HMRC v Portsmouth City Football Club Ltd & Ors

A creditor challenging a company voluntary arrangement must establish unfair prejudice or a material irregularity. Unequal treatment of creditors, including payment of one class in full, is not automatically unfair. The court should compare the arrangement with realistic alternatives, including liquidation, and compare the treatment of different creditors. Where payment to football creditors comes from funds that would not otherwise enter the insolvency, its anticipated payment in full does not itself unfairly prejudice other creditors. An omission is materially irregular only if disclosure of the omitted information gave creditors a substantial chance of rejecting the arrangement. For voting purposes, a claim may be unliquidated where its basis and amount depend on an unresolved inquiry, even though a later assessment creates a technical liability.

HMRC challenged a creditors’ voluntary arrangement proposed for Portsmouth City Football Club Ltd while the company was in administration. The challenge was brought under section 6 of the Insolvency Act 1986, together with an appeal under rule 1.17 of the Insolvency Rules 1986.

HMRC alleged that the arrangement unfairly preferred football creditors, failed to disclose possible recoveries under section 127 of the Insolvency Act 1986, and bound creditors into an inferior outcome. It also disputed the chairman’s decisions on football creditors’ voting rights and on the amount of HMRC’s own disputed tax claims admitted for voting. The central issues were whether the CVA involved unfair prejudice or material irregularity, and whether the voting decisions were correct.

1. Disposition. The application under section 6 of the Insolvency Act 1986 and the appeal under rule 1.17 of the Insolvency Rules 1986 were dismissed.
2. Under section 6, prejudice must arise from the arrangement itself and must be unfair. The court should make both vertical comparisons, principally with liquidation, and horizontal comparisons between creditors. Differential treatment requires careful scrutiny but is not automatically unfair. The court must assess realistic commercial alternatives rather than speculative alternatives.
3. The CVA did not prevent HMRC from seeking a compulsory winding-up order after the administration ended. Accordingly, any delay before pursuing potential section 127 claims did not amount to unfair prejudice. The omission of those claims from the comparison in the proposals was not material because the recoveries would have been relevant on both the CVA and liquidation scenarios, and there was no substantial chance that disclosure would have changed the vote.
4. The anticipated payment of football creditors in full did not unfairly prejudice other unsecured creditors. On the evidence and without deciding the validity of the football creditor rules, those payments would come from funds that would not otherwise be available to the CVA or the club’s general creditors. The commercial alternatives were no better for HMRC.
5. Football creditors were entitled to vote. CVA voting rules did not require separate creditor classes, and those creditors retained a real interest in approval because liquidation could end their employment contracts and jeopardise the continuation of the club.
6. HMRC’s image-rights and employee-benefit-trust claims were unliquidated for voting purposes. Their basis and amount depended on resolving whether payments were sham remuneration and, for image rights, on determining their real value. Later tax assessments did not make admission at the full amount the only permissible exercise of the chairman’s discretion.

The judgment does not state a prior appellate history. The application and appeal were determined at first instance by the High Court (Chancery Division).