Friday, 2 July 2010

What is the Football Creditor Rule?

Having read much on the subject, I am surprised that nothing I have found describes what it is in legal terms.

The only major case on it is Inland Revenue v Wimbledon Football Club Ltd & Ors [2004] EWHC 1020 (Ch) in which the Inland Revenue attempted to argue that the Rule breached s.4(4)(a) Insolvency Act 1986 in that it provided for a third party to make payment of football creditors ahead of their preferential debts. They failed on grounds that appear to be nothing to do with the Rule. However, from reading this case and the appeal, there is much to still be investigated about this Rule.

Rules 47 and 48 of the Rules of the Premier League state:

Power to Deduct
47. If any Club or Relegated Club (“the debtor Club”) fails to make any payment due to any creditor of the description set out in Rule C.48, upon being reasonably satisfied to that effect, the Board shall be empowered to deduct the amount of any such payment from any distribution of UK Broadcasting Money, Overseas Broadcasting Money, Commercial Contract Money, Radio Contract Money or Title Sponsorship Money payable to the debtor Club, paying the same to the creditor to which it is due.

48. The creditors to which Rule C.47 applies are:

48.1 another Club (or club); or
48.2 the Company; or
48.3 any Associated Undertaking, Fellow Subsidiary Undertaking, Group Undertaking, or Subsidiary Undertaking of the Company; or
48.4 any pension or life assurance scheme administered by or on behalf of the League; or
48.5 the Football League; or
48.6 any Associated Undertaking, Fellow Subsidiary Undertaking, Group Undertaking, or Subsidiary Undertaking of the Football League; or
48.7 the Football Foundation.

The first thing notice about Rule 47 is that it does not mention insolvency. The second is that it is the power to deduct, not the power to forfeit. Therefore it is not triggered by the insolvency event and does not operate to affect the asset of the club on its insolvency. The Rule confirms it operates against monies "payable to the debtor club". I think this clears the Rule of any charge that it is repugnant by virtue of any attempt to put the assets of the insolvent club beyond the reach of creditors.

Rule C55 is a repeat of C47 but triggers on insolvency. It gives the same power over money due to the club in slightly different terms.

"55. While pursuant to this Section of these Rules a Club is suspended or its suspension is postponed, the Board shall have the power, subject to Rule C.58, to make such payments as it may think fit to the Club's Football Creditors.."

Interestingly, C58 limits the board's power to exercise discretion within a number of parameters, one of which is the provisions of the Insolvency Act 1986.

Having established that the club still owns the asset after becoming insolvent and assuming that the Rule is not illegal, what is the mechanism by which a creditor can be paid from the assets of the club in priority to other creditors? The obvious answer would be that the Rule acts as a form of security over the assets of the club. This would give the football creditors the right to deduct their debts at any time, unaffected by the insolvency of the debtor club. If its not a form of security and its not a forfeiture, it is unlikely to be able to defeat the claims of a liquidator or administrator.

If Rules 47 and 55 creates a security of the assets of the club, are there any circumstances whereby the security may be rendered void? To answer this we have to identify what sort of security is created.

S.248 Insolvency Act 1986 describes a security as "any mortgage, charge, lien or other security". It is clearly not a fixed charge as the creditor has no control over the asset and it is certainly not a floating charge.

This leaves us with a lien. Normally a lien does not give rise to the power of sale but a contractual lien can, and this does not make it a registrable charge. (Trident International Ltd v Barlow & Ors [1999] EWCA Civ 2061) The lienee may be given the power to have his lien asserted by an agent, in this case the Football League.

A difficulty for the League is that a lien will only operate in insolvency against assets held at that time and not subsequently acquired. In the context of Rules 47 and 55, it may be that it could only attach to the monies due to the club at the date of insolvency. That might include several years parachute payments but the creditor might be in difficulty asserting a lien over TV monies from the following years fixtures or the ongoing sale of players.

Another way of looking at C55 in particular is to consider it as a trust with the board as trustees with discretionary powers. In that case, if the assets of the debtor are held in part on trust for a creditor, is that another form of security from the point of view of the creditor? Is it a setoff issue instead?

If some or all of this is right, what is the effect on a football insolvency? The IP would need to identify the security rights and consider whether they are effective as against the company. The football creditors would also have to value their security and decide whether they wished to rely on it. This would have an effect on both the football creditors' ability to vote.
It is this last point which I have found of interest in the recent insolvency of Portsmouth FC. In the recent CVA meeting the football creditors appeared to have contributed to the 81% majority of unsecured creditors voting in favour of a 20p in the £ proposal, yet they themselves were to receive 100p. This is not impossible as preferential creditors are also unsecured but would normally expect to be paid in full. If it is the case that Rule 47 gives the football creditors a form of security then they may have waived their security by seeking to vote as unsecured in the CVA. Alternatively the chairman ought to have denied them the vote as they had failed to comply with Rule 2.40(1) Insolvency Rules 1986 is they had failed to deduct their security. In the case of Portsmouth, this amounts to around £35m of the votes in favour, 26% of the total votes cast and enough to make a difference between success or failure of the vote.

Also in the context of Portsmouth, at the time of Administration in March, the club's contractual right to parachute payments were about £24m. Some weeks later the clubs voted to increase payments to around £48m. Depending on the nature of how that was effected, it may be that the lien could not be exercised against the extra £24m and this would be available to the club or its creditors.
Perhaps this is the way forward for the Football Creditor Rule. It is not illegal but as a form of security the creditors are not entitled to vote in and therefore influence the ongoing insolvency.

This does leave one point of conflict. The asset against which the Football Creditor Rule attaches in the main relies on the survival of the club in some form. If the unsecured creditors voted against a CVA then the secured creditors' asset would be destroyed. They could not vote to protect their assets as they are secured and they could only vote for the contingency that their asset might be lost at a value of £1. Would this force the Board to consider exercising the discretionary power within Rule 47 to only deduct part of the monies due to the club in exchange for the unsecured creditors voting to save the club?

4 comments:

Anonymous said...

You need to look at Rule C50 et seq where it is spelled out in terms of insolvency C58 in particular

Stephen Hunt said...

I have made a small amendment but C50-58 doesn't seem to affect my point.

I am trying to find a category to fit the FCR into before deciding how it should be treated in a formal insolvency. Whether security or a trust, I can't get away from the fact that it confers a right to a creditor over the assets of the club and as such it should be treated as a form of security for voting and dividend purposes.

Stephen Hunt said...

To put it in practical terms, when I am constructing a Statement of Affairs for a company, where does the Football Creditor sit?

The FCR does not forfeit the asset so the money due from the TV rights etc must appear as an asset at the beginning of the document. Either the football creditors are then shown as a deduction as some form of charge, or the assets are avalailable to other creditors and the football creditors rank as unsecured. It cannot be any other way can it?

Stephen Hunt said...

I have just had a conversation with someone who was looking at the opposite view in that the income wasn't the asset of the club. This raises quite different problems.

If there is a rule that states that the income belongs to the club but on insolvency it is payable elsewhere then this is a classic forfeiture clause that has been tested time and again, especially in the field of pensions. In short, it is very difficult to forfeit your own assets on insolvency but a third party can impose a forfeiture in terms that you only have a right to an asset whilst you are not insolvent. See Scientific Investment Plan 1999.

I think the League might suffer some real difficulty in running this argument without causing colateral damage to itself. It's all very well constructing a contract that says that certain monies are not payable to an insolvent club, but it is quite another to then expect the club to perform its duties and effectively earn that money only to see the fruits of that work paid away by the Board under its discretion. In bankruptcy that is the equivalent of a bankrupt working for free and the spouse receiving a high wage and this would be overturned as a sham. The League could end up in a position whereby the only way to protect their Rule is to fully suspend the club and to remove it from fixtures.

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