HM Revenue and Customs v The Football League Ltd & Anor

The pari passu principle and the anti-deprivation rule address different insolvency mischiefs. The former applies to assets available for distribution and prevents contractual arrangements that give one creditor more than its proper share. In an administration, it applies when the administrator gives notice of an intended distribution. The anti-deprivation rule applies from the commencement of administration and prevents deliberate arrangements whose predominant purpose, or one of whose main purposes, is to remove assets from the insolvent estate. It does not operate as a general anti-avoidance rule and does not permit the court to rewrite genuine contractual rights. A trading association may make continued membership conditional on payment of debts to members and other specified creditors.

HMRC brought a Part 8 claim against The Football League Ltd, with The Football Association Premier League Ltd intervening, challenging the Football League’s football creditor rule. The rule operated through the Football League’s articles, regulations and Insolvency Policy. On an insolvency event, the League could require transfer of the club’s share and could suspend or withdraw that step on conditions including payment of football creditors.

HMRC contended that the arrangements deprived insolvent clubs of assets and distributed estate assets contrary to the pari passu principle. The Football League argued that the relevant rights did not arise until completion of the season and that continued participation in the League could lawfully be made conditional on payment of football debts. The central issues concerned the scope of the two insolvency principles, particularly in administration, and their application to articles 77, 80 and 4.

1. Different operation of the principles. The pari passu principle prevents contracting out of the statutory scheme for distributing assets among unsecured creditors. It applies only to assets belonging to the insolvent estate at the relevant distribution date. In an administration, that date is when the administrator gives notice of an intended distribution. The anti-deprivation rule is distinct. It applies from the commencement of administration and prevents deliberate arrangements designed to remove assets from the estate and evade insolvency law.
2. The anti-deprivation rule requires attention to the substance of the transaction, but this does not authorise the court to replace the parties’ legal rights with an assessment of commercial reality. Bona fide commercial transactions are outside the rule where deprivation is not their predominant purpose or one of their main purposes. The existence of a statutory trust is not a prerequisite to either principle.
3. Article 77.3 made completion of all fixture obligations a condition precedent to any legal liability for payments from the Pool Account. A club that did not complete the season therefore had no accrued entitlement which could be deprived. Article 80.2 operated during the season. It required sums which would otherwise become payable at the season’s end to be applied to football creditors. The club consequently had no larger asset available for distribution.
4. The Football League’s articles represented the collective terms on which member clubs agreed to play one another. Continued participation by an insolvent club could be conditional on payment of existing and future debts to football creditors. The authorities concerning stock-exchange membership and essential supplies supported that conclusion.
5. The court declined to decide the validity of direct-payment provisions in construction contracts, since the issue was unnecessary to the outcome. In most circumstances the challenged provisions were not void under either principle. The declarations sought by HMRC were therefore refused.