EFL club insolvency: football creditors rule on staff wages explained

Though Wigan Athletic’s shock entry into Administration has reportedly come about in dubious circumstances, such has been the impact of Covid-19 on football clubs' finances that it may prove to be the start of things to come. In the event of Administration, what can players and other staff expect to recover?

Normally, when a company enters Administration, an employee’s recovery of wage arrears is capped at a maximum of £800. Thankfully, for players and staff of EFL clubs, there are different rules in place to protect their wages, namely the Football Creditors Rule. This Rule is set out in the EFL Articles of Association.

What’s different about the Football Creditors Rule?

When a club enters into an ‘Insolvency Event’ (including Administration), the club will be given the opportunity to transfer its EFL share (the ‘Golden Share’) to another entity or to restructure its own financial affairs. The EFL will only ratify the Golden Share transfer or financial restructure on the condition that all Football Creditors are paid in full. The definition of ‘Football Creditors’ includes current and former full time employees. This would also, by virtue of legislation, in all likelihood extend to part time employees.

Under the Rule, unless it enters liquidation, an insolvent EFL club’s players, manager, back room staff and any other employees will receive any wages owed to them by the club in full. To meet these payments, the EFL Board will apply any funds in its central ‘Pool Account’ (where it receives broadcasting and other such revenue), which would otherwise have been distributed to the defaulting club at the end of the season. These funds are used to pay off the club’s Football Creditors before any other unsecured creditors.

In the order of priority, staff’s wages fall behind only the EFL, Premier League and FA bodies, the PFA and EFL pension schemes, other Premier League and EFL clubs, and any subsidiary or holding company of the EFL. If the relevant funds in the Pool Account are not enough to satisfy the club’s debts to the EFL, Premier League and FA bodies, the PFA and EFL pension schemes or the EFL’s associated companies, the EFL Board will decide how to allocate the funds between these classes of Football Creditors. In this kind of unprecedented situation, club staff and other creditors would not recover any money owed to them from the club.

If, having discharged all previous Football Creditors ahead of staff in full, it is clear that the remaining funds are  not enough to repay all staff, the remaining sums in the Pool Account will be split pro rata between all staff of the club. Depending on the size of the deficit, staff could still recover a considerable proportion of the debt owed by the club. The same logic applies to all Football Creditors who sit behind staff in the order of priority.

Are any employee claims not covered under the rule?

Often, an Administrator will terminate staff contracts without notice. This will amount to a breach of the employment contract. However, the Football Creditors Rule states that staff are only entitled to ‘arrears of remuneration up to the date at which that contract of employment is terminated’ (italics added). Compensation for breach of contract would not be payable under the Rule. Faced with this situation, staff should therefore consider the possibility of affirming their contract – in other words rejecting any attempted termination in breach and continuing to treat their contract as ongoing. In keeping the contract alive, staff may seek to recover payment for all wages due until the end of their notice period or fixed term contract.

Affirming the contract (and keeping the employment relationship alive) may also give the employee an opportunity to transfer to a purchaser as a result of TUPE.

Do the payments received under the Football Creditors Rule prevent staff whose contracts have been terminated from receiving the usual State guaranteed payments?

As with other businesses that enter insolvency, the Government steps in to guarantee some payments due to dismissed staff.  These include:

• Up to 8 weeks wage arrears, capped at £538 per week;
• Up to 6 weeks of holiday pay (taken or accrued in the last 12 months), capped at £538 per week;
• Statutory notice pay, capped at £538 per week; and
• Redundancy pay (or the basic award for Unfair Dismissal).

Where employees transfer under TUPE (or would have but for being dismissed by reason of the transfer), these State guarantee payments are payable up to the date of transfer. The transferee (new owner), is not liable for any State guarantee payments.

What happens to wage claims if an employee’s contract is adopted by the Administrator?

If an employee has not been dismissed by way of redundancy within 14 days of the Administrator being appointed, the employee’s contract is considered to be adopted. This has the effect of ranking wage liability accrued post-adoption, (including holiday pay and pension contributions), ahead of Administrator’s fees and unsecured creditors in the order of priority. Because of this, Administrators are usually unwilling to adopt anything other than the most important employee contracts unless the club is likely to be sold.

What if employees are transferred under TUPE?

Where an EFL club’s players and staff remain in employment at the point of transfer, TUPE operates to transfer their contracts of employment (and therefore wage liability) to the new employer. This also applies in respect of staff who are dismissed before the transfer where  the principal reason for the dismissal is the transfer, unless the club can show that the dismissal was for an “Economic, Technical or Organisational” reason. The same applies to any contractual variations in pay made principally because of the transfer.

Given the potentially powerful impact that the Football Creditors Rule, and other provisions of the EFL’s Articles of Association and Insolvency Policy, can have in the event of a club entering into Administration, club owners, current and former staff and prospective purchasers should seek  advice regarding the operation of the Rule and ensure that they fully understand how these football specific provisions can cut across the expected ‘norms’ of Administration.

If you anticipate that your club is considering entering into Administration, is in Administration or you are a prospective purchaser looking to buy a club out of Administration, talk to us today by calling 0333 004 4488, emailing hello@brabners.com or completing our contact form.