well-run sustainable clubs selling players to those with shysters or criminals owning and running them.

    I want to see a credit rating league table, and so will other clubs.

    Nathan

    June 9, 2011

  7. @Rob…You’re a WImbledon fan, yes? This is the model that served Wimbledon well for years in the top flight, isn’t it? And it wasn’t a lack of income from selling players that caused Wimbledon’s problems, was it?
    -yes indeed, but tat was one of the reasons we were screwed as a club. Even paying the lowest wages we never had enough income, and eventually moved ground and the rest is history. As AFCW we do not have to sell players to survuce, we are on a sustainable business model and if we can get 5 promotions in 9 years doing it the right way then so can everyone else.

    We have lost out on many players in the last 9 years as their wage demands were way too high, only for the players to even drop a level to achieve it.

    The problem is the amount the players get – it is not sustainable and rather than agreeing to the amounts demanded the clubs should start telling them to go away. But it will never happen as football is fucked.

    Jertzeedon

    June 10, 2011

  8. Nice to keep saying that it’s football clubs vs the taxman. You might get a bit less sympathy if you said that it was footbal clubs vs the NHS or schools.

    The truth is that it’s rarely the case that we’re talking about the extinction of a footbal club. As Halifax and Chester have shown, at the last resort any club can be revived in the lower leagues.

    Isn’t this special pleading not about clubs wanting to survive but rather clubs wanting to be able to stay at a particular level in the pyramid?

    How often do you hear fans complaining when directors take a club into debt to sign players or in an attempt to win promotion? Hardly ever – yet when the chickens come home to roost, they expect special privileges.

    FFFFFC

    June 10, 2011

  9. Plus, if there’s such a problem with bad debts, don’t transfer the registration of a sold player before you’ve been paid up front.

    FFFFFC

    June 10, 2011

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