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HMRC v Portsmouth – Post-match Analysis

This recent top of the list clash in the Companies Court at the Royal Courts of Justice (Wembley for lawyers) produced some highlights affecting more than the players on the pitch.

HMRC clearly went for the big win in this match and referee Mr Justice Mann identified two attacking strategies in play: firstly a conviction that CVA arrangements that do not treat all unsecured creditors equally are unfair and secondly a “deep-rooted antipathy to the football creditor rules” which is putting it mildly.

HMRC put a lot of pressure on the referee to issue a straight red to the football creditor rules (which require clubs to pay players and other clubs to avoid points penalties and other league-imposed sanctions) and to rule against the FAPL and Football League insolvency rules penalising clubs which do not come out of administration via a CVA and expelling from the league clubs in liquidation. Commenting that FAPL and the Football League were not on the pitch to defend their goals and that HMRC had a grudge match lined up against FAPL in the High Court for later in the season, the referee kept his cards in his pocket and waved the claims away.

Over two days HMRC had five shots at Portsmouth and its CVA and even without David James, Portsmouth’s team kept a clean sheet and hit HMRC on the break.

  • HMRC argued that the CVA was unfair because by bringing in the administrators before HMRC could get a winding-up order Portsmouth’s owners had pushed the process down the CVA route and prevented HMRC pursuing previous payments (including those to football creditors). The Court said no: the type of claim HMRC wanted to make could still happen later. 1 – 0 Portsmouth.
  •  HMRC contended that the CVA proposal wrongly did not show the benefits of the claims it wanted to make against football creditors in the comparison between liquidation and CVA and also left FAPL parachute payments out of the liquidation calculations. The Court said no: since HMRC’s attempts to recover money could work either way they did not affect the comparison and the League insolvency rules would probably have stopped parachute payments in the event of liquidation. 2 – 0 Portsmouth.
  •  HMRC said that allowing football creditors to be paid 100% out of the parachute payments was unfair. The Court said no: the parachute payments were only going to be received at all if the club stayed out of liquidation and paid its football creditors (or the league would do it for them). The parachute payment money was not going to be available for any other use and challenging the validity of the football creditor rules was a match for another day. 3 – 0 Portsmouth.
  •  HMRC said football creditors guaranteed to get paid 100% should not vote on the CVA which gave HMRC and others 20p in the pound. HMRC didn’t get the ball over the line on this point either: the Court held that players had a clear interest in avoiding a heavy points deduction, probable relegation and a liquidation which would see Portsmouth kicked out of the League and their contracts terminated. 4 – 0 Portsmouth.
  •  HMRC’s last effort was a Route One attack on the CVA approval meeting and its Chairman who only allowed £1 of votes for over £11m of tax claims over image rights and employee benefit trust (EBT) payments. HMRC scored an own goal on this one – its claim for tax on these payments was made against the Club after the administration and so only counted as an unascertained claim allocated a value of £1 for voting purposes. HMRC therefore lacked the votes to block the CVA and was stuck with the outcome. 5 – 0 Portsmouth.

 The referee rejected HMRC’s suggestion that if the CVA did not go ahead Portsmouth could soon bring on a substitute purchaser and find more money for creditors. The Court found that unless there was a successful challenge to the football creditor rules and League insolvency rules “there is no way in which worthwhile money is likely to flow into this insolvency…other than via the CVA.”

What can we learn?

HMRC’s decision not to appeal will be welcome on the South Coast but leaves open the issues of the football creditor rules, league insolvency rules and taxation on player EBTs and image rights. There is plenty to play for in forthcoming fixtures. The FAPL is presently trying to get the case on football creditor rules cancelled.

Outside football, the Court took account of general insolvency law principles that not all creditors have to be treated the same for a CVA to be valid and also took seriously the commercial reality that the rules of the FAPL and Football League meant the CVA was the only way to avoid liquidation and financial disaster for Portsmouth. The key point was that CVAs can produce very different results to liquidations but that does not make them unfair provided they are operated properly.

Portsmouth’s administrators had a duty to try to save the business before they broke it up through liquidation and the Court has supported the way they interpreted that duty. HMRC wasn’t happy with the result but since no foul play was found and it couldn’t prove that it had lost out enough to force a replay, the result stands.

For further information please contact Daniel Milnes of Forbes Solicitors Sports Group on 01254 54374 or email daniel.milnes@forbessolicitors.co.uk


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