Sporting Rules/Regulations Part 5
Posted on 11/10/2013 in News | Tags: Sports Lawyers, Sports Agents, solicitors, Football News, football agents, football agent
A response to the question that critically considers the self-regulatory sporting rules and the impact of the same on the UK Domestic Laws, The ECJ jurisprudence and the inpact of the EC White Paper on Sport: written by Football Agents and Sports Lawyers:
Financial Administration — the UK examples
The following analysis of specific examples are taken from the English football leagues that provides a balanced insight into the competing philosophies associated with self-regulation of football clubs in administration.
With recent high profile clubs becoming bankrupt, urgent action was required from UEFA to national level. Financial restraint and penalties for clubs getting it wrong have been deployed by the Football Association (FA), Premier League (PL) and Football League (FL) (hereinafter together "Domestic Regulators") to sure-up and help reduce financial mis-management. One aspect in recent times is to 'control' and 'preserve' the membership of the league by having a deep rooted say in what happens to a club when it can no longer pay its debts or liabilities when they fall due. Where there is a club failure, an administrator is appointed to sure up the business (with an advantage of a moratorium from creditor action) as a going concern whilst looking for a buyer. If a buyer cannot be found it may fall into liquidation and cease to exist as a legal entity.
From an insolvency point of view, administration is the preferred option, albeit there are several other options" to a club in financial difficulty. However it is not without a price, the Domestic Regulators will sanction a 10 point penalty if FL (9 points PL). This self-regulatory rule is to prevent owners/directors/those in control seeking, out a financial advantage over other competing clubs by putting it into administration simply to pay off creditors at a discount, ridding itself of debt. The points deduction is to counter-balance this move for the benefit of the game as a whole as this sanction often leads to relegation thereby reducing the club's value and any incentive to apply for club administration.
It is not just the points deduction clubs must contend with when they exit administration, they must have an agreed Company Voluntary Arrangement (CVA) unless there are 'exceptional circumstances' present. A CVA is where a 75% approval of the club's creditors is required. To compete within the FL clubs are granted a share in each of the FL and FA. Immediately upon entering administration the FL will suspend the club's share. Failure to agree a CVA may result in further points deduction of at
least 15 points" and could even result in it being expunged from the FL if football debts are not paid in full. Should this arise the defaulting club may re-apply to the league at least two pyramids below the club's current status, thus in the case of Portsmouth, to enter at the Southern Premier Division." Again a harsh punishment if the club gets it wrong off the field of play.
Football Creditors Rule (FCR)
Directors or more likely creditors can petition to seek the club's winding up.47 Under the FA rules, clubs must pay football-related debts first (i. e. salaries, player transfer obligations, the Association, (the so called FCR) even where these are the very contracts that may have sparked the club's downward financial spiral; HM Customs and Revenue (HMRC) would be entitled to what remained."
But football is a unique business, supporters expect that their club ought to be granted significant leeway in how it deals with its creditors. The HMRC had acquired a pre-2008 reputation for being cautious when dealing with clubs in administration only receiving £3.5m from a pot of £31.7m from 18 UK clubs who could not pay their debts." Certainly there is a compelling cause and effect relationship observed between league relegation (competitive failure) and administration (financial failure) where unsustainable player salaries do not result in on-field success, the downward spiral to insolvency and administration tends to follow;50 Middlesbrough51, Crystal Palace52, Queens' Park Rangers53, Leeds United54, and Southampton55 are prominent examples.
With heightened pressures on the public purse, the HMRC attitude on these issues has shifted from indifference to aggressive debt collection methods.56 In the current national austerity environment, HMRC is often the first party to petition the club for winding up. It is noted that the overarching insolvency philosophy enshrined in the 1986 Insolvency Act is 'rescue' — where possible, the debtor company is permitted time and space to re-organise its finances and re-structure its operations, as opposed to the sterile liquidation routes sanctioned under the previous legislative umbrella.57
The Luton Town example exemplifies the newly evident HMRC aggression in its recovery of public funds. HMRC was the only Luton creditor to vote against its proposed reorganisation, as the proposed scheme would be have paid football related creditors in full, leaving a percentage only paid to HMRC.58 Further challenges by the HMRC have resulted in failure; HMRC v Wimbledon FC 2004 CA58 and recently in the High Court the HMRC failed in its quest to be treated equally like any other unsecured creditor against Portsmouth FC.6°
The FA in a 2004 Financial Advisory Committee Report defended the FCR suggesting that it supports and protects football as it helps to avoid the "domino effect" of clubs defaulting on one another and thus putting at risk the financial league structure of member clubs. Whilst it can be can be argued that the FCR will activate section 239 of the Insolvency Act' where an aggrieved creditor considers that there has been preferential treatment of unsecured creditors resulting in a disproportionate loss, the successive failures by the HMRC to make a successful challenge makes this avenue difficult.
An influential body of MPs has reported that the FCR distorts and "epitomizes the extent to which financial priorities are being distorted.62" At paragraph 97 of the report it refers to the injustice that the rule creates where highly paid footballers, for instance, will received 100% of their wages but cites that the St John's Ambulance do not get anything. The Report suggests that there is a wider social consequence of the rule that effect smaller businesses and creditors. Certainly the rule has been mooted to be anticompetitive63 and whilst the FA Chairman, David Bernstein, accepts that there was a lack of equity associated with the rule, explained that the FA, on balance, remained supportive of it. There is movement with the Domestic Regulators that the rule has "had its day"64 and that the added financial rules (some discussed here) being put in place will reduce the extent and hardship on non-football creditors. This stand-off attitude has aggravated Parliament and a move to legislate against the FCR could be on the cards.65
Whilst there appears to be incremental developments towards relaxing the rule the adverse effects still stand, with legal submissions advising that FCR has nothing to do with Statutory Insolvency Law, but simply on membership to which the non-football.
creditor such as the HMRC are not a party66 highlights the difficulty. The combined effects of the FCR, points deductions and procedure for clubs entering into administration, emphasises the weaknesses in Sports Governance quest for exclusive autonomy in that the wider social-economic aspects that the White Paper preaches are overlooked due to inward thought and conflicting self-perpetrating interest stifling competition and the free movement Treaties.
44 "Options Options for clubs facing insolvency" (2009) 7 9(2) WSLR8
45 See Leeds United administration, page 12 below.
46 See Administrators CVA proposals June 2012 Re Portsmouth FC paragraph 5 in particular.
47 The combined effect of the Insolvency Act 1986 and the Enterprise Act 2002; see
48 As of May 2012, this preference remained UK law; see HMRC v The Football League and FA/Premier League note (36).
48 Sport and the Law 'Football Clubs and Insolvency Rules: "Offside" says Her Majestys Revenue and Customs University of Edinburgh School of Law 2012 [online] <http://www.law.ed.ac.uk/courses/blogs/sportandthelaw/blogentry.aspx?blogentryref=8135
50 Ibid, the dates cited in footnotes 42 through 46 are provided at this source.
51 1985/1988, relegation to administration.
52 1994 / 1998, as above.
53 As above, 1996 to 2000.
54 As above, 2004 to 2006.
55 As above, 2005 to 2009.
56 See the ultimately failed attempt (subject to appeal), in HMRC v The Football League and FA/Premier League [2012] EWHC 1372 (Ch).
57 See re 'priority claims' made by creditors generally: Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and anor [2011] UKSC 38.
58 Burnett, R et al, "UEFA Financial Fair Play Regulations: analysis" (2010) 8(12) WSLR 14, 17.
60http://www.bbc.co.uk/news/business-18208076; see also HMRC v Portsmouth City Football Club Ltd & Ors [2010] EWHC 2013 (Ch) (05 August 2010) and HM Revenue and Customs v The Football League Ltd & Anor [2012] EWHC 1372 (Ch) (25 May 2012)
61 Section 239 (4) of the Insolvency Act 1986.
62Culture, Media and Sport Committee, Seventh 2011
63 Ibid, paragraph 98
64 Football governance: seventh report of session 2010-12, Vol. 1 para 104 - 105
65 http://www.bbc.co.uk/news/business-18208076
An original essay written by Football Agents and Sports Lawyers
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