HMRC v Portsmouth City Football Club Ltd & Ors

This is an application and appeal by HMRC in relation to a company voluntary arrangement (“CVA”) involving the company which trades as Portsmouth City Football Club (Portsmouth City Football Club Ltd – “the club”) and which the creditors approved on 17^th June 2010. The challenge to the CVA is on the grounds of material irregularity and unfair prejudice. It is related to, but does not itself arise directly out of, the rules of the Premier League and the Football League under which those leagues insist that football creditors (essentially the other clubs and the players) have their debts paid in full as the price of being able to carry on playing in the league, or at least playing without a significant points penalty. At the time of the insolvency events which are referred to in this judgment the club was playing in the Premier League, but at the end of the 2009-10 season it was relegated to the Championship, the top division of the Football League. There is also an appeal from the chairman’s decision on the amount of the HMRC debt to be allowed for voting purposes at the CVA meeting, brought under Rule 1.17 of the Insolvency Rules 1986.

The hearing of this application and appeal has been expedited because it is said that a decision is required by the beginning of the new football season (on 7^th August). It was therefore heard over 2 days on 3^rd and 4^th August. While the Football League is believed to be sympathetic to tolerating the present uncertainty for a short time beyond then, the only potential purchaser of the club is said to intend to pull out if the matter is not resolved (in favour of the CVA) by that date. The application was heard over two full days, and was supported by full skeleton arguments. The urgency with which this judgment is required means that at one or two points I have not set out the full detail of statutory provisions, and some documentary material, that I would otherwise have set out. That is simply in the interests of saving time. I have at all times had the relevant provisions and/or documents in mind.

The club has been in financial difficulty for some time. In recent times its owner (through a BVI company called Portpin Ltd) has been a Mr Chainrai. By mid-2009 it had accumulated tax liabilities and on 1^st October 2009 HMRC petitioned to wind it up. On 3^rd November an agreement was reached which enabled the petition to be dismissed on payment of the outstanding tax, and it was also agreed that a £4m bank guarantee would be provided in respect of subsequent tax liabilities. The club more or less immediately went into arrears again in respect of PAYE, National Insurance Contributions (“NIC”) and VAT, and on 23^rd December 2009 a new winding up petition was presented on the basis of a debt of £11,464,169 (ignoring pence). On 10^th February it was heard by Registrar Derrett who adjourned it and directed that a statement of affairs be produced. A statement of affairs was produced which showed the club was insolvent on both balance sheet and cashflow bases. The possibility of an administration was referred to. On 26^th February administrators were appointed by Portpin Ltd under a charge. HMRC had doubts about the validity of the charge under which they had been appointed, but in the end did not pursue the challenge in that respect.

The petition was heard again on 2^nd March 2010 by Norris J. The effect of the supervening administration was that the petition was suspended under Schedule B1 para. 40 of the Insolvency Act 1986. He gave directions for the determination of the challenge to the appointment of the administrators but after the exchange of some evidence HMRC decided not to pursue the challenge and on 16^th March Lewison J made an order confirming the suspension of the petition.

A creditors’ committee was appointed (on which HMRC had a representative) and the administrators prepared proposals which proposed an exit from the administration via a CVA. This proposal was worked up and resulted in the CVA which is now challenged on this application. The challenge is mounted under section 6 of the 1986 Act. In order to understand the basis of the CVA, and of the challenge to it, it is first necessary to step back and consider the nature and effect of some of the rules under which the club operated in the Premier League, and under which it will operate after relegation in the Football League.

The rules of the two leagues are similar in the manner of operation, and for present purposes there is no material distinction between them. This general description of how the relevant provisions work can be applied to each of them.

In the case of each league, teams that play in them do so through entitlements conferred by membership of the company which carries on the business of each league, and pursuant to obligations imposed by inter alia the Articles of Association, rules and an Insolvency Policy. Each participating club is entitled to a “golden share”, which entitles it to play in the league. The clubs are also entitled to moneys collected by the leagues (from, for example, television and broadcasting rights) and distributed down to the clubs. The amount of moneys payable depends, inter alia, on the final position of the club in the league – the higher the position the greater the rewards. If a team is relegated from the Premiership it has to surrender its golden share in that league, but it is also entitled to a considerable sum to ease the stress of relegation – a “parachute payment”. In the case of Portsmouth its golden parachute would be in the order of £48m.

Each league has strict provisions which operate in the event of an insolvency event. If an insolvency event such as an administration occurs, the golden share (or the rights under it) are suspended, though that suspension can itself be suspended on terms. The written Insolvency Policy of the Football League provides that if a club company enters administration it must exit via a CVA approved by the requisite majority of creditors. Furthermore (and this is central to the dispute in the present case) all football creditor debts must be paid in full or fully secured. Football creditors are, in outline, other clubs (to whom sums may be due for transfer fees), players (for remuneration) and various football authorities and organisations. If the club’s playing activities are to be transferred to another company then the League may impose conditions which require, inter alia, that the football creditors are paid or secured in the same manner.

If an insolvent club cannot fulfil these conditions then it can only carry on playing under “special circumstances” conditions. As part of those conditions the League is likely to impose a serious points penalty on the club (perhaps as many as 20), leaving it at a very significant disadvantage in relation to the other clubs and quite possibly making relegation fairly inevitable.

If the club goes into winding up the golden share is cancelled and the right to play in the Premier or Football League is lost. Player registrations are cancelled, so the liquidator has no players to sell. The leagues’ rules provide that moneys owing to the club by the league are to be applied to pay football creditors. The result is likely to be a financial disaster. The means of earning further money are lost, the assets are seriously devalued and moneys formerly due are not paid. Moneys from the league are a very significant part of a club’s income.

The rules of the Premier League also provide for payment of football creditors by that league during the period of administration (I was not shown any equivalent rules of the Football League – they may exist, but it does not matter for present purposes). Rule 55 provides that while a club is suspended (which it will be if there is an insolvency proceeding such as an administration) the Premier League may make such payments as it thinks fit to football creditors out of the moneys that the League would otherwise pay to the club. Thus the administrator is deprived of a significant source of fund (millions of pounds) and a group of creditors is de facto preferred.

The rules which prefer football creditors have become known as the football creditor rules. The justification for this preference is set out in the witness statement of one of the club’s Administrators. It is said to be that it is not tenable for a club to remain a member of the League if it is playing other clubs while owing them money. That is said to put it at a financial and footballing advantage. So the football creditors are paid and the ordinary creditors are commensurately disadvantaged.

The rules have been criticised from time to time (including criticism by a House of Commons Select Committee) but they still stand as rules. However, HMRC takes the view that they are impeachable as being in contravention of insolvency principles (principally the pari passu distribution principle) and what has become described as the anti-deprivation principle. It has voiced the complaint before me that the technique of making sure that companies exit administrations via a CVA deprives it of the opportunity of challenging the rules; it says that it would have had that opportunity had one or more clubs gone into liquidation (HMRC is almost invariably a major creditor in football club insolvencies and therefore a substantial loser as a result of the operation of the football creditor rules). I am not convinced that it has been as disadvantaged as it says by this situation. I would be very surprised if there had been no opportunity for it to engineer a challenge in the context of one or more of the football insolvencies that have occurred over the past few years, but be that as it may it has mounted a challenge in separate proceedings recently commenced against the Premier League. In that challenge it seeks a declaration that the rules are unlawful and against public policy and seeks an injunction restraining the Premier League from giving preference to a particular class of creditors when a club has become insolvent. Those proceedings were issued on 18^th May 2010. I am told that the Premier League has applied to strike them out on the basis that it is inappropriate to debate the point in the abstract and other than in the context of a real insolvency and real payments made. That application is pending. HMRC also takes the point (after a fashion) in the present proceedings (because, as will appear, the Premier League has been paying football creditors and the CVA anticipates that football creditors will be paid in full and other creditors will have only a dividend of about 20p in the £. I say “after a fashion”, because HMRC does not say I should necessarily make a finding about the validity of the rules, though if I reached the prima facie view that the rules are inconsistent with insolvency principles then I should take that into account in the exercise of any discretion that I have in relation to remedies on its application under section 6. The Premier League has written to me, in terms of appropriate politeness, pointing out the existence of the other proceedings, pointing out that it is not a party to (or a participant in) the present proceedings, and inviting me (in effect) to say as little about the issue as possible.

As Mr Gregory Mitchell QC for HMRC acknowledged, the validity of the football creditor rules is a question raising difficult issues of public policy which in the ordinary course of events would have to be tried with the parties giving evidence. The league whose rules were being challenged would have to participate in the challenge. The Football League has said it does not wish to participate in these proceedings, and the Premier League has said the same, pointing out in addition that it has not had time to arrange for proper participation anyway. I agree that the current proceedings, formulated as they are, with the parties and participants that they have, and with the limited timescales available for them, are not the appropriate place for deciding the point, and they are hardly an appropriate forum for expressing a prima facie view about them either. Time permitted only very limited submissions in relation to what is obviously a difficult point. Although the point was referred to in simplistic terms as being the applicability of the “anti-deprivation principle” to “the football creditor rules”, that disguises the difficulty of the point. There is no one single principle which can be applied as such, and there are various different aspects of the policies and rules which have to be treated differently and in relation to which there might, in theory, be differing results. So I do not intend to decide the point, and I do not even intend to express a prima facie view. Fortunately I am able to arrive at a decision without having to do either.

I can now resume the narrative against that background.

Since the present winding up petition the Premier League started to pay football creditors out of sums which would otherwise have been paid to the club. It is said to have paid a total of £23.5m in total in this way; HMRC says that more could be involved. About half of that sum was paid direct. The rest was paid to the client account of solicitors acting for the club (Messrs Fuglers), who themselves then paid football creditors (and others). It is alleged that this device was adopted to avoid the inconvenience of the club’s bank account being frozen on the presentation of the petition (because of the operation of section 127 of the 1986 Act); and it is said that Fuglers did not feel themselves to be under the same constraints as banks (and my attention was drawn to the fact that one of the partners at the time was also a director of the Club). After a while the client account mechanism was moved to other solicitors, Messrs Balsara & Co. It is at the heart of HMRC’s case that these payments can and should be recovered pursuant to the provisions of section 127, and that that should have been pointed out to the creditors in the CVA proposals (which were in fact silent on the point).

After several weeks of the administration, the administrators entered into an agreement with the Premier League for the payment of sums to them by the League to finance the continuation of the club’s activities. It was dated 18^th March 2010. It was agreed that the League would pay an Advance of sums to which the club would be entitled from the League’s funds for 2011 (i.e. the next year). There were to be three payments of £2m (roughly monthly) and a fourth of some £886,000 odd. It was a term of the agreement that the sums would be used to pay player wages. Thus the funds were to be used to pay football creditors. It was a term of the agreement that:

“neither the Administrators nor the Club will bring any claim against the PL in respect of any payment of Central Funds which would otherwise be due to the Club and which the PL [Premier League] Board in its absolute discretion determines to withhold or pay to any creditor of the Club (including but not limited to any Football Creditor)”

HMRC criticises this provision. It says that the administrators should have come to the court for directions before agreeing such a thing. I think that the criticism was originally premised on the assumption that that agreement would hamper an application under section 127, but whether or not that is right Mr Mitchell accepted at the hearing before me that the agreement could not have that effect. The administrators could not make such an application – only a liquidator can do that – and they could not bind the liquidator either. So the administrators were merely entering into contractual arrangements, the real significance of which for present purposes eludes me. Mr Sheldon told me that this was a requirement of the League which the Administrators could not resist if they wanted the money (which they did). I do not think that much now turns on this particular provision.

HMRC had submitted an initial claim to the administrators in the sum of £17,276,315.76 on 19^th March. However, on 5^th May it submitted a revised claim for £35,318,928.91. The claim was accompanied by additional assessments. Part of this claim (about £11m) related to payments for image rights and employee benefit trusts (“EBTs”). A club is entitled pay, and a player is entitled to receive, payments for his image rights, that is to say for use of his image in publicity and other material. Where those payments are properly made the club is not obliged to account for PAYE or NIC in respect of them. A club is also entitled to pay, and a player is entitled to agree, the payment of sums to a discretionary trust for his benefit or the benefit of his family. Where such payments are made PAYE and NIC are not paid when the payment is made; they are paid later when the moneys are applied for the benefit of the employee. The books of the club showed that payments had been made over the preceding 3 years or so, and there had been an investigation into them for a lot of that time. HMRC apparently decided that there was no proper basis for the payment of the sums thus recorded, and that they were, in effect, shams. In reality they were just part of the remuneration. This entitled it, it said, to claim PAYE and NIC on those sums. Hence that part of the expanded claim. This reasoning (or most of it) was not made clear at the time of the increased claim. On 24^th May the Administrators appealed just over £14m of the new assessments and asked for a postponement of the payment date. On 23^rd June a postponement was granted.

Meanwhile the administrators set about trying to find a purchaser for the club. While there were some expressions of interest, none went beyond that for some time. They had not identified a clear purchaser by the time the CVA was proposed.

In due course the proposals for the CVA were propounded. It was put forward in a document dated 28^th May 2010. By now the football season had ended and Porstmouth’s relegation to the Football League (and its loss of Premier League status) had taken effect. The CVA Proposal is a long document, with no clear distinction in layout or presentation between those parts of it which are narrative or background and those parts of which contain the binding parts of the arrangement. The material parts of that arrangement for present purposes are as follows:

Section 3 set out “Benefits to Creditors”. It pointed out the perils of liquidation and that a CVA would safeguard the current status and provide a basis for Newco to make the payments previously identified. “It should be noted that [the contribution of £16.5m necessary to pay the dividend] is before costs and expenses and after accounting for £22.4m of football creditors being deducted from the unsecured creditors total. Football creditors will be paid by the [Premier League] by way of a direct deduction from the Club’s allocated parachute payments.” (para. 3.05). A table then gives a breakdown of those figures, and shows how the football creditors are said to be made up according to category of payments. The largest figure is transfer fees (over £17m).

Section 4 deals with “Football Matters”, and among other things it deals with the football creditor rules. It points out, simply, that if football creditors are not paid by member clubs then the club in question will be thrown out of the league and would have to reapply for membership at least two “pyramids” below the Football League. Paragraph 4.07 recognises that football creditors are treated differently:

“The Administrators believe in pari passu distribution to all creditors and sympathise with unsecured creditors who will only receive a certain percentage in the pound, whereas FCs [football creditors] get paid in full, which goes against all normal principles of insolvency law. However as we have tried to explain in this Proposal, voting against this Proposal will have no impact on the FC Rule. Voting against the proposal would result in the Club suffering a further points deduction for failing to achieve a CVA, which is the result of non-compliance with the FL requirements of a CVA. In this instance, unlike other clubs, we are of the opinion that it is likely that the FCs will not be paid by the Club or any subsequent purchaser of the Club but by the FAPL, which is outside of the control of the Club. If FCs are not discharged by the FAPL they will have to be paid by a subsequent purchaser of the Club to abide by the FL rules. Creditors are therefore asked to distinguish between their dislike of the Football Creditor Rule and voting for the CVA, which are two separate and distinct matters.

4.08

… FCs currently incurred by the Club, which become due at some point in the future, will be dealt with by the FAPL not the Club or any purchaser of the Club …

4.10

It is understood that a separate action is being initiated by HMRC against the FC Rule, it is therefore not intended that a challenge to the Football Creditor Rule will be undertaken by the future Liquidators of the original company.”

Paragraph 5.10 sets out certain resolutions previously passed by the creditors’ committee, including one providing that the club would move from administration to liquidation via a CVA.

Section 6 set out the then current financial situation of the club, recording a rise in the unsecured creditors which was primarily explained by additional claims made by HMRC (and which I have to deal with below when I consider whether any votes were improperly registered). “The Administrators will, in due course, take the necessary tax advice to evaluate the accuracy of HMRC’s increased claim in this matter.”

It also contained financial projections for the club operated by Newco, showing projected profits and cash flow. “The projection also illustrates that the Club will generate sufficient cash flow from its trading activities and the ‘parachute payments’ from the FAPL to pay the projected dividend obligation of £3.375m per year for the following 4 year period”.

Section 7 sets out “The Proposal”. It implements the scheme described above, and provides that contributions will be made by Newco as set out above. “Duration” is dealt with in clause 7.07:

“The CVA shall continue for an initial period of 9 months or such further periods as the creditors allow and at that point will be placed in Creditors Voluntary Liquidation”

And Termination is dealt with thus:

“7.11

The CVA shall continue in full force and effect until it automatically terminates upon either:

(a)

[the club] is placed into voluntary liquidation

(b)

[the club] is placed into compulsory Liquidation

(c)

the expiration of nine months from the Effective Date or such further period as the creditors allow.”

Paragraph 7.13 provides for the Administration to run alongside the CVA and states that the Administrators will investigate potential claims for breach of fiduciary, wrongful trading, transactions at an undervalue, preference “etc”.

Other paragraphs provide for the administration of the scheme. Paragraph 12 provides that the scheme is not intended to operate in a full and final settlement way:

“12.01

This CVA is not intended to provide a full and final settlement of claims by Preferential and Unsecured Creditors of the Club. The Club will subsequently be placed into Liquidation and the creditors’ claims will survive the CVA so that they can claim in the Liquidation for the full amount of their claim, less any amount paid to them under the CVA.”

Paragraph 14 contained a mechanism for submitting, valuing and adjudicating on claims. Other paragraphs contain what might be called standard provisions and do not need to be referred to.

The CVA was put to a meeting of creditors on 17^th June. HMRC sought to vote in the sum of £37,768,387.13 but was only permitted by the chairman to vote in the sum of £24,474,435.41. The chairman had placed a figure of £1 on the sum claimed in respect of the “sham” image rights sums and had rejected the whole of a claim of £2,947,468. HMRC claims that these disallowances of voting amounts were wrong and a material irregularity.

Football creditors (those who could potentially benefit from the diversion of Premier League moneys to satisfy their claims) were allowed to vote in respect of what the chairman ruled were their proper claims. This was despite the fact that they could expect to have their claims satisfied in due course by the Premier League – indeed, the CVA was premised on the assumption that that would happen (see above) even though, as Mr Sheldon QC (counsel for the club and for the Administrators) pointed out the payments by the Premier League were theoretically discretionary.

The result was that the Proposals were passed by more than 75% of the creditors and, subject to the challenge in this appeal, they bound the all the creditors. Total votes cast were £131,360,781.7. Votes for were £106,795,858.8; votes against were £24,474,435.41. Only one creditor other than HMRC voted against the proposal (in the sum of about £450,000) and he has now apparently decided that he is a football creditor (and so would presumably vote the other way if the vote were taken again).

The Administrators had continued their attempts to find a purchaser for the club to whom the footballing activities and assets could be transferred so as to preserve them and prevent a points deduction or expulsion from the League. Eventually they found, and negotiated a deal, with one. The intended purchaser is a VK company named PFC Realisations Ltd. Apparently it is associated with, if not owned by, Portpin Ltd, a BVI company owned by Mr Chainrai. The deal which has been struck is essentially that anticipated by the CVA, with the additional factor that the secured debt of Portpin will be rolled over into the new company and will no longer be a debt of the present club. It will pay the sums anticipated by the CVA. The basis of the purchase is that the club will be passed over so that it can carry on playing in the Football League without a points deduction, so it will take over the present players and pay the football creditors out of (or at least partly out of) the parachute payments to be paid by the Premier League (which will be paid to the new club by that League). If the present appeal were to succeed then on the evidence before me that sale would be lost and the club would not have the means to trade into the new season. Indeed, it would probably not be able to satisfy the Football League (which it must do) that it will be able to trade throughout the season, so expulsion is likely. The League has indicated that it might wait a game or two to allow the situation to be resolved. The purchaser has not given that indication. There is therefore some risk that unless this appeal is determined in favour of the CVA, and by Saturday 7^th August, the deal with be lost, and if the deal is lost there is a very sizeable risk, if not a virtual inevitability, that the club will be expelled and forced into liquidation (or vice versa).

I shall have to supplement this factual narrative with more facts when considering the grounds of the application before me.

The present appeal is brought under section 6 of the Insolvency Act 1986 and under Rule 1.17 of the Insolvency Rules 1986

Section 6 provides:

“6(1) Subject to this section, an application to the court may be made, by any of the persons specified below, on one or both of the following grounds, namely –

(a)

that a voluntary arrangement which has effect under section 4A unfairly prejudices the interests of a creditor, member or contributory of the company;

(b)

that there has been some material irregularity at or in relation to either of the meetings”

It is common ground that HMRC is a person entitled to apply.

The powers of the court on such an application are set out in section 6(4):

“Where on such an application the court is satisfied as to either of the grounds mentioned in subsection (1), it may do one or both of the following, namely,

(a)

revoke or suspend any decision approving the voluntary arrangement … or, in a case falling within subsection (1)(b), any decision taken by the meeting in question which has effect under that section;

(b)

give a direction to any person for the summoning of further meetings …”

It is common ground that the relief is discretionary in the sense that even if I find one of the grounds established then I may, in my discretion, decline to grant any relief if in my judgment the circumstance justify that course.

Rule 1.17 provides:

“1.17(1) Subject as follows, every creditor who has notice of the creditors’ meeting is entitled to vote at the meeting or any adjournment of it.

1.17(2) Votes are calculated according to the amount of the creditors’ debt as at the date of the meeting or, where the company is being wound up or is in administration, the date of its going into liquidation or (as the case may be) when the company entered administration.

1.17(3) A creditor may vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained and for the purposes of voting (but not otherwise) his debt shall be valued at £1 unless the chairman agrees to put a higher value on it.

1.17A(1) Subject as follows, at any creditors’ meeting the chairman shall ascertain the entitlement of persons wishing to vote and shall admit or reject their claims accordingly …

1.17A(3) The chairman’s decision on any matter under this Rule or under paragraph (3) of rule 1.17 is subject to appeal to the court by any creditor or member of the company.

1.17A(4) If the chairman is in doubt whether a claim should be admitted or rejected, he shall mark it as objected to and allow the votes to be case in respect of it, subject to such votes being subsequently declared invalid if the objection to the claim is sustained.

1.17A(5) If on an appeal the chairman’s decision is reversed or varied, or votes are declared invalid, the court may order another meeting to be summoned, or make such order as it thinks just.

The court’s power to make an order under this paragraph is exercisable only if it considers that the circumstances giving rise to the appeal give rise to unfair prejudice or material irregularity.”

HMRC mounts its application under 5 heads. I set them out (paraphrased) in this paragraph as they appeared in Mr Mitchell’s skeleton argument, though they became modified during the course of argument.

Before considering each of those grounds in turn it will be useful to set out some relevant principles as they emerge from the cases. Extensive citations appeared in the skeleton arguments. The urgency with which this judgment is required does not permit me to set them out at length here. Suffice it to say that I have considered the cited cases carefully and the following principles emerge:

It was abundantly plain from the outset of this hearing that HMRC has throughout been motivated by two very significant factors. First, it has a policy (which sounds as though it is invariable) to oppose any CVA which does not treat unsecured creditors within the same class equally. That has guided it throughout this matter. Second, it has a deep-rooted antipathy to the football creditor rules. It considers them to be quite contrary to proper insolvency principles and (if it is different) to be contrary to public policy. I have already referred to the challenge to those rules that it has mounted elsewhere.

That policy may be laudable. The antipathy to the rules may be understandable, particularly as it is (as I have said) often the serious loser as a result. But I do not have to rule on that, and I have to be careful not to let those personal views of HMRC bear an inappropriate amount of weight. They explain, to some extent, why HMRC has acted as it has, but neither of them necessarily makes the CVA unfairly prejudicial or the meeting irregular. Again as I have already said, this application is not the place for the court to tackle the potentially difficult area of the validity of the football creditor rules, so I cannot base a decision on such a finding. I shall focus on the statutory tests.

The factual background to this ground is as follows.

The winding up petition in this case had been presented in December. At no time did the company, or any creditor, apply for any validation order under section 127 of the Insolvency Act. Despite that, it is said that there were significant dispositions of the company’s property since the presentation of the petition, continuing through the period of the administration. They were principally payments to football creditors, directly or indirectly out of moneys coming from the Premier League, and they also include payments to, or in the direction of, Portpin Ltd. Many of the payments were made through the two solicitors’ client accounts referred to above. As at the date of the administration order HMRC puts the total of payments at £23.5m. Since that date the Premier League has continued to make payments which might be impeachable under section 127. I do not need to go any further into what the amounts might be. It is sufficient to say that prima facie there are some very substantial amounts that are potentially vulnerable to a claim under the section if a winding up order is made on the present suspended petition.

HMRC’s first point in this application is that the benefits of such a claim will be lost as a result of the CVA because the exit is via a voluntary winding up (CVL), and section 127 is not available in respect of such a winding up. Its argument was premised on an assumption that no order could be made on the outstanding petition.

I consider that this argument is based on a fallacy. I do not consider that on their true construction the Proposals bar a winding up order on HMRC’s petition. It is true that the proposals provide for an exit from the administration via a CVL, but that is because some form of exit had to be provided for and that was doubtless seen as convenient – the administrators merely have to file a notice under paragraph 84 of Schedule B1 to the 1986 Act. It might mean that a creditor could complain if there were no liquidation. But there is in my view nothing in the arrangement which would prevent HMRC procuring a winding up order on its own petition once the administration had come to an end and the suspension of the petition were lifted. In other words, there is no express provision, or necessary implication, that the only form of winding up is to be a voluntary winding up. It is well established on the authorities that a creditor can obtain a compulsory winding up order notwithstanding the existence of a voluntary winding up, if the circumstances justify it. If there is a potentially valuable section 127 claim which requires a winding up order on the present petition then it is hard to see how anyone with a legitimate interest in the matter could oppose such an order.

For what it is worth, the Administrators share that view as to the effect of the Proposals and the CVA. They say they have never been opposed to a compulsory winding up, and have ascertained that more than 50% of the unsecured creditors (I think that means the non-football creditors) would support such a course.

In the light of all that I think that the main way in which this is put becomes a non-point. The premise of the argument fails.

However, that is not a complete end to the matter. HMRC takes a timing point in the alternative. Mr Mitchell points out that if applications to recover moneys are to be made then they cannot be made until the winding up, which is likely to be more than 9 months away (it was anticipated that the CVA might last as long as 9 months). That introduces a delay which is potentially costly, and the trail has got commensurately colder and there is the potential for claims to be harder to establish and enforce.

That there will be delay is obvious. However, I do not think that in the context of this case it is that great. If there are recoveries then they will presumably include interest, to compensate for the delay. So the point becomes one of the trail becoming colder. I do not ignore this point, but if there are claims they are unlikely to be claims where relevant facts become harder to establish. Furthermore, one of the prime targets is likely to be the Premier League, and they are not likely to be going anywhere in the next year or so. So this point is not of great weight either.

So the combined effect of delay, especially when measured against the benefits of the arrangement to non-football creditors (which I deal with elsewhere) is such as to make it impossible for HMRC to say that they are unfairly prejudiced in this respect. In addition, if it matters, there is no particular prejudice to them, in contradistinction to the other creditors, either.

The factual basis of this claim is as follows.

The Proposals contained an estimated outcome statement in Appendix 7. It compared the results of the administration (assuming the contributions from a purchaser as referred to in the Proposals) with a liquidation. It showed a 20p dividend in the former case, and a 0.4p dividend in the latter case. In neither instance are any recoveries under s 127 shown, nor is any part of the Premier League parachute payment (said to amount to some £48m) shown. Indeed, Appendix 8, which shows financial projections for the successor company, shows that the parachute payments would be enjoyed by that company. These are said to be serious omissions. The creditors were not told of material financial benefits in an immediate winding up and were thereby deprived of information which would be likely to have made a difference to their attitude to voting. The administrators simply missed the section 127 point.

It is true, as a matter of fact, that the Proposals do not identify those matters as potential financial benefits in a liquidation. But the question is whether that is in some way an inaccuracy, and whether any shortcoming is unfairly prejudicial to HMRC.

I will deal with the section 127 point first. HMRC’s original position was that Appendix 7 ought to have shown section 127 recoveries as being available in an immediate winding up, but not available if there were a CVA. For the reasons given above under Ground (i), that is based on a fallacy. If the section 127 recoveries are to be referred to at all they ought to be referred to under both scenarios.

I do not propose to consider whether section 127 ought to have been referred to. I prefer to jump to the question of whether its omission amounts to unfair prejudice or material irregularity. In my view that will depend on the extent to which it is likely to have made a difference to the attitude and voting intentions of the creditors – see the principles set out above. I have to imagine Appendix 7 with the amounts shown on both sides of the comparison. Is it sufficiently material that that would have changed the attitude of the non-footballing creditors?

I do not think that it is. The creditors would have seen the same figures, but swollen on each side by the same amount. They would have seen the CVA-based figures which indicate a dividend based on the amounts coming into the CVA plus the section 127 recoveries, and assets in a liquidation which would not have the CVA-based recoveries but with the addition of the same section 127 amount. In those simple terms the decision would be easy – he would stay with the CVA. He could hardly be worse off – he can only win by staying with the CVA because it promises more, and even if none of that “more” is achieved, he will be no worse off than he would be if he voted against the CVA and went for a winding up now. The only counter-argument would be the one based on delay – if he has to wait for his winding up and the consequential section 127 recoveries, then he will have to wait for at least 9 months and the trail might have got a little colder. But those arguments are highly unlikely to affect the voting intentions of those who would like to get the additional 19.5p dividend that the CVA holds out. The effects are probably immeasurably small.

It has to be said that the really sophisticated voter would wonder what the real effect of the section 127 claims would be on the dividend payable, because successful section 127 claims would swell the number of unsecured creditors seeking to prove in the swollen pot, and it might be that the financial difference would be different on the CVA and non-CVA sides of the comparisons. However, this is a very difficult exercise to perform. No-one sought to perform it before me (and indeed no-one suggested it), and I consider it highly unlikely that it would have been done by a creditor before the CVA, let alone that it might have resulted in a change of voting intention.

Accordingly, I do not consider that the omission of any reference to section 127 claims was a material irregularity or that it has worked any unfair prejudice on HMRC. I have assumed for these purposes that the section 127 claims would be as unanswerable as Mr Mitchell submitted they were – he said there could be no defence to them. If in fact there might be a defence to them (which cannot be ruled out, and the Premier League would presumably say that its insolvency policy provided a defence), and if that had been pointed out in the Proposals, then the likelihood that a reference to these recoveries would incline a creditor to consider the liquidation route more favourably than the CVA route is even less.

So I turn to the omission of any reference to parachute payments in the winding up scenario. First, it must be determined what the Proposals ought to have said about this if they were going to say anything at all.

The first thing it would have to do is get the quantum right. The payments would not be £48m, because about £7m had already been paid in advance to the Administrators under their agreement of March. Next it would be necessary to point out that if any of these payments came in to a liquidation a large part of them would be taken by secured creditors (possibly as much as £17.5m. Next it would be necessary to point out that the payments would come in over 4 years (if at all), and not immediately. And then it would be necessary to point to the fact that the payments might well not come in at all because the Premier League would undoubtedly take the view that they are not payable to a company in liquidation and which is not running the business of a football club because its rules (and in particular Rule 59) do not allow a relegated club which is no longer in the Football League to be paid the parachute payment. The fate of that argument will probably depend on the anti-deprivation principle operating so as to compel a payment out of Premier League moneys which its own rules do not prima facie entitle the proposed payee to receive. Last, it would be necessary to point out (if it were not obvious already) that the attempt to recover the parachute payments would require significant funding and potentially exposed the liquidation to significant adverse costs.

Proposals which referred to the possibility of getting in the parachute payments would therefore have to present it as being dependent on a potentially very difficult piece of litigation which the Premier League would be bound to resist because it would go to the heart of its insolvency policy. While the policy may be hard to admire, and whatever else might be said about it, it is impossible to say that a legal dispute about it will be anything other than difficult. It would also be costly. While there is no doubt as to the hostility of HMRC to the football creditor rules, and of its willingness to challenge them, I very much doubt if, faced with this CVA, any other creditor would share that level of hostility (or enthusiasm). In the circumstances, even assuming that an appropriate reference to the parachute payments should have been made in the proposals, such that a failure to make it was an irregularity, I do not consider that it was material because it would have had to have been so guarded that there is not a sufficient level of likelihood that anyone’s consideration of the merits of the CVA would have been affected.

I therefore find that this basis of challenge fails.

It is undoubtedly anticipated by, or is an assumption of, the CVA that football creditors will be paid in full from moneys coming from the Premier League. However, this ground of attack assumes more than that – it assumes that the CVA approves payments already made, and approves future payments in full.

Mr Sheldon submitted that the first of those assumptions built into this ground is false – he says that the CVA says nothing about past payments. This is a short point of construction. I consider he is right about that. The CVA purports to operate in relation to debts existing at the time of the CVA and which were still outstanding, and says nothing about what has gone on in the past (save insofar as it makes it plain that claims for things such as preferences survive). There is no approval of historic payments.

So far as the future is concerned, it certainly anticipates that football creditors will be paid in full. However, it is not clear that it approves that, or that it is a term of the agreement. No reference is made to it in the section of the Proposals which sets out the CVA Proposal, though it does appear in the Summary. The football creditors are not in terms barred from proving in the CVA, but it is probably implicit that they will not because they will be dealt with elsewhere. The status of the football creditors under this arrangement is a slightly tricky one which was not developed in argument before me.

However, I do not think I need to resolve that, because even if the CVA actually does provide for the football creditors to be paid in full, it does not do so at the expense of the other creditors at all, so it is not, in my view, unfair to those creditors. Subject to a particularly successful attack on the Premier League’s insolvency policy and the corresponding provisions of its rules, so far as football creditors are paid in full they are not being paid out of assets which would otherwise fall into the CVA, so they are not being paid at the expense of the other creditors. The money out of which they are being paid is money which would not otherwise come into the CVA (or into the club) in the events which have happened or in any events which are likely to happen. The vertical comparison is significant. If there were no CVA there are various alternative scenarios:

There are probably other comparisons which can be drawn, but none of them present a position which is more favourable to the non-football creditors than the present CVA. They all present one or other of the following features. Either the football creditors are paid in full, but not to the detriment of the other unsecured creditors (because they are paid out of moneys which are not available to the other unsecured creditors) or they are not paid in full, and increase the amount of unsecured creditors with no commensurate increase in the assets available to them.

It will probably be obvious that this analysis proceeds on an important assumption, which is an assumption that HMRC would not accept. It is that the money which is to pay the football creditors is money that cannot be made available for the unsecured creditors, because if it is not paid to the football creditors the Premier League need not, and will not, make it available in the insolvency of the club. This brings us back to the validity or otherwise of the football creditor rules. For the reasons given above, I cannot make any finding or assumption that they are somehow void and unenforceable in a way which gives an insolvency appointee a valuable claim. In the absence of that finding or assumption there is no apparent unfair prejudice (if there is prejudice at all), because the CVA does not deprive HMRC (or the other non-footballing creditors) of money which would otherwise flow in their direction. The most that can be said is that it is all very difficult, and that is an insufficient foundation for a finding of unfair prejudice.

In his submissions Mr Sheldon relied on an earlier football club insolvency case, namely IRC v Wimbledon Football Club Ltd [2004] EWHC 1020 (Ch); on appeal [1004] EWCA Civ 655. That was a case in which the court had to consider whether administrators could do anything about the effects of the football creditor rules, on the assumption that the requirements of the Football League had to be complied with. The commercial realities of that case are, I accept, the same as the commercial realities of the present case. The big difference in terms of background is that in that case there was apparently no suggested challenge to the effectiveness of the football creditor rules, whereas in this case HMRC certainly does not proceed, or invite me to proceed, on the footing that they are valid. To that extent the case is distinguishable. However, in practice I am not sure that there is a big difference, because although there is an absence of common ground on that point, I still cannot decide this case on the footing that the rules are invalid, and in practice can do little more than note the case of HMRC that they are. To find unfair prejudice I would actually have to find in favour of their invalidity, and that I cannot do.

This point started life as a material irregularity point. Reliance was placed on class voting rules in schemes of arrangement, and it was said that it was a material irregularity for the football creditors to be allowed to vote at all where they were voting in the same class as the other unsecured creditors. They should have been treated as if secured, and not allowed to vote (unless they gave up their “security”). However, at the hearing Mr Mitchell accepted that the provisions for voting in CVAs do not require, or perhaps even allow, for separate classes, and that an overall vote of all creditors is required. So there was no “irregularity”. Accordingly, the point switched to an unfair prejudice point – HMRC was been unfairly prejudiced by being voted down by creditors with no interest in the outcome because they are going to be paid in full.

Mr Sheldon questioned whether this point was capable of making a difference. He said that only £15m odd of creditors were treated as football creditor debts, and if one took those out of the count there was still more than a 75% majority in favour of the arrangement. HMRC’s calculations are different – they put the count at over £40m, which is enough to make a difference. There was no time for lot of argument over this, but it seems to me that HMRC’s approach is to be preferred. The Administrators had counted only debts that were accrued (and not future). Future elements were allowed in the voting (at an appropriate valuation) but were not counted (for these purposes) as football debts. HMRC’s point is that it is unfair to allow it to be swamped with those whose debts will be paid in full. So far as this is a good point, it is inappropriate for these purposes to leave out any debts which it is anticipated will be paid outside the CVA, whether those debts are currently payable or not. So I will approach this point on the assumption that the correct figure (whatever it may be) could make a difference if it were taken out of the voting.

I have found this point a little more troublesome than some of the others, but in the end I find that it suffers the same fate – it does not amount to unfair prejudice. If it were the case that these creditors had no real interest in the CVA at all then there might be something in it. Why should those with no interest in the CVA at all, and who were being paid outside it, be entitled to force unwilling creditors into a CVA which is not approved by a requisite majority of that smaller class? However, as Mr Sheldon pointed out, that is not quite this case. The football creditors do have an interest in the CVA being approved. If it is not approved, and if there is a liquidation, then their contracts of employment come to an end. They may or may not get ones that are as favourable in that event, but if they continue into the new company after the CVA then the balance of their present contracts will be honoured. Mr Sheldon also submitted that they would also have an interest in the event that they were not in fact paid with moneys coming from the Premier League, but that seems to me to be a technical possibility only. Nevertheless, they are creditors, and they do, as creditors, have what can be described as a real interest in the outcome. In the circumstances, troubling though this point is, I do not think it amounts to unfair prejudice. Furthermore, in the end, HMRC have been bound into a CVA which can only leave them financially better off than a liquidation, on the assumptions on which I have to operate for the purposes of this application and appeal. That, too, is not unfair in my view.

This point concerns the approach of the chairman to part of the HMRC claim. He allowed HMRC to vote in the amount stated above, and disallowed a sum of over £13m. The application before me concerns his decision in relation to two amounts which total (in round terms) £11.5m. HMRC says that the Chairman’s decision to disallow these amounts for voting (save for £1) was wrong; they should have been admitted in the full amount in the events which happened. On the figures, if HMRC wins on just one of these (even if it is the larger amount) then it would still not have had 25% of the votes (on the assumption that all the football creditors should have their votes counted). It therefore needs to succeed in its assertion that both elements should have been counted. In that event it would have just over 25% of the vote (25.2%, to be reasonably precise, to 2 decimal places).

The outline events relating to this matter appear in the narrative above. Some other events have to be filled in briefly.

These claims were not made until 5^th May. The Administrators’ initial response to receipt of the claim was that the claims would be allowed to vote in full but marked as objected to. Mr Mitchell says that that stance was correct, but sensibly does not say that the Chairman (one of the Administrators) should be held to that position merely because he once stated it.

On receipt of the revised proof of debt and assessments on that date the Administrators took advice from solicitors and from their firm’s tax department in relation to the tax position and in relation to the question of the amount in which the Revenue claims should be admitted to vote. HMRC’s case as opened before me was that advice was not taken. The Administrators’ evidence makes it clear that it was.

The claims made by HMRC contained hardly any detail. The initial indication of claims on 5^th May just contained a list of amounts, years, and brief statutory basis of claims, with a total of £35m odd. The assessments identified that specified sums were due in respect of some named players, and some “unnamed players”, in various preceding tax years, and in specified amounts (often round figures). The Administrators have since understood that HMRC were saying that the amounts were “uncommercially high”. It is not clear whether that was understood by the time of the CVA meeting. Their researches indicated that the Revenue was claiming tax and NIC on (and was therefore challenging) all the image rights payments made by the Club. He was advised that it could not be said that the image rights had no value, and that the value in any individual case was not known (which, it seems to me, must be even truer for “players unknown”). The advice he received was that since the value to be put on the image rights was unknown a claim based on excess payments for image rights (if that is what the claim was) was unliquidated or unascertained for voting purposes.

So far as the EBT-related claims were concerned, the Administrators say they did not really understand the basis of the claim, but the same sort of reasoning applied to make the claim unascertained or unliquidated.

On that basis £8.5m of the claims were admitted to vote in the sum of only £1, as unliquidated or unascertained claims.

The remaining £2.9 of claims were not admitted to vote at all. The Administrators or their solicitors had in fact been given advice on these claims which they no longer stand by. The sums were rejected for voting on that erroneous basis. The Administrators now say that these sums fell to be treated in the same way as the £8.5m. In my view the sensible way of dealing with the point on this application is to consider them together with the £8.5m. In fact it makes no difference. If HMRC do not win on the larger sum, the smaller one makes no difference.

The relevant provision is the Insolvency Rules rule 1.17, which I have set out above, and the most important provision is rule 1.17(3) which I set out again.

“1.17(3) A creditor may vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained and for the purposes of voting (but not otherwise) his debt shall be valued at £1 unless the chairman agrees to put a higher vote on it.”

There are two questions at the heart of this point. First, do these elements of HMRC’s claim fall to be treated as unascertained or unliquidated, so that £1 is the appropriate voting figure unless the chairman determines otherwise; and second, if they do so fall, should the chairman nevertheless have admitted them in their full amount under his discretion. It is common ground that the nature of the debt falls to be determined as at the date of the administration, and not as at the date of the meeting.

HMRC’s case is that the debts were neither unliquidated nor unascertained for the purposes of the rules. An obligation on the employer to pay PAYE amounts and NIC arises when the associated payments are made to the employee. That is a liability arising then and there under the Income Tax (Pay as You Earn) Regulations 2003 Regs 21 and 68 in the case of PAYE; and there is said to be a corresponding regulation (which I was not shown) in respect of NIC. Thus the liability arises. If the employer does not account properly then the liability may be unknown in the sense that no-one has worked it out, but working it out is a mere matter of mechanics when one knows the information. The only reason that the amount is unknown is because a human being has not worked it out. This does not bring it within the category of unliquidated or unascertained debts for the purposes of Rule 1.17, so the chairman should have allowed it to be voted in full, albeit marking it as objected to.

If that argument is wrong then HMRC’s fallback position is that service of the assessments on 5^th May mean that the only reasonable decision that the chairman could have reached was to allow the claims in full. The assessments were made under Regulation 80 of the Taxes Management Act 1970 and the result of that was that the tax claimed was due under that those assessments save insofar as any appeal was ultimately successful. A postponement of payment pending appeal under Regulation 55 only deferred the obligation to pay; it did not affect the underlying liability which existed until altered on appeal, and an application for a postponement pending appeal a fortiori did not affect the liability. So at the date of the meeting HMRC had made its claim, the moneys were due and quantified, there had been no more than an application for postponement of the payment (not yet adjudicated on) and in those circumstances the only reasonable approach for the chairman was to allow voting in the amount which was, for the time being at least, payable.

The first question is whether, as at the date of the administration (26^th February 2010) HMRC had a claim which was any more than unliquidated or unascertained. As at that date the position was as follows. Unknown to the company, HMRC had been investigating the image rights and EBT payments to the players. The investigations had covered a period of 2-3 years, and had not been pursued during the period of a criminal investigation. It is not known what the subjective views of HMRC were at the date of the administration, but it is known that they did not actually advance these claims in their first proof. So they were not ready to advance them then. The claims are now said to be based on an assertion that the payments to or for the benefit of players, purportedly as image rights or EBT payments, were actually shams in the sense that they were not for any such thing and fall to be treated as remuneration attracting PAYE and NIC obligations. (I should say that not even that was known in relation to the EBT payments until Mr Mitchell said so during the hearing – there was no formal evidence about it at all.) HMRC has apparently claimed all payments indiscriminately. Nothing more is known about the claims than that. However, it is plain enough from the evidence that HMRC decided it needed to bring these claims into the melting pot as quickly as possible, and that triggered the assessments and claims of 5^th May in which the tactic is to claim all the sums and put the onus on the taxpayer of justifying the payments in an appeal.

I am prepared to assume that there is an underlying liability on an employer who fails to account for PAYE and NIC before any formal claim is made by HMRC and before any formal assessment. If and to the extent that the payments were shams there was a claim accordingly. The nature of the claim is therefore one which relies on payments being treated as shams, and may fail to the extent that image rights have some value. That value would have to be determined in some sort of inquiry. So both the basis of the claim, and its quantum, cannot be treated as certain as at the date of the administration (by which time formal assessments had not been served).

So the question becomes whether that claim thus described is unliquidated or unascertained. The wording of Rule 1.17 is (in this respect) new as of 2003. There is no authority on the meaning of those expressions in that Rule. The only authority going to the meaning of those words that I was shown was Re Dummelow (1873) LR Ch App 997. The case involved the status of a claim for costs which was “estimated” by the claimant at £200. This was held to be inadequate for the purposes of valuing the claim for voting – he ought to have been more positive in his averments. In his judgment Sir G Mellish LJ said:

“The question really is, what is meant by ‘an unliquidated debt’ … The fair construction of the clause seems to me this: ‘a contingent debt’ refers to a case where there is a doubt if there will be any debt at all; a ‘debt, the value of which cannot be ascertained’ means a debt the amount of which cannot be estimated until the happening of some future event; and ‘an unliquidated debt’ includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits he cannot state the amount.”

If I apply those elaborations (I am sure the learned lord justice did not intend them to be definitions) it seems to me that the Revenue debt is not unascertained in that sense. While the amount is disputed, its determination is not dependent on anything other than an inquiry within the context of a piece of litigation. I doubt if that is the sort of future event that Sir G Mellish had in mind. However, it does seem to me that the debt falls to be treated as unliquidated within that elaboration. The fact that the claim had not been asserted as at the date of the administration is perhaps a small pointer to HMRC not feeling it was of a definable amount at that date, and the circumstances of its emerging indicate an intention to make it as high as possible and leave it to the taxpayer to challenge it. I do not know, and the chairman did not know, the material on which that is based, but the fact that it apparently encompasses all the payments made, with no apparent acknowledgment that image rights might have some value, supports the view that that is the basis on which the claim was ultimately made. As at the date of the administration there was no articulation even to that extent. As at that date there was no more than an underlying claim (which I assume for these purposes to exist) for an amount which depends on establishing a sham (or at least raising that issue – I make no finding as to where the burden would lie), and then, if that were established, perhaps determining the real value of image rights for which players were “paid”. It seems to me that in those circumstances the creditor cannot “fairly” put a figure on the claim, or at least cannot “fairly” claim the whole amount due to be his debt. So adopting Sir G Mellish’s elaboration, it seems to me that as at the date of the administration the disputed debts were unliquidated for the purposes of the rule.

I am not saying that any debt which can only be finally established by litigation is as an unliquidated debt for the purposes of the rule. There will be many disputed debts, both as to amount and as to liability, which will not fall to be dealt with as an unliquidated debt but which the chairman will have to allow in and mark as disputed. My decision is only as to the particular, somewhat unusual, facts of this case. The uncertainties as to the quantification of the debt seem to me to make it unliquidated for present purposes. HMRC could, in fact, have removed this difficulty if they had served an assessment, which itself gives rise to a defined liability, but they had not done that by the date which is accepted as being the relevant date for these purposes.

That being the case, HMRC then says that the service of the assessments, which made clear HMRC’s claim (if not its full factual basis) and gave rise to a technical liability to pay, means that the chairman should, in the exercise of his discretion, have decided to value the claims at their full amount. I do not accept that argument. The chairman has a discretion. The nature of HMRC’s challenge is such that it can only succeed if the decision he took could not be justified, which in turn means (on the facts of this case) that HMRC has to establish the only justifiable decision was to admit the Revenue’s claim in full. The nature of the Revenue’s claims, the paucity of information provided, and their prima facie tactical purpose makes that claim unsustainable. These were not claims which were self-evidently wholly right, or even prima facie wholly justifiable, absent the technical liability under the assessments. If the chairman had stuck by the originally expressed view that the claims would be admitted but marked as objected to then that might of itself be a justifiable decision, but even if that is right it was not the only justifiable decision. A middle ground, of allowing the claims but making a discount to reflect the fact that they might not succeed in whole, might have been even more justifiable, but again it is not the only justifiable decision and would probably not help the Revenue in this case because any significant reduction below the full amount would still leave them with less than 25% of the vote, so any irregularity in this respect would not be material.

In the circumstances this alternative HMRC case fails too.

It follows, therefore that the application and appeal of HMRC fail and fall to be dismissed. In the course of arriving at that conclusion I have not dealt with all the points and submissions made because it was neither possible in the time available nor strictly necessary. I have, however, borne them all in mind. By way of tidying up I would add the following:

In the circumstances, and for the above reasons, the application and appeal of HMRC both fail.