Soccer and solvency: the Football Creditors Rule

This afternoon MPs will debate the Football Creditors Rule. The rule requires that an insolvent football club’s new owners must repay the money owed to key ‘football creditors’ (players, managers and other clubs), irrespective of the position of any other creditors. Some within football claim the rule is good for competition, but HM Revenue & Customs claims it has lost millions of pounds owed to the tax authorities as a result.

Culture, Media and Sport Committee recommends abolishing the rule

In evidence to the Culture, Media and Sport Committee, the Football League claimed that the Football Creditors Rule protected the “integrity of the competition”, prevented individual clubs from gaining an unfair sporting advantage, and prevented a “domino” effect of financial distress. Others, including supporters’ trusts and insolvency practitioners, opposed the rule.

In its July 2011 report on football governance, the Committee recommended that the rule should be abolished. The Committee said there was a strong moral argument against the rule as it harmed the communities that football is supposed to serve – where local businesses don’t get paid for services provided to a club. The report also claimed that the rule “positively encourages excessive financial risk-taking, in a system that already offers other inducements to so do, by offering a safety net to those who seek to benefit from such practices”.

HMRC’s legal challenge dismissed

In May 2012, a challenge brought by HM Revenue & Customs (HMRC) against the Football Creditors Rule was dismissed in the High Court on the grounds that HMRC had failed to establish that the rule infringed the principle that debtors should not withhold assets from the insolvency process and the rule allowed all creditors in the same class to be treated equally.

An HMRC spokesman commented:

Our view remains that the football creditor rule is unfair to all other unsecured creditors who are forced to make do with much smaller returns – if anything – on monies owed to them by football clubs which enter administration.

Subsequent developments

In its January 2013 follow-up report on football governance, the Culture, Media and Sport Committee again called for the rule to be abolished:

The Football Creditors Rule protects the interests of often highly-paid footballers and other clubs at the expense of HMRC and the many small local businesses which supply clubs with services and equipment and which make up the majority of unsecured creditors. Despite the admission by the football authorities that there is no moral defence for the rule, they have failed to develop an alternative. The football authorities must explore other ways of reducing the chances of insolvency such as the greater use of clauses in players’ contracts allowing clubs to pay them reduced salaries in the event of the team being relegated. We recommend that the Government legislate to ban the use of the Football Creditors Rule at the earliest opportunity.

In an April 2013 letter to the Committee, the then Minister for Sport, Hugh Robertson, said he hoped that the implementation of Financial Fair Play principles in football would “negate the need” for the Football Creditors Rule. However he warned that the government would monitor the financial discipline of clubs, and, if necessary, would re-consider the need for legislation to address the issue.

Most recently, in February 2014 Helen Grant, the Minister for Sport and Tourism, again said that legislation remained an option if the football authorities failed to demonstrate that they can reform their governance of the game, including the Football Creditors Rule.

Author: John Woodhouse