19 February 2004

IF FOOTBALL'S "SUPER CREDITOR" RULE DISAPPEARS, CAN A NINETY-TWO CLUB, FULLY PROFESSIONAL FOOTBALL LEAGUE BE SUSTAINED?

In its recent report on football finances, the self-appointed All Party Parliamentary Football Group (APFG) advocated the abolition of football's "super creditor" rule which discriminates against trade creditors when a club goes into a Creditor's Voluntary Arrangement (CVA) or into administration. The discrimination arises because the rule requires that football creditors (ie players and other clubs) are paid in full in such circumstances whatever the fiscal position of the club, on pain of expulsion from their league.

The APFG may get what it wants - and certainly much sooner than any of the other items on its wish list (such as re-distribution of broadcasting revenues). This is because the Inland Revenue (no longer a preferred creditor under the Enterprise Act) is seeking to overturn the "super creditor rule" in the context of the CVA entered into by Exeter FC on the grounds that Exeter's CVA unfairly prejudices the interests of a creditor (namely itself) under the Insolvency Act 1986. The legal test for "unfairness" here will be whether the CVA eliminates competing debt (the Revenue's) to a disproportionately detrimental extent for the benefit of the football creditors.

The Inland Revenue's application put Exeter in an invidious position as it could not satisfy both the Revenue and the Football League. This has led to proceedings involving Exeter and the Football League which are due for a hearing on 29 March in Bristol. Exeter is arguing that the rule is unfairly prejudicial to it under company law. If either Exeter or the Inland Revenue's application succeeds under company law or insolvency law respectively (and there will doubtless be lengthy appeals if they are), the repercussions for professional football will be far reaching.

If, in future, there is going to be an unsecured creditor with unlimited resources (the Inland Revenue) and if all trade creditors stand to get a fair crack of the whip in a CVA or administration (instead of 1p in the pound), their leverage over football clubs is going to increase

From the club's perspective, if football creditors (including players) are in no better position than trade creditors in a CVA, will clubs continue to give each other credit (eg for gate monies, loan monies and transfer payments) if they are unsure of the financial position of their debtors? The "old pals" act, whereby clubs allow each other credit often unmerited by status will be replaced by demands for cash on the nail, credit checking, properly drafted inter-club contracts and debt recovery proceedings in appropriate cases (ie normal business practices). In such a climate, fans' cries to the Chairman to "loosen the purse strings" will go unheeded.

One fairly immediate consequence of the eventual disappearance of the rule is likely to be that the already enfeebled transfer "market" will become very illiquid and may disappear altogether (and take many agents with it). The most marked effect, however, is likely to be on the players: at a stroke, their bargaining position at a financially troubled club which seeks protection will be whisked away. Contracts of more than a season won't look like such a good idea (even if clubs can still afford them) as there is no point in being left standing in line with the other creditors when the music stops. The alternative is big wage cuts for the players who remain - so clubs will get more leverage. This in turn could lead to a very large number of clubs adopting CVAs.

It follows that if the lengthy court procedures go against the League, professional football in this country will change and change utterly There will either be fewer clubs or fewer professional players.

Stephen Hornsby
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