HM Revenue and Customs v The Football League Ltd & Anor

The court considered whether provisions in The Football League's articles of association, regulations and Insolvency Policy (notably articles 4.7.4, 77 and 80 and related regulatory provisions) which give priority to so-called "football creditors" are void as contrary to fundamental insolvency principles. Two central legal principles were analysed: the anti-deprivation rule and the pari passu principle. The anti-deprivation rule prevents contractual provisions that remove assets from the insolvent estate on insolvency, while the pari passu principle requires pro rata distribution among unsecured creditors.

The judge held that the anti-deprivation rule applies from the commencement of an administration as it does on liquidation, whereas the pari passu principle becomes engaged only when an administrator gives notice of an intended distribution (or on liquidation). Applying the legal tests, the court concluded that, in the normal circumstances of Football League club administrations (which typically commence during the season and where the League operates article 80 during the season), the challenged provisions do not deprive clubs of an asset at the relevant time and therefore do not offend the anti-deprivation rule or pari passu principle. The court declined to make the declarations sought by HMRC.

Background and parties: HM Revenue & Customs (HMRC) challenged the Football League's (FL) contractual regime for dealing with insolvent member clubs. The FL operates a "football creditor rule" under its articles, regulations and Insolvency Policy which, in practice, results in certain classes of football-related creditors (other clubs, players, the League itself, and related bodies) being paid in full in priority to other unsecured creditors in many insolvencies of member clubs.

Nature of the application: HMRC sought declarations that specified provisions of the FL's articles and Insolvency Policy (including article 4.7.4, parts of article 77 and article 80 and specified policy sections) are void and unenforceable because they conflict with the anti-deprivation rule and/or the pari passu principle in insolvency law.

Issues framed:

• Whether the anti-deprivation rule and the pari passu principle apply to companies in administration, and if so from what point in the administration;
• Whether the FL’s provisions operate to deprive an insolvent club of assets or to distribute assets on a non-pari passu basis at the relevant time;
• Whether the FL’s arrangements can be justified as bona fide commercial/regulatory measures that fall outside the anti-deprivation rule.

Court's reasoning and findings: The court analysed authorities on the anti-deprivation rule and pari passu principle (including Belmont Park and British Eagle). It held that the anti-deprivation rule applies from the commencement of an administration; the pari passu principle only bites when an administrator gives notice of an intended distribution (or on liquidation). The FL’s structure was examined: participation rights, player registrations and entitlement to payments from the Pool Account are governed by the articles. Article 77 conditions a club’s legal entitlement to payments on completing all fixture obligations for the relevant season; article 80 permits application of Pool Account sums to football creditors where a club defaults in paying them. The court concluded that, typically, administration commences during the season and the FL applies article 80 during the season so that no debt in the club’s favour crystallises beyond the balance remaining after football creditor payments. On that basis there was no deprivation of an asset at the relevant time and no non-pari passu distribution to be set aside. The court declined to decide a number of subsidiary contentious issues (for example the wider validity of "direct payment" clauses in construction contracts) as unnecessary to the decision.

Practical point: the judgment is narrowly focused on the legal tests and on typical factual patterns; the court recognised that different factual circumstances (for example insolvency commencing after the end of a season and before article 80 has operated) might give rise to a different result and should be decided in an appropriate factual case.

The court declined to make the declarations sought by HMRC and therefore dismissed HMRC's challenge to the specified provisions. The judge held that the anti-deprivation rule applies on the commencement of an administration but that the pari passu principle is engaged only when an administrator gives notice of a proposed distribution (or on liquidation). Applying those principles to the FL's articles and Insolvency Policy, and having regard to the usual factual pattern (administrations commencing during the season and application of article 80 during the season), the arrangements did not operate to deprive clubs of assets or to effect a non-pari passu distribution at the relevant times, so the declarations were refused.