On Sunday night I watched the docu-drama, The Last Days of Lehman Brothers. On Monday I watched my customary dose of English Premier League Highlights. How are these things connected? A Lehman Brothers case currently before the new English Supreme Court (formerly House of Lords) may have a crucial impact on the future of the League, so much so that the Football League, and HM Revenue and Customs (“the Revenue”), are interveners in the Lehman Brothers appeal.
The Lehman facts are far removed from the world of the ‘beautiful game’. They concerned an agreement relating to synthetic collateralised debt obligations! The Court of Appeal in Perpetual Trustee Company Ltd, and Belmont Park Pty Ltd. v BNY Corporate Trustee Services Ltd and Lehman Bros. Special Financing Inc EWCA Civ 1160 (in a joint judgment with a case arising out of the Woolworths administration) dismissed the appeal and held that the Lehman transaction, did not infringe the co-called ‘anti-deprivation’ principle. The contract in question agreed that on certain events of default, the trustee company would meet secured obligations owed to the noteholders out of the collateral, ahead of secured obligations owed to LBSF (in reversal of the priority which was in place prior to an event of default). The Court held that this did not infringe the ‘anti-deprivation’ principle, first because the ‘flip’ clauses amounted to a re-ordering of priorities between security holders in the event of a certain shortfall, and secondly because the event of default was not the filing of chapter 11 for LBSF, but the earlier filing of Lehman Bros Holdings.
The Court of Appeal mainly decided this case on the narrow grounds of interpretation of the agreement, rather than the wider ground taken by the judge below. However, the Court considered the history of case law such as the case of ex parte Mackay, British Eagle v Air France, and the High Court of Australia’s more recent interpretation of the IATA agreement (by majority decision, Kirby J dissenting) in IATA v Ansett . The English Court of Appeal has endorsed the approach of the majority in the HCA as to the policy and scope of the anti-deprivation principle, often known as the British Eagle principle.
According to the Supreme Court’s website, the Lehman appeal to the Supreme Court, which has already been heard, has as its central issue:
“The scope and application of the ‘anti-deprivation’ rule that ‘there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his creditors’(ex p Jay; in re Harrison (1880) 14 Ch D 19,26 Cotton LJ)”
So why was the Revenue and the Football League intervening in the Lehman case? As some readers will know, football is as sacred to the English as Aussie Rules is to the Australians, or as Hockey in Canada. Not only that, it is big business, for successful clubs, and for the associated broadcasting and merchandising rights. If one of these football clubs, particularly in the Premier League or even the next division down, gets in financial trouble, the consequences are drastic. As we also know, many English football clubs, even some that are doing well in the league, have high levels of debt, and pay ridiculous wages to their players. The Football League tries to encourage good governance, and both it and UEFA has also instituted financial governance requirements and other due diligence reporting measures in the last year or so.
However, the Football League, and the FA, which controls the Premier League, has a rule known as the ‘football creditors’ rule. It states in the Premier League Rules, that on insolvency occurring, certain creditors will have to be paid in full before the League will allow the Club’s membership of the League to continue. ‘Football creditors’ include any groups that are directly involved with ensuring that the ‘show will go on’. They are the employees, including of course the players, their pension funds, and also the football organisations (the League, FA etc.). Furthermore, the rules provide that broadcasting and other revenues owing to a club can be diverted to football creditors on an insolvency event occurring. That is, an asset owing to the club can be ring-fenced for one set of creditors, the football creditors. The argument of the League is that these are conditions of membership of the League because if matches cannot be played because players, managers and ground staff and the footballing authorities have not been paid, this will have a consequential effect on other clubs, and on the associated commercialisation surrounding the match.
This means that, if the clubs want to continue (notwithstanding possible points deductions for going into administration or liquidation-see below) then the massive wage bills of the players must be paid out, and, from the Revenue’s point of view as an unsecured creditor, there is little or nothing left for them. Not only that, but not all those who might fairly be considered ‘football creditors’ get paid. In the words of Niall Quinn, former Sunderland striker and now its Chairman:
“ The fan in the street meets the guy who printed the programmes who didn’t get paid and he sees the player driving out in the big car who was paid and I think that’s damaging”. Well, absolutely.
Notoriously, the St John’s Ambulance was an unsecured creditor of Portsmouth FC in its administration last year. Then there are all the other trade creditors, without whose continuing support it is arguable the matches would not have been played (for example, the power for the floodlights).
Not everyone in football supports the rule, as some realise that it leads to a degree of moral hazard which encourages the market in clubs and players to take place in a diligence-free bubble- a bit like synthetic collateralised debt obligations, one suspects. Furthermore, the football creditor rule has even raised questions recently in Parliamentary inquiry into football governance.
For some time, the Revenue has been attempting to challenge the football creditor rule. Earlier attempts in the administration of Wimbledon Football Club in 2004, and last year in Portsmouth FC’s administration, have not hit the right spot in terms of a court decision on the point. Earlier this year proceedings were set on foot to challenge the Leagues’ rules head-on. The proceedings are now postponed to await the outcome of the Lehman case in the Supreme Court.
The Revenue is no longer a preferential creditor in the UK insolvency law, and does not have much incentive to co-operate in rescuing football clubs- whilst the rules will deduct 9 points from clubs which go into administration or liquidation, the preferred route of a Company Voluntary Arrangement requires a 75% creditor majority. HMRC are often in a position to block a CVA, and whilst the football creditor rule exists, they are reluctant to stand by and see ‘football creditors’ effectively gaining the preferential position which has been taken away from the Revenue. Millions of pounds are owed to the Revenue, mostly from the top flight Premier League.
The football creditor rule is a blatant breach of the anti-deprivation principle, however narrowly you define it. (For a broader justification for the insolvency rule, look to Kirby J in Ansett, or just to Niall Quinn). The League defends its rule on economic grounds, namely the consequential impact of cessation of operation of the club, and, somewhat more ironically, on grounds of collectivity- i.e that clubs in the league, are mutually dependent on each other. However, insolvency legislation around the world makes few exceptions to the normal distribution rules. In the case of financial markets or recognised clearing houses, exceptions are made in order to avoid systemic risk resulting from failure of market players. Even if football is regarded as so sacred in England that some would put on a parallel with the country’s financial markets (and I suppose this is not inconceivable!), such a carve-out would have to be made by Parliament. The Premier League, which has said it will ‘vigorously defend’ the rule, has no legal justification for providing its own set of insolvency rules merely on the basis that the consequences of failure will affect others in the business, or that feed off it. The same can be said for any area of economic activity that gets into trouble, such as construction or motor vehicles, but (absent government bailouts) these have to play by the normal rules of insolvency. Those insolvency rules, and the pari passu principle which is behind them, are arguably about fairness. For an organisation that champions fair play and mentions that in the same set of rules, the League is letting the side down. The world (or even English football) will not collapse if the football creditor rule is removed, but undermining the anti-deprivation rule in insolvency law would send out a message with far wider repercussions, in England and elsewhere.
The Lehman case could probably be confined to interpretation of the agreement, just as could the amended IATA agreement in the Ansett case. However, it is anticipated that the Supreme Court will address the wider question of the insolvency principle framed on its website. Hopefully this will be enough to bury the football creditor rule.
Meanwhile… my team is currently bottom of the division, so I have more than an insolvency academic’s interest in the outcome!