The mad, mad world of football insolvency

Like many Pompey fans, I was appalled at the long list of local trade creditors included in the administrator’s Report to Creditors.  These include charities, notably St John’s Ambulance, and a number of local schools and colleges.  All can expect to receive only a fraction of what they are owed (but at least Pompey fans have donated more to St John’s Ambulance in the last 24 hours than is owed by the club).

In an earlier blog on insolvency we described the deprivation rule, which is a long-standing insolvency principle.  It is a common law principle set out in Ex p Jay: In re Harrison (1880) 14 Ch D 19, but has been codified in s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986.  The principle states that the assets of an insolvent company must be distributed in accordance with the shareholders’ and creditors’ share of their interests in the company.  It is against public policy to permit a company to contract out of this principle to favour one shareholder or creditor above all others.

So how is it that Pompey and other clubs in financial difficulty continue to pay their outstanding transfer fees and players’ wages in full, in what amounts to a preference to these so-called football creditors?  There is no legal exemption for football clubs in insolvency law.  Instead, this is the effect of provisions in both the Rules of the Premier League and the Regulations of the Football League.  These define “football creditors”, and require clubs to settle the debts of these football creditors in full in order to retain membership of the Premier League (or relevant Football League).  In the Premier League, a club’s share of television (Sky) distribution rights revenue can even be distributed directly to the football creditors by the Premier League itself.

Many, including HMRC and even the current administrator at Pompey, consider that this effectively gives football creditors a “super creditor” or “pre-preferential” status, but so far the legality of the relevant provisions in the Rules of the Premier League and Regulations of the Football League has not been tested in court.  There are good arguments for these rules, based upon ensuring that there is fair competition between clubs by ensuring that a club does not gain an advantage over others in any league by importing top players and defaulting on their transfer fees or pay. 

However, expect more public scrutiny of these provisions as the Pompey administration plays out.  No-one can be happy that a club can default on debts to local charities at the same time as paying million pound transfer fees.

2e's or not 2e's, that is the question

In our blog on Fitzroy Robinson Ltd -v- Mentmore Towers Ltd (Key personnel?), we noted that commercial lawyers have to keep an eye out for new case law in related areas.  Another important example is the recent Chancery Division insolvency case of Butters -v- BBC Worldwide, which addresses the common circumstances of a joint venture shareholder licensing IPR to a joint venture.

2 Entertain JV

2 Entertain JV

The case involved the joint venture agreement (JVA) setting up 2 Entertain Limited, abbreviated in the judgement as “2e”.  2e had a subsidiary, BBC Video Limited, which was the licensee under a master licence agreement (MLA) that was conditional upon the JVA.  The MLA included a term that terminated the licence if, following an Insolvency Event within the Woolworths Group, BBC Worldwide served a notice in accordance with the JVA requiring the Woolworths’ shareholder in 2e (WW Realisations 8 Ltd) to sell its shares in 2e to BBC Worldwide.

As a result of this linking between licence termination and notice to sell shares, it was successfully claimed that the clause in the MLA   to terminate the licence offended the insolvency deprivation principle, being the common law principle set out in Ex p Jay; In re Harrison (1880) 14 Ch D 19.  This principle is the common law equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986, which ensure that the assets of a company on insolvency are distributed in accordance with the shareholders’ and creditor’s share of their interests in the company.  It is against public policy to permit a company to contract out of this principle to favour one shareholder or creditor above all the others.

The key lesson for IT/IP and commercial lawyers is not that automatic termination of licences upon insolvency offends the principle, but that the termination cannot be linked to any mechanism that enables the licensor to benefit as a creditor/shareholder from the fall in value in the licensee as a result of the termination of the licence. 

It should be notes that a similar case, Perpetual Trustee Co Ltd -v- BNY Corporate Trustee Services, involved this principle and came to different conclusions.  As permission of this case to be appealed has already been given by the Chancellor, it is expected that both these cases will go to appeal.