Unfair football creditors rule?

Posted on April 26, 2010 by Chris Laughton

Portsmouth FC's administrators' proposals to creditors make fascinating reading. Their accessibility highlights the Football Association's football creditors rule, which requires players, clubs and agents to be paid often very large sums in full, while non-football creditors including charities such as St John Ambulance, ordinary business suppliers and HM Revenue & Customs, receive only pence in the £ through a Company Voluntary Arrangement (CVA).

HMRC lost its legal argument against the football creditors rule in 2004 in the High Court and the Court of Appeal in the Wimbledon FC case. There, HMRC was a preferential creditor, but analogous arguments applied. The problem was that it was not the company but the buyer of the business who paid the football creditors. The courts found, perhaps surprisingly, that the amount paid by the buyer to the company was not reduced by the amount the buyer paid to the football creditors. In effect, payment to the football creditors was an entirely separate issue from the insolvency and distribution of the company's assets. The payment was a condition required by the football authorities to allow the purchaser to have the club continue to play in the Football League.

More recently in the Lehmans and Woolworths insolvencies, the courts have considered the deprivation principle ("an anti avoidance principle designed to prevent parties agreeing in advance provisions which better [a] party's position in the event of insolvency" according to the Woolworths judgement). One could imagine HMRC running an argument that the football creditors rule puts the football authorities in a better position than they would otherwise have been (namely that the participants in the football authorities' league competitions, and their associates, are protected financially when a club becomes insolvent).

Of course, in cases such as Portsmouth, where HMRC may be a sufficiently large creditor to vote down the CVA and force the club into liquidation, the point may not be argued in court. It will however be of great concern to Pompey fans, who want to see the club's business continue beyond the FA Cup Final. Many commentators (from CRITique via The Lawyer and accountingweb to The Daily Mail and The Telegraph) are now questioning whether the football creditors rule can survive, especially as its abolition has been proposed by the All Party Parliamentary Group on Football and questioned in parliament.

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Portsmouth FC's insolvency lessons

Posted on March 5, 2010 by Chris Laughton

Portsmouth Football Club’s insolvency has valuable lessons for other troubled businesses. Why did this premiership club that has been established for over 112 years go bust?

Putting aside the football legislation and emotional embroilment of Pompey’s fans, there were several business factors that led to Portsmouth FC becoming the first premiership club to go into administration.

  • Overdue payments to HMRC

Portsmouth failed to pay its scheduled payments as they fell due. This allowed HMRC to provide the courts with evidence that the company was technically insolvent. Not every case will result in a creditor taking action against an overdue unpaid bill, but directors should remain aware of the potential consequences. 43% of successful winding-up petitions are presented by HMRC, but they will support what they believe to be a viable business, so it is vital directors act early.

  • Cash flow

It is reported by the BBC that due to Portsmouth’s insufficient ground capacity, the club relied heavily on TV payments to meet its monthly outgoings. When the premier league withheld its TV payments in January 2010, the strain on the company’s cash flow was evident with players not been paid on time and management searching for new sources of finance. Accountancy Age reported that the club was looking to receive a cash injection before 17 February from an associate, but this never came. Cash flow is a key component in operating a successful business, and during a recession its importance cannot be understated. If you are regularly unable to pay suppliers or employees, then without restructuring your business and finances, the outcome will normally be insolvency. There are various cash management strategies that can be implemented (for example, re-negotiating supplier terms or selling non-core assets) to give a company some breathing space.

  • Management and infrastructure

In the last 12 months, Portsmouth has had 4 different owners and sold several key players, such as Jermain Defoe and Peter Crouch. Management failed to recognise that stability and long term planning is vital for the future success of a company. Without key employees or coherent management strategies, it will be difficult to overcome any external pressures. Now, more than ever, owners/directors should be keeping a close eye on the company’s accounts and the monthly management reports. Spot potential problems and resolve them quickly and swiftly. If ever unsure, directors should seek advice promptly before it is too late.

Should these recent events be a stark warning to all that HMRC are starting to play hard ball? Will 2010 bring a influx of winding up petitions being presented against companies? Should the Portsmouth situation start to ring alarm bells for other companies in similar situations? The answers are most likely to be yes in all cases.

On 2 March, the Financial Times reported that following HMRC request the High Court has ordered a hearing to be held to consider whether the administrators appointment was valid. So with HMRC continuing to add pressure, there is still a danger that Portsmouth could be wound up.
 

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