By Nick Harris

2 June 2010

HM Revenue & Customs has started legal proceedings against the Premier League in the wake of the financial collapse of Portsmouth to try to have the so-called ‘“football creditors’ rule” (FCR) abolished.

Under the rule, if a club enters administration, “football creditors” including other clubs, players and managers owed cash are guaranteed to be paid in full while “non-football” creditors have to make do with whatever offer – generally small – is put on the table by the administrator.

HMRC filed a legal writ against the Premier League on 18 May, according to a scoop today for Accountancy Age.

Sportingintelligence has independently corroborated the details, and understands that HMRC believes it has a good case to get the FCR scrapped. A Premier League spokesman told us this afternoon: “The League will robustly defend its position.”

A long, convoluted legal process lies ahead but if HMRC were successful, insolvency proceedings around football would undergo a sea change.

Football creditors would no longer have any preferential call over the local pie seller or St John’s Ambulance brigade, for example, and a “domino collapse” of defaulting creditors throughout the game could lead to knock-on financial hardships. Some would argue this is only right; others that football is a special case.

HMRC’s view is “that the practical application of the so-called Football Creditors Rule may be unlawful. We have nothing further to add at this stage.”

The League’s stance is that the creditors’ rule, while imperfect, helps to maintain stability in the game, and that if the rule were not in place, liquidations of clubs would become much more common, and therefore “ordinary” creditors could suffer even more by getting no money at all.

Portsmouth’s football creditors can expect to get their total £22.4m in debts paid in full, eventually, while unsecured creditors (including HMRC, owed tens of millions) have been offered 20p in the £, or £16.5m of £83m owed in total, over time.

Legal experts believe HMRC has a decent case, with law firm Olswang LLP saying the FCR “arguably offends two major principles of insolvency law: one, the pari passu principle that requires that all creditors should share equally in the surplus assets of an insolvent company; and two, the anti-deprivation principle that requires that a company shall not be deprived of its assets by reason of insolvency.”

David Roberts, a partner at Olswang, adds: “These principles are designed to ensure that when a company fails, the creditors are not deprived of assets of the company that would otherwise be available to share and that the assets of a company must be shared evenly amongst all unsecured creditors. The Football Creditors rule is not kind to either principle.

“HMRC has thus far proved to be a loser in football club failures because clubs have not been accounting for PAYE and NICs, which is unlawful. However, as long as the [FRC] is in operation, ‘Football Creditors’ will effectively rank ahead and in preference to all other unsecured creditors, including HMRC, and the operation of the rule diminishes the quantum of any surplus assets that might otherwise be payable to unsecured creditors…..

“Given that Portsmouth are unlikely to be the last club in the Premier League to incur an event of insolvency, the continued viability of the [FRC] rule is likely to be the subject of intense scrutiny.

“Thus Olswang LLP welcomes HMRC taking responsible steps to seek to settle this grey area and trusts that this current uncertainty will be addressed efficiently and in due course by the appropriate body, namely, the court.”

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