Insolvency

Football – CVAs – Creditors’ meetings – Unfair prejudice

Portsmouth City Football Club Ltd (in administration) sub nom Revenue & Customs v (1) Portsmouth City Football Club Ltd (in administration) (2) Andrew Andronikou (3) Peter Kubik (4) Michael Kiely (joint administrators): ChD (Companies Ct) (Mr Justice Mann): 5 August 2010

The applicant Revenue applied for the court to revoke or suspend the approval of a company voluntary arrangement (CVA) involving the first respondent football club company (P). The Revenue also appealed against the decision on the amount of its debt to be allowed for voting purposes at the CVA meeting.

P had accumulated arrears in respect of its tax liabilities, and the Revenue had petitioned to wind it up. P subsequently went into administration. The second respondents (X) were appointed as administrators, and the petition was suspended.

The Football League’s insolvency policy required a club to exit administration by an approved CVA, and that all football creditor debts had to be paid in full or fully secured. Football creditors were other clubs (to whom sums might be due for transfer fees), players (for remuneration) and various football authorities and organisations. The Premier League provided payment of football creditors during a period of administration out of the monies it would otherwise have paid to the club. Those rules, which preferred football creditors, were known as the football creditor rules. The Revenue had, in separate proceedings, sought a declaration that those rules were unlawful and against public policy, and an injunction restraining the Premier League from giving preference to a particular class of creditors when a club had become insolvent.

In P’s case, the Premier League had paid football creditors out of sums which would otherwise have been paid to P. X subsequently prepared proposals for an exit from the administration via a CVA, which was put to meeting of creditors in June 2010. The Revenue had sought to vote in the sum of £37,768,387, but was only permitted by the chairman to vote in the sum of £24,474,435. The CVA proposals were passed by more than 75% of the creditors. The Revenue brought its application and appeal under section 6 of the Insolvency Act 1986 and rule 1.17 of the Insolvency Rules 1986.

The Revenue contended that the CVA unfairly prejudiced its interests because it would result in the loss of valuable claims under section 127 of the act and had approved payments past and future payments to football creditors in full. It submitted that allowing football creditors to vote amounted to a material irregularity as they, unlike the other creditors, would be receiving payment in full. The Revenue argued that if the football creditor votes had been disallowed then it would have had more than 25% of the vote and would have been able to block the CVA. It submitted, further, that it should have been allowed to vote on the basis of its full claimed debt.

Held: (1) Any CVA which left a creditor in a less advantageous position than before the CVA would be prejudicial to that creditor. However, it was not necessarily unfair that one creditor or class of creditors should be paid in full when others were not, although that situation would require careful scrutiny, Mourant & Co Trustees Ltd v Sixty UK Ltd (In Administration) [2010] EWHC 1890 (Ch) applied. Unless the court was satisfied that a better compromise would have been available, it could only compare that which was proposed with no compromise at all, Sisu Capital Fund Ltd v Tucker [2005] EWHC 2170 (Ch), [2006] BCC 463 applied. Furthermore, any irregularity would only be material where revelation of the truth was substantially likely to have made a difference to the way in which the creditors would have considered the terms of the CVA, Trident Fashions Plc (In Administration) (No2), Re [2004] EWHC 293 (Ch), [2004] 2 BCLC 35 applied.

(2) In the present case, if there was a potentially valuable section 127 claim which required a winding-up order on the present petition, then the Revenue could still apply for such an order. The omission of any reference to parachute payments in the winding-up scenario was not a material irregularity because it was unlikely that anyone’s consideration of the merits of the CVA was thereby affected.

(3) The issue of whether there was unfair prejudice from approval of payment in full, and approval of further payments in full, to one class of creditors (the football creditors) on the footing that the football creditor rules were invalid could not be decided in the present case.

(4) The football creditors had an interest in the CVA being approved. If it was not approved, and there was a liquidation, then their contracts of employment would end. Accordingly, it had not been unfair to have allowed them to vote at the CVA meeting.

(5) The Revenue’s appeal under rule 1.17 could only be allowed if the only justifiable decision at the CVA meeting was to admit its claim in full. Given the nature of its claims, the paucity of information provided, and their prima facie tactical purpose, the appeal was unsustainable.

Application refused, appeal dismissed.

Gregory Mitchell QC (instructed by the in-house solicitor) for the applicant; Richard Sheldon QC, Hilary Stonefrost (instructed by Walker Morris) for the respondents.