Lawyers joust over football's special rule

Fratton Park
Pompey went into administration in February 2010

In the rather nondescript court one at the High Court - more IKEA than the oak-panelled rooms you get in television dramas - lawyers are jousting in a case that could have far reaching consequences for football.

English football has never been more popular and marketable - or so the Premier and Football League maintain - but behind that shiny facade lies a less impressive track record of financial mismanagment.

Since 1992 clubs have gone into adminstration 53 times in English football, while in the last two years HM Revenue and Customs (HMRC) has presented 25 winding-up petitions.

If those statistics are testament to football's never-ending desire to "live the dream" at the expense of financial probity, it has also made HMRC angry.

What galls HMRC most is the preferential treatment given to football clubs and players when a team goes bust.

So the tax authorities are targeting a change in the "football creditor rule" (FCR), which allows the football world to be paid in full, but usually results in other creditors getting a small percentage of the debts they are owed.

"Whenever the football creditor rule is applied, there is always a loss to the taxpayer, which is why we bring these proceedings," HMRC QC Gregory Mitchell told the court.

The case against the Football League comes a day after Portsmouth's owners Convers Sport Initiatives entered administration as the Championship club continues to struggle with the consequences of becoming the first Premier League team to use that insolvency protection tool in 2010.

When that happened the club's players and other football creditors were paid in full - to the tune of £30m - while Pompey's other creditors received about 16 pence in the pound.

Pompey's ongoing financial difficultes rather supported Gregory Mitchell's argument that "on the basis of the track record of the Football League clubs it is likely that there will be further insolvencies".

Not that Mitchell mentioned Portsmouth's lastest financial hiccup.

Indeed HMRC's lawyer rather left the impression that he might not be a football fan, a view strengthened when Mitchell mispronounced Benfica as "Benfika", prompting a few titters in the courtroom.

It was a rare moment of levity in between points of law regarding part eight claim and principles of anti-deprivation and pari passu.

If his mastery of the pronunciations of Portuguese football teams was slightly off key, Mitchell was more assured in his legal arguments.

Just why should the football world be given preferential treatment and in doing so deprive other creditors - such as small businesses - of large amounts of money, he asked as he outlined the crux of HMRC's case.

"As far as we know there is no similar rule operating in any other country or industry," Mitchell told the court.

HMRC's QC also argued that the FCR as applied by the Football League is "inconsistent with EU law" because it discriminates against foreign clubs which are not considered preferred creditors.

Judge David Richards is to rule on that point of law depending on the success or otherwise of the HMRC case.

With Mitchell due to finish outlining the tax authorities' case on Thursday, little was heard on Wednesday from the Football League legal team, which is led by Mark Phillips QC.

The Football League, which represents the 72 clubs outside the top-flight, will argue that the FCR must remain in place to maintain the "integrity of competition" in its leagues and cups.

"Why should a football club be forced to play another club which hasn't paid a transfer fee or its transfer gate money - that's unsustainable," lawyer John Verrill of Dundas & Wilson - the Football League's solicitors - told BBC Sport.

Verrill added that if the Football League was to protect the value of its television rights deal it was essential that all clubs were in operation at the end of the season.

In his witness statement the Football League's chief operating officer Andy Williamson added: "A payment default can start a chain reaction that undermines the integrity and the stability of the League's competition.

"This is the so-called 'domino' effect which, after maintaining the integriy of the Football League's competition, is the second principal reason why the existing regulatory regime is in place."

Williamson also pointed out that businesses have the option not to deal with football clubs if they are unhappy with the FCR rule.

"Each of those suppliers or lenders has a choice as to whether a contract with the club or not and can use its own commercial judgment in making that decision."

The legal jousting is expected to go on for a few more days, with the Premier League as well as the goverment interested parties in judge Richards final ruling.

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