The Football Creditor Rule (FCR) is a controversial rule which prioritises the payment of football creditors such as managers, players and clubs in a situation where a football club enters administration. The rule means that following an administration, any of the unsecured creditors deemed “football creditors’ are paid in full despite them being general unsecured creditors like everyone else. The remaining funds will then be divided between the other creditors – leaving them in a far less favourable position.
An example of the above rule in action can be seen following the administration of Crystal Palace on 26th January 2010. The total unsecured liabilities of the London club amounted to £27 million. The debts of football creditors amounted to £1.9 million. The administrators were able to recover £2.4 million to pay all unsecured creditors and out of this £2.4 million the football creditors were paid in full; with the remaining unsecured creditors being paid only 2p in the £1.
There have unsurprisingly been recent calls for a drastic change to the above rule with HMRC branding the FCR unlawful. HMRC has expressed serious concerns that wealthy footballing individuals and clubs receive all of the money they are owed, leaving the tax payer and local businesses as the real victims. Paying football creditors 100p in the £1 before any other creditors are dealt with has been deemed massively unfair.
HMRC has recently challenged the rule through the courts unsuccessfully. Mr Justice David Richards stated that the rule does not contravene insolvency laws, but did acknowledge that the rule had received a considerable degree of criticism. The Insolvency Act creates a provision that all unsecured creditors should be treated equally and HMRC has attempted to criticise the rule on this basis.
The rationale behind the rule is that football is a community; with each team being liable to one another in relation to transfer fees and other financial transactions. The Premier Leagues and Football Leagues in England and Scotland argue that football is a close knit business system and should liabilities such as the FCR be removed, the community would be left vulnerable; with the negative implications being felt in the league as a whole. The league argues that were the rule to be removed, insolvent clubs would have to be expelled from the league as other clubs would not want to play them thus ruining the entire infrastructure and basis upon which football is founded.
The Culture Media and Sport Select Committee has produced a series of recommendations in its latest football governance report. The Committee wants the controversial rule to be updated at the earliest opportunity. The government now has until Easter to respond to these recommendations.
Here at Farleys we have dedicated Sports Law and Commercial Litigation Solicitors. If you have been affected by any of the above issues then do not hesitate to contact us and one of our insolvency lawyers will be able to advise you on the options available to you.