Property available for distribution – Pari passu – Anti-deprivation
Revenue and Customs Commissioners v Football League Ltd: ChD (Mr Justice David Richards): 25 May 2012
The defendant, Football League Limited (FL), was a company limited by shares. The FL acted to regulate the competitions which were run by it and the conduct of clubs. It was also a commercial organisation which negotiated and held commercial rights to broadcasting and sponsorship for the benefit of its member clubs. Article 4.5 of the FL’s articles of association provided that the board of the FL might give the member club concerned written notice to transfer its shares to such person as the board ‘shall specify at the price of 5p per share’, including if any member club became subject to or suffered an insolvency event. The instant proceedings concerned the ‘football creditor rule’ (the rule), which operated under the articles of association of the FL and its regulations. The purpose and effect of the rule was to ensure that, in the event of a member club becoming insolvent, particular classes of creditors, such as other clubs in the FL, the clubs’ players, managers, other employees and the FL itself, were paid in full in priority to any other creditors. The Revenue and Customs Commissioners (the Revenue), contended that the rule thereby caused it, and other creditors, loss. The Revenue brought, inter alia, a part 8 claim to challenge the rule and it sought certain declarations and the determination of the court on what it termed as an issue of general public importance that arose as and when any member of the FL became insolvent, namely whether the rule contravened fundamental principles of insolvency law. The Football Association was granted permission to intervene.
The issues for consideration were, inter alia: (i) whether the pari passu principle and the anti-deprivation rule applied to a company in administration; and (ii) whether the rule which applied on insolvency of a football club was void and of no effect on the ground that they were contrary to the pari passu principle and anti-deprivation rule. Consideration was given to Insolvency Act 1986.
The court ruled:
(1) The pari passu principle applied to any distribution whether or not it was expressly triggered by the relevant insolvency procedure. It was enough that the effect of the relevant contractual or other provision was to apply an asset belonging to the debtor at, or following the commencement of, the insolvency procedure in a non-pari passu way. Contracts conflicting with the pari passu principle were void without any need to show that their purpose was to avoid a pari passu distribution. The pari passu principle served a purpose and should come into play only if the purpose of the insolvency procedure was to effect a distribution. In the case of liquidation or bankruptcy, that was when the company entered liquidation or the debtor was declared bankrupt. In the case of administration, that was when the administrator gave notice of the proposed distribution. It was settled law that the anti-deprivation rule was aimed at attempts to withdraw an asset on bankruptcy or liquidation or administration, thereby reducing the value of the insolvent estate to the detriment of creditors. While there was some overlap with the pari passu principle, it was distinct from it and aimed at a different mischief. The anti-deprivation rule applied only if the deprivation was triggered by the insolvency proceedings, and the deprivation had to be of an asset of the debtor which would otherwise be available to creditors. It followed that the anti-deprivation rule applied on a company going into administration as it did to a company going into liquidation. Accordingly, if a transaction had the effect of depriving a company of an asset in order to distribute it among only some of the creditors otherwise eligible to participate in the distribution, it offended both principles (pari passu and anti-deprivation), but if the deprivation occurred on the company going into administration only the anti-deprivation principle would be engaged (see , [67, ,  of the judgment).
Applying those principles to the instant case, in most circumstances in which the relevant provisions of the FL’s articles of association and insolvency policy would operate, they would not be rendered void by the anti-deprivation rule or the pari passu principle. It might be that either or both might be engaged in particular circumstances. Whether that was so would have to be decided in the context of a real case if and when it ever arose. It was an important consideration that the pari passu principle applied in the instant case only to the distribution of assets belonging to the insolvent estate at the commencement of the insolvency proceedings (see  of the judgment).
The right course was to decline to make the declarations sought by the Revenue (see  of the judgment).
Per curiam: The overall approach of the Revenue seemed at times to be to treat the anti-deprivation rule as a general anti-avoidance principle. If the effect of the relevant provisions taken as a whole was to produce a different order of priorities than prescribed by insolvency law, they had to be void. This is to misunderstand the anti-deprivation rule which is specific in what it prohibits. Broader or different restrictions would require statutory intervention, as has occurred in the cases covered by sections 238-246 of the act. The FL should not regard the result of this case as an endorsement of its approach to football creditors. It is a decision on a challenge brought on a particular legal basis (see ,  of the judgment).
Gregory Mitchell QC and Catherine Gibaud (instructed by the solicitor for Revenue & Customs) for the Revenue; Mark Phillips QC and Daniel Bayfield (instructed by Chadbourne & Parke (London)) for the FL; Gabriel Moss QC and Daniel Bayfield (instructed by McCormicks) for the intervening party.