• HMRC mounted legal challenge which judge dismissed
• Present 'rule' does not break insolvency law
The controversial "football creditors rule" needs a change in the law if it is to be outlawed, a judge has ruled, dismissing a legal challenge by Her Majesty's Revenue and Customs. Mr Justice David Richards stated that the rule does not currently break insolvency law, although he referred to it having been "subject to a good deal of criticism, in parliament and the courts" and said: "The Football League should not regard the result of this case as an endorsement of its approach to football creditors."
The rule applies when a Football League or Premier League club falls insolvent and goes into administration, which, the judge noted, was "infrequent" throughout football history until the late 1990s, since when there has been "a high incidence" of insolvencies. For a club to come out of administration and be a member of the Football League, usually via new owners, it must pay in full "football creditors" – other clubs owed transfer fees and players' wages.
Other debts, always including tax and VAT, local businesses, public bodies and charities, are settled for a fraction of the money actually owed. The judge referred to the recent administrations of Crystal Palace and Plymouth Argyle, in which "football creditors" were, as required, paid in full, while the other creditors, owed £27m in Palace's case, were forced to accept 2p and 0.77p in the pound respectively.
Players' very high salaries must be paid in full, while a tiny proportion of the tax owing on those salaries has been paid, leading to HMRC's frustration and legal challenge.
HMRC argued the rule was contrary to two specific aspects of insolvency law: that all creditors must be treated equally, and that an insolvent company cannot be "deprived" of a valuable asset, in this case the share of league membership, which is transferred to a new company when football debts are settled.
In his 31-page judgment, Mr Justice Richards said he had to decide whether the rule actually breaches insolvency law as it is drafted by statute, not make a moral judgment on how it affects creditors: "These proceedings are not concerned with whether giving priority to football creditors is socially or morally justified. The issue is one purely of law."
He concluded, based on the precise way the rule is operated, with a new company taking on the Football League share and the old company settling creditors debts for a smaller percentage of what they were owed, does not breach the law. Broadening insolvency's legal principles to outlaw the football creditors rule as HMRC argued would, the judge said, "require statutory intervention".
Welcoming the judgment, the Football League said it recognised that "Some regard the application of these rules as being imperfect. However, they remain an essential part of football's approach to handing insolvent clubs."
The league argues that the rule is necessary to maintain competition, because other clubs owed money would suffer financial problems if left owed money. If the rule were not applied, the league said, insolvent clubs would inevitably be expelled from the league because other clubs would not want to play them:
"This would have devastating consequences for the clubs concerned, their supporters and people living in their local community."
HMRC said it was "naturally disappointed" with the judgment and was taking time to consider whether to appeal.
Last year the parliamentary culture, media and sport committee said the rule should be abolished, and Damian Collins, a Conservative MP on the committee, repeated that, saying that the rule is "morally unjustifiable". Read More
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