HMRC scores own goal in insolvency ruling regarding the Football League

In HMRC v The Football League Ltd1 the High Court delivered judgement on the controversial "football creditor rule" operated by The Football League.

This rule establishes that if a club becomes insolvent, the claims of its players and other football clubs have priority over the claims of the club's other creditors.  The operation of this rule is of significance to HMRC as it is common for football clubs to incur significant tax liabilities prior to entering into an insolvency process.  HMRC argued that it has suffered significant loss as a result of this rule which enables a football club's football creditors to be paid before HMRC meaning that there is very little money left to settle HMRC's claims.  HMRC argued that the operation of this rule violated the parri passu principle (which requires the distribution among unsecured creditors of assets available in an insolvent estate on a pro rata basis) and the anti-depravation rule (which renders void any attempts to withdraw an asset on insolvency and thereby reduce the value of the insolvency estate to the detriment of creditors).

The decision in this case is likely to be of interest to parties structuring transactions and credit agreements because it suggests that a contractual provision, such as an inter-creditor agreement or a deed of priorities under which the rights of an insolvent company are varied, will not breach the pari passu principle where that provision takes effect effect on administration - it will only become an issue when the administrator gives notice of its intention to distribute a dividend.

However, the High Court held that the football creditor rule did not violate the pari passu principle or the anti-deprivation rule.  The Court held that the pari passu principle applies only if the purpose of the insolvency process is to effect a distribution.  This may be the case in liquidation or bankruptcy but not necessarily in administration because the purpose of an administration is the continuation of the company.  In terms of the anti-deprivation rule, the Court held that the dominant purpose of the Football League's articles is to take a commercial approach to a club's insolvency, as opposed to depriving the club of an asset.

For a more detailed discussion of this decision see RPC's article at: 

http://www.internationallawoffice.com/newsletters/detail.aspx?g=ebd1340c-1d99-4a80-8612-575e7dd8bbe3

1.  [2012] EWHC 1372