Leeds have today had their appeal against the 15 point penalty imposed on them this season rejected. While it is not yet 100% clear why the arbitrators rejected the appeal, it is clear that Leeds were criticised for the length of time it took them to take action and noted the agreement it had reached with the League over the points deduction. Earlier last month we had speculated on the likely outcome of Leeds appeal.

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Leeds United, fingers crossed?

18 April 2008

Behind closed doors at an independent Arbitration hearing in London this week Leeds United kicked off their attempt to overturn the 15 point deduction imposed by the Football League for an alleged breach of the League’s insolvency rules. Leeds, arms spread wide proclaiming their innocence say this was outside of the League’s powers. Success in the Arbitration is vital for the League’s authority and the competitions integrity, but Leeds feel the foul was outside the box and that no penalty should have followed.

If the Arbitration panel overturn the 15-point penalty there are sure to be significant repercussions or ‘war’ as the manager of Swansea, Roberto Martinez, has succinctly  put it. Any decision that leapfrogs Leeds into an automatic promotion place (they are currently in the play off positions) will have a knock on effect for those teams already occupying those slots. While Swansea’s position is strong enough for them to still join the Championship automatically, Carlisle’s hopes could be seriously undermined. No wonder their manager, John Ward, believes the situation is ‘very embarrassing’ for football. To go into the business end of a season with teams not knowing what they need to do to gain promotion is close to farce – which would have been prevented had Leeds acted more speedily. Interestingly both Martinez and Ward believe that Leeds will regain some of their points but not all.

It is hard to know exactly what arguments are being employed behind closed doors but some guidance can be found in the claim form and particulars that Leeds issued in the High Court before agreeing to the Arbitration procedure.

By way of background on 4 May 2007 Leeds United (‘Leeds’) voluntarily entered into administration following their inability to surmount crippling debts.  Substantial sums were owed to creditors including players, employees and HM Revenue and Customs, to whom they owed over £7 million. KPMG were appointed Joint Administrators and the Administrators the same day hived down the assets of Leeds to Leeds 2007 Limited (who are now the party to the Arbitration). Leeds 2007 Limited (‘Leeds 2007’) then agreed to sell the entire issued share capital to a new company, Leeds United Football Club (‘LUFC’). KPMG proposed a Creditors Voluntary Arrangement (‘CVA’) but following opposition from Her Majesty’s Revenue and Customs this plan was abandoned and the business of Leeds was re-offered for sale, which resulted in LUFC still obtaining Leeds but not under a CVA rather on an unconditional basis.

The Football League felt that Leeds had not complied with its insolvency policy and were thus entitled to refuse to transfer Leeds share in the Football League to Leeds 2007. Each club in the League holds a share in the Football League Ltd, which entitles the club to membership of the league.  The League, however, exercised its discretion under the so-called ‘exceptional circumstances’ provisions and allowed the club to make the transfer. Significantly, Leeds 2007 entered into an agreement with the Football League on 3rd August 2007. In this agreement Leeds 2007 agreed to conditions on the transfer of the share, notably:

‘…that with effect from the commencement of Season 2007/8 Leeds will be subject to a points deduction of fifteen (15) championship points…subject to…The Appeal’.

The ‘Appeal’ was defined as a ‘hearing of Football League Members’ which took place on 9th August. Leeds 2007 lost the Appeal by 65 votes to 5.

Clearly the first major hurdle Leeds 2007 has to overcome is this agreement to accept the 15-point penalty. In essence they argue that they had no choice, that they had a gun to their head. Leeds 2007 had already spent significant sums to continue the business; that the season was fast approaching and there was little time to prepare; that had they not signed they could not have brought in players and would thus have not been able to fulfil its fixtures; and that both parties were acting under a mistake of law (i.e. that the League had the power to sanction it as it did).

There seems an inherent weakness in this approach. Leeds seem to accept that the League could have refused to sanction the share transfer at all (in accordance with its insolvency policy). They entered into an agreement to allow this to happen (accepting a 15 point penalty) and the league stepped outside its usual policy because of this agreement. Leeds don’t argue that they had their fingers crossed but for some they may as well have.

Even if Leeds 2007 can convince the arbitration panel that the agreement is void, what arguments do they have that the sanction was improper? Essentially Leeds 2007 attack is twofold. First that the League had no power or authority to impose the 15 point penalty; second that it is unfair.

Leeds 2007 have trawled through the Football League’s Memorandum of Association, their insolvency policy and their Regulations and concluded that there is no provision for a points penalty in these circumstances. If we take that at face value (and the argument looks stretched) then we come back to the issue that Leeds 2007 seem to accept that the League could have prevented the transfer of the share (and thus Leeds would not have been in the League at all) but were not entitled to accommodate Leeds with the imposition of a penalty. In this respect it is worth remembering that the purpose of the League’s insolvency policy is to prevent Club’s gaining an unfair advantage by not paying its creditors. It is to prevent teams breaking the bank on players and, for example, avoiding relegation before going into Insolvency and re-emerging as a ‘new’ club with the benefits of its debt’s wiped clear and its league position intact. Leeds 2007 are asking for something similar – that the League’s flexibility in allowing them to continue in the League be rewarded with a battle to show that they had no right to penalise them with a points deduction.

If Leeds 2007 are wrong about that, and equity suggests they should be, then they argue that the penalty was unfair. They rely on the incorrect application of the League’s insolvency policy, the fact that the League relied on Leeds not entering into a CVA and that Leeds 2007 broke no rules. Each of these arguments would struggle to survive if the arbitration panel decides that the League had the power to impose the sanction. Leeds 2007 also argues that the penalty was not proportionate and here they may have an argument.  Leeds 2007 argues that the League wanted to make an example of them and that ‘deterrence’ was high on the Leagues agenda. 15 points is a harsh penalty, the issue being whether it is too harsh to deal with the issues created by Leeds.

What is clear is that if the points penalty is overturned then the integrity of the league will be destroyed and clubs that miss out on potential promotion slots are already sabre rattling and more legal action could follow. In this context messers Ward and Martinez seem to have received clever counsel and offer the Arbitration panel their easiest way out – a reduction in the penalty that does not affect the automatic promotion spots.

© Davenport Lyons 2008. All rights reserved.
This document reflects the law and practice as at May 2008. It is general in nature, and does not purport in any way to be comprehensive or a substitute for specialist legal advice in individual circumstances.