The Football Creditors Rule & The Changing Face Of The Insolvency Game

By on May 26, 2012 in Latest, Politics | 2 comments

There are, of course, two sides to every coin. The news that HMRC had failed in its bid to get the football creditors rule, which ensures that all football creditors are paid in full in the event of an insolvency event at a football club while the the taxman has to join all other unsecured creditors in the line for coppers from a CVA wasn’t particularly surprising.

As the presiding judge made clear in his summary, there is no statute which takes into account the football creditors rule, because the this rule is, in terms of the way in which it applies within the framework and protocols of inolvency law, so unique. It is difficult to think of another trade body – which is ultimately all that the Football Association, the Football League and all those other organisations that we refer to as “governing bodies” are, if you really stop and think about it – which demands that its members treat other such members differently in the event of insolvency events on the part of its other members.

It is easy to get sucked into emotive debates about millionaire footballers being protected while St Johns Ambulance aren’t, or why football clubs should receive preferential treatment to the HMRC in such situations. As ever in the event of emotive arguments, though, the cases for and against the retention of the football creditors rule are both more nuanced than we would ever guess from the timbre of those most keen to defend or attack it. The reason why the football creditors is in rule is in place to begin with is – or, as cynics might choose to add, is claimed to be – to maintain competitive imbalance within the fame. What would be, they argue, the moral implications of a football club hoovering up all of the best players from its rivals, declaring itself as insolvent and getting to hold on to those players without having paid for them.

Critics of the authorities over these claims cry disingenuity. They argue that this is an example of the insularity of football, of clubs choosing to overlook the broader moral implications of insolvency and the convention in insolvency that all creditors, once the division between secured and unsecured has been made, should be treated equally. They argue that the FA, the Premier League and the Football League could all take far more significant measures to protect competitive balance if they chose to, but that the more even-handed distribution of prize money and television money and the reintroduction of the sharing of gate receipts seems as far away as it has done at any point over the last two decades. Football, critics argues, wears a veil of caring about protecting the sporting integrity of its competitions to mask the real motive behind the football creditors rule – to enjoy a preferential status which means that football clubs themselves are insulated from the financial recklessness of other football clubs.
Both arguments have degrees of merit, but one matter that is seldom discussed wheh discussing the football creditors rule is that it’s not all about millionaires and clubs. What contitutes a “football creditor” has a clear definition and is broader than we might anticipate. The overwhelming majority of players that are affected by clubs suffering from insolvency events are far from millionaires. In the case, for example, of Plymouth Argyle’s many months of not paying its players, there was considerable talk of the genuine financial hardship that these players were suffering. They have, it could well be argued, a right to be recompensed for the jobs that they have a contract to do.

Professional footballers were little more than wage slaves for many, many years – a process that began to crumble with the end of the maximum wage in 1961. Repealing protection for workers could hardly be described as a very progressive move in the field of labour relations within the game. It is also often overlooked that what we could describe as the “civilian” staff – the office workers and so on – are also protected by the rule, and these are people that certainly aren’t in the pay bracket of multimillionaire players.

What is starting to become increasingly clear, however, is that the existing rules within the game are unsatisfactory. Over the last few weeks or so, it has started to feel as if the current raft of legislation that has been introduced in football over the last few years or so – the Fit & Proper Persons Test, the football creditors rule, the automatic ten point deduction for entering into administration and so on – is already creaking under the weight of the sheer level of mismanagement within the game, and it may be instructive that two of this season’s prime basket cases – Darlington and Kettering Town – both came from the Football Conference, the league with by far the toughest regulations for insolvency. As such, we could well argue that what is required within football is a cultural and attitudinal shift as much as a legislative one.

The continuing existence and financial security should be the only criteria of success by which football clubs – in particular smaller clubs – are judged. This will require the involvement of the authorities, the media and supporters themselves. The likelihood of it coming to pass is slim-to-none, but progress has already been made in this area at such a glacial speed that it would be easy to have missed it. The sugar daddy model of ownership is discredited at lower levels of the game and prospective new owners of clubs are now treated with suspicion that would be considered as bordering upon paranoia were it not for the fact that so many asset-strippers and charlatans have found their way into clubs over the last few years. There is, however, still work to be done in this respect.

At a legislative level, there is further work to be done. The anticipated use of a controversial pe-pack CVA by Kettering Town, coupled with the announcement that it intends to spend heavily on new players next season is a worrying development and is a nettle that the authorities have to grasp. Pre-packaged CVAs (which bypass insolvency practitioners and effectively allow directors to buy what they already own and whilst wiping out debts without any recourse for creditors) have been controversial enough to lead to cause for them to be outlawed (although the government ducked this earlier on this year. If their use increases, further legislation to ban their use in football will be required.

There has been little indication that the current line of punishments – relegations and points deductions – works, and it would be faintly absurd to suggest that clubs which don’t get into financial bother should be rewarded for merely doing what all football clubs, as businesses, should be doing. Fifty plus one per cent shareholding rules, as seen in Germany, seem like a pipedream, but the introduction of bonds to be paid by football club owners from their own money at the start of each season might work. Of course, the current emphasis upon what happens when a football club enters into administration takes the focus away from where it should be – on not getting into that situation in the first place.

The judge’s words with regard to the latest challenge on the football creditors rules made it reasonably clear that, from a moral viewpoint at least, the Football League’s “victory” was a hollow one. In noting that he could only issue judgement based on statute law rather than moral considerations, he allowed us to reach the conclusion that the football creditors rule is morally beyond the pale. We will never know whether the authorities truly believe what they say about competitive balance being of overriding importance when it comes to their rationale behind their fierce defence of this rule and there are at least crumbs of comfort that we can take from it. It seems likely, however, that with the culture of football finance now starting to gravitate towards debt avoidance rather than debt management, the rules that have been drawn up and redrawn several times over in recent years will have to be tightened still further. If there is one thing that we have learned beyond reasonable doubt over the last decade or so, it is that football clubs cannot, on the whole, be trusted to act honorably off their own backs.

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    2 Comments

  1. This decision just absolutely beggers belief. It seriously does.

    Scott Lee

    May 27, 2012

  2. The current line of punishments doesn’t work, and nor will any other punishments that are brought in. The whole idea that clubs will behave properly because of prospective punishments is completely flawed.

    The system is only reactive – there’s no proactive aspect anywhere. Why should Man City’s owners care about the terrible state they’re going to leave the club in in ten years’ time? Why should John Radford care about the implications of him wholly owning Field Mill? The system allows these things to happen.

    We really, really need club licensing. Following Irish football for a couple of years shows that it’s not a perfect system, but it’s still massively better than not having it. We need to be able to say to clubs “No, you can’t separate your ground from your club”, “No, you can’t spend money you don’t have yet” and so on. We need clubs to be assessed on the way they’re run, so that the ones who are run properly are allowed to flourish and the ones who aren’t are quickly identified BEFORE things go sour.

    Sean

    May 28, 2012

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