The Owls and The Rams
A statement released by the English Football League (“EFL”) on 20 July 2020 stated:
‘At the point a Club is charged with misconduct, it is referred to an Independent Disciplinary Commission and from that point onwards, the format and timing of the proceedings are controlled by that of the Independent Commission. Our stated position and the policy agreed with our Clubs is that we do not pass any comment on these individual matters, other than to confirm the charges at the outset and the subsequent outcomes.
The EFL is committed to announcing any final outcome promptly following notification of the decision by the relevant Independent Disciplinary Commission, giving consideration to the issues raised above and in accordance with its regulations.
Independent Disciplinary Commissions are well aware of the challenges for any Club that is subject to proceedings, and the need for clarity for financial and operational planning purposes, particularly ahead of the summer transfer window opening later this month. In addition, there is also the consequential impact to consider on how any decisions may affect other Clubs within a division who require the same courtesy to plan with as much certainty as is practically possible.
…
… the primary objective of any Independent Disciplinary Commission is to deal with cases expeditiously and fairly’.
Independent Disciplinary Commissions of the EFL are currently dealing with, inter alia, proceedings in respect of the EFL’s charges for misconduct against Sheffield Wednesday FC (“SWFC”) and Derby County FC (“DCFC”). This article will (i) set out the charges against DCFC and SWFC; (ii) explain the relevant EFL’s Profitability and Sustainability Rules in respect of those charges; and (iii) consider SWFC’s and DCFC’s likely defences.
The Charges
SWFC
A statement released by the EFL on 14 November 2019 stated:
‘Following a formal investigation into financial information provided by Sheffield Wednesday in relation to the Club’s 2017/18 Profitability and Sustainability (P&S) submission, the EFL has today issued a number of charges relating to alleged breaches of EFL Rules.
Earlier this year the EFL launched an investigation into [SWFC’s] financial submission for the period ending July 2018 under the relevant P&S Rules following the completion of the sale of Hillsborough Stadium.
The EFL has reviewed a large number of documents obtained from [SWFC] as part of this process and concluded there is sufficient evidence to justify issuing charges of Misconduct. The charges are in respect of a number of allegations regarding the process of how and when the stadium was sold and the inclusion of the profits in the 2017/18 accounts’.
The ‘charges’ were made against SWFC and others associated with SWFC, however those charges in respect of others associated with SWFC have since been dropped, as confirmed in a statement released by SWFC on 20 March 2020.
In reply to the EFL’s charge, a statement released by SWFC on 4 December 2020 stated:
‘Sheffield Wednesday Football Club has today filed its response to the charges brought against it by the English Football League for alleged misconduct concerning the sale and leaseback of Hillsborough stadium and the inclusion of the profit on that sale in the Club’s 2017/18 accounts. The Club has informed the EFL that the charges are themselves unlawful and, without prejudice to that fact, are all denied by the Club and the other Respondents.
…
The Club maintains that it consulted with the relevant executive officers of the EFL in connection with the stadium transaction and that it acted in good faith. The Club has in its possession numerous emails, letters and other documents in which the EFL gave authorisation to the transaction, and on which authorisation the Club understood it could rely. That authorisation gave rise in law to a legitimate expectation that the transaction would be accepted by the EFL, which is binding on the EFL. The EFL is acting in breach of that binding legitimate expectation by retrospectively treating as misconduct that which it had itself previously authorised, and this makes the charges themselves unlawful. The Club is accordingly bringing its own claim against the EFL to establish that it is acting unlawfully, as well as standing ready, if necessary, to vigorously defend the charges’.
The evidence referred to in those statements from the EFL and SWFC is unavailable. However:
Full accounts of Sheffield Wednesday Football Club Limited (CRN: 02509978) (“SWFCL”), the company entity of SWFC, for the period ending 31 July 2018 (“SWFCL 2018 Accounts”) state that SWFCL made a profit of £38,061,000 on the sale of Hillsborough but overall SWFCL made a profit of only £2,576,000 (SWFCL 2018 Accounts, pg. 14).
SWFCL 2018 Accounts also state at pg. 29 that ‘Income of £61,266,667 was receivable from related parties in respect of transactions recognised in these financial statements’.
Land Registry documents show that the amount paid for Hillsborough on 28 June 2019 was £60,000,000 and that the current owner of Hillsborough is Sheffield 3 Limited (CRN: 12064489) (“S3L”).
S3L was initially owned by Sheffield 4 Limited (CRN 12062155) (“S4L”) and is now owned by Sheffield 5 Limited (CRN: 12066053) (“S5L”). S4L was voluntarily wound up following a resolution passed on 28 June 2019 as part of an Insolvency Act 1986, s. 110 reconstruction which saw S4L’s ownership of S3L transfer to S5L.
S4L was owned by Dejphon Chansiri, and S5L is owned by Dejphon Chansiri. Dejphon Chansiri is also a director of SWFCL.
SWFCL is owned by Sheffield Wednesday Holdings Limited, a company that has been reported as being registered in Hong Kong and wholly owned by Dejphon Chansiri (although, a search of Hong Kong’s company registry does not show a Sheffield Wednesday Holdings Limited but a ‘SWFC Holdings Limited’).
Further, SWFCL’s full accounts for the period ending 31 May 2017 show that SWFCL made a loss of £20,765,000, and SWFCL’s full accounts for the period ending 31 May 2016 show that SWFCL made a loss of £9,755,000. Notably, SWFCL’s fixed, tangible assets for the period ending 31 May 2017 are valued at £26,881,000 and for the period ending 31 May 2016 are valued at £25,558,000. Such valuations would have included Hillsborough, as SWFCL was the previous owner of Hillsborough, but such valuations do not reflect a price of £60,000,000 paid for Hillsborough in 2019.
DCFC
A statement released by the EFL on 16 January 2020 stated:
'Following a review of Derby County’s Profitability and Sustainability (P&S) submissions, the EFL has charged the Club for recording losses in excess of the permitted amounts provided for in EFL Regulations for the three-year period ending 30 June 2018’.
In reply to the EFL’s charge, a statement released by DCFC on 17 January 2020 stated:
‘Derby County Football Club acknowledges receipt of an EFL notice of charges in respect of the Club’s valuation associated with the sale of Pride Park stadium in June 2018, and further in respect of the Club’s amortisation policy associated with intangible fixed assets (players).
The club will strongly contest the challenge to the valuation of Pride Park stadium, as well as the newly notified charge in respect of intangible fixed asset amortisation.
As a matter of law, the EFL is not entitled to bring either of the charges, having previously agreed to all of the arrangements surrounding the stadium sale and never having raised the issue of player amortisation before. The Club shall argue that the very bringing of the Charges itself is unlawful.
At all times, the Club has acted transparently with the EFL in its submissions for both FFP/P&S and, in respect of the charges above, had received written approval for all of its submissions in respect of this legislation. No allegation has been raised to the contrary by the EFL. Rather, the EFL now claims that it made a “mistake.”
The Stadium was valued by professional valuers immediately prior to the transaction. The transaction and valuation were discussed extensively with the EFL Executive, which asked for a relatively modest price adjustment which was accepted. The valuation report was prepared by a highly reputable and professional and independent firm, with industry experience, who had valued the stadium on two prior occasions, one in 2007, and one in 2013.
The Club discussed the rationale for the stadium sale with the EFL Executive, ahead of the transaction, supplied and discussed the valuation, and bar a small adjustment in respect of its FFP/P&S submissions, the Club was given written approval.
…
Had the EFL not given the green light in writing in respect of both charges, the Club would have reacted accordingly. The Club cannot re-trace the steps of the actions it legitimately took in good faith as a result of EFL approval of both matters.
The EFL can choose to correct what they now see as an error in their decisions. However, it cannot punish the Club for its own errors’.
In respect of the charges against DCFC, this article focuses on the charge in respect of the sale of Pride Park. Again, the evidence referred to in those statements from the EFL and DCFC is unavailable. However:
Full accounts of The Derby County Football Club Limited (CRN: 00049139) (“DCFCL”), the company entity of DCFC, for the period ending 30 June 2018 (“DCFCL 2018 Accounts”) state:
‘The Company recorded a profit of £14.6m for the year to 30 June 2018 (2017: loss of £7.9m) as a result of selling and leasing back Pride Park Stadium which created a gain of £39.9m. The Company and its board of directors took the difficult decision to fully realise the market value of the stadium from its balance sheet after consideration of the Club’s P&S position for forthcoming years’ (DCFCL 2018 Accounts, pg. 2 and 11).
DCFCL 2018 Accounts also state at pg. 29 that ‘Sales of £81,103,493… were made to companies under common ownership’.
Land Registry documents show that the amount paid for Pride Park (otherwise known as ‘Derby County Stadium’) on 28 June 2018 was £81,100,000 and that the current owner of Pride Park is Gellaw Newco 202 Limited (CRN: 11422836) (“GN202”),
GN202 was initially owned by Gellaw Newco 201 Limited (CRN: 11420415) (“GN201”), and is now owned by Gellaw Newco 204 Limited (CRN: 11420415) (“GN204”). GN201 was voluntarily wound up following a resolution passed on 28 June 2018 as part of an Insolvency Act 1986, s. 110 reconstruction which saw GN201’s ownership of GN202 transfer to GN204.
GN201 was wholly owned by Melvyn Morris, and GN204 is wholly owned by Melvyn Morris. Melvyn Morris is also a director of DCFCL.
DCFCL is wholly owned by SEVCO 5112 Limited, a company wholly owned by Gellaw Newco 203 Limited (“GN203”). GN203 is also owned by Melvyn Morris.
Further, DCFCL’s full accounts for the period ending 30 June 2017 show that DCFCL made a loss of £7,872,715, and DCFCL’s full accounts for the period ending 30 June 2016 show that DCFCL made a loss of £14,725,000. Notably, DCFCL’s fixed, tangible assets for the period ending 30 June 2017 are valued at £42,564,939 and for the period ending 30 June 2016 are valued at £33,456,186. Such valuations would have included Pride Park, as DCFCL was the previous owner of Pride Park, but such valuations do not reflect a price of £81,100,000 paid for Pride Park in 2018.
The EFL Championship Profitability and Sustainability Rules
The EFL’s Championship Financial Fair Play Rules were replaced from the 2016/2017 season onwards to the Championship Profitability and Sustainability Rules (see EFL Regulations, Appendix 5, part 1, Notes) (“CPSR”).
The CPSR’s key points and requirements in respect of EFL’s charges against SWFC and DCFC are:
Pursuant to CPSR, regulation 1.1.12, EFL Championship clubs are monitored over a three-year period, which include the year in which a club’s assessment under the CPSR takes place (known as ‘T’), the year before T (known as ‘T-1’), and the year before T-1 (known as ‘T-2’).
Pursuant to CPSR, regulation 2.2, by 1 March in each season all EFL Championship clubs are required to submit to the EFL’s ‘Executive’ (i.e. the EFL’s Chief Executive and other officers) (i) annual accounts for T-1 (which are accounts company directors are required to prepare pursuant to the Companies Act 2006, s. 394 in respect of the company – i.e. the company entity of a football club – they are directors of), and T-2 if not previously submitted; and (ii) its estimated profit and loss account and balance sheet for T.
Pursuant to CPSR, regulation 2.3, the FPL’s Executive determines whether ‘consideration in the Club’s Earnings Before Tax arising from a Related Party Transaction is recorded in the Club’s Annual Accounts at a Fair Market Value. If it is not, the Executive shall restate it to Fair Market Value’.
Pursuant to CPSR, regulation 1.1.10, a ‘Related Party Transaction’ is one that is disclosed in a clubs annual accounts or should have been but for the ‘accounting standards under which the Annual Accounts were prepared’. Unhelpfully, this does not provide an explanation of what a Related Party Transaction is, but in general it will be a transaction between a company and one or more of that company’s directors taking place directly or indirectly.
Pursuant to CPSR, regulation 1.1.8, ‘Fair Market Value’ is ‘the amount for which an asset could be sold, licensed or exchanged, a liability settled, or a service provided, between knowledgeable, willing parties in an arm’s length transaction’.
There are further requirements of the CPSR, which take effect if an EFL Championship club’s aggregate earnings before tax for T-1 and T-2 result in a loss:
Pursuant to CPSR, regulation 2.5, if the aggregation of an EFL Championship club’s earnings before tax for T-1 and T-2 results in a loss (and subject to any adjustments being made pursuant to CPSR, regulation 2.3), then the club must submit its ‘Adjusted Earnings Before Tax for each of T, T-1 and T-2’.
Pursuant to CPSR, regulation 1.1.2, ‘Adjusted Earnings Before Tax’ is a club’s Earnings Before Tax adjusted to exclude costs in respect of specific items listed under CPSR, regulation 1.1.2.
Pursuant to CPSR, regulations 2.6 and 2.8, if the aggregation of an EFL Championship club’s adjusted earnings before tax for T, T-1 and T-2 results in a loss of ‘up to the Lower Loss Threshold’ or that ‘exceeds the Lower Loss Threshold’ then the EFL’s Executive has the power to take certain actions and require the club to provide certain information and secure funding (see CPSR, regulations 2.7 and 2.9, and EFL Regulations, regulation 6.20).
Pursuant to CPSR, regulation 3.1, the ‘Lower Loss Threshold’ is an aggregation of an annual amount of £5,000,000 (whether the club’s season for the relevant year was in the Premier League or the Championship). So, for example, if T, T-1 and T-2 are being considered by the Executive, the Lower Loss Threshold for the period T, T-1 and T-2 will be £15,000,000.
Pursuant to CPSR, regulation 2.9, if an EFL Club’s adjusted earnings before tax for T, T-1 and T-2 results in a loss that ‘exceeds the Upper Loss Threshold’, then the EFL’s Executive has the power to take certain actions (see EFL Regulations, regulation 6.20) and the club will be in breach of the CPSR and will be referred to a Disciplinary Commission in accordance with EFL Regulations, section 8. For an explanation of EFL Regulations, section 8 and the EFL’s Disciplinary Commission generally, see Football Law’s overview of the EFL.
Pursuant to CPSR, regulation 3.1, the ‘Upper Loss Threshold’ is an aggregation of an annual amount of £13,000,000 for any season in the EFL Championship, and £35,000,000 for any season in the Premier League. So, for example, if T, T-1 and T-2 are being considered by the Executive and the relevant club spent T in the Premier League and T-1 and T-2 in the EFL Championship, the Upper Loss Threshold for the period T, T-1 and T-2 will be £61,000,000.
Both SWFC and DCFC were in the EFL Championship for the accounting periods ending 2016-2018, meaning that the aggregation of the applicable Upper Loss Threshold for each club for that timeframe equals £39,000,000. But for SWFCL selling Hillsborough for c. £60,000,000, SWFCL would have made an aggregated loss of £66,005,000 for the accounting periods ending 2016-2018. But for DCFCL selling Pride Park for c. £81,000,000, DCFCL would have made an aggregated loss of £47,897,715 for the accounting periods ending 2016-2018. Whilst those figures do not account for any deductions to be made for ‘Adjusted Earnings’, such figures in any event identify the significance of SWFCL and DCFCL respectively selling their stadium but raises questions of how such sales square with CPSR’s rules on related party transactions at fair market value (CPSR, regulation 2.3).
SWFC’s and DCFC’s Defences
SWFC’s and DCFC’s statements made in reply to the EFL’s charges indicates that both clubs are using, inter alia, a defence of legitimate expectation. ‘Legitimate expectation’ is a public law concept that is available when a public authority has conferred on a person or a company a legitimate expectation of a procedural or substantive benefit and that public authority may not frustrate that expectation if to do so would be unfair as to amount to an abuse of power.
However, ‘legitimate expectation’ is only available in respect of challenging the lawfulness of decision of a ‘public authority’ and it would be difficult to establish that the EFL is a ‘public authority’.[1] Further, ‘legitimate expectation’ is properly used a cause of action rather than as a defence to an action (i.e. a defence to the charges made against SWFC and DCFC). Furthermore, legitimate expectation, as a form of judicial review, is only properly brought before the courts, not by way of arbitration before a sport’s disciplinary commission.
Considering SWFC’s and DCFC’s statements made in reply to the EFL’s charges and the private relationship between SWFC and the EFL and between DCFC and the EFL, it is this author’s opinion that a defence to the charges against SWFC and DCFC respectively properly lies in estoppel. Estoppel is analogous to legitimate expectation.[2] There are several types of estoppel, with the most relevant for the purposes of this article being:
Estoppel by representation: a defence of estoppel by representation will arise where (i) a representation was made by a party to litigation or some person whose representation that party is responsible (e.g. the EFL); (ii) that representation contradicts a representation or case which the representor (e.g. the EFL) subsequently seeks to advance in litigation; (iii) the original representation was made with the intention of inducing the representee (e.g. SWFC and DCFC) to rely upon it; and (iv) the representee (e.g. SWFC and DCFC) changed its position in reliance upon the representation and would suffer detriment if the representor (e.g. the EFL) were permitted to resile from the representation in the subsequent litigation. Estoppel by representation operates to prevent a representor from alleging or seeking to prove a position that contradicts the original representation.
Promissory estoppel: pursuant to EFL Regulations, regulation 3.1 membership of the EFL constitutes ‘an agreement between [the EFL] and each club to be bound by’, inter alia, the EFL Regulations, which means that there is a contractual relationship between SWFC and the EFL and between DCFC and EFL. A defence of promissory estoppel arises where (i) there is a pre-existing legal relationship between the parties (e.g. as there is between SWFC and the EFL and DCFC and the EFL); (ii) a clear and unequivocal promise or representation is made by one party (e.g. the EFL) expressly or impliedly that they will not insist upon their strict legal rights against the other (e.g. DCFC and/or SWFC); (iii) the promise or representee (e.g. DCFC and/or SWFC) had changed its position in reliance upon that promise or representation such that it would be inequitable for the promisor or representor (e.g. the EFL) to renege on that promise or representation. Promissory estoppel operates to prevent a representor from enforcing its otherwise enforceable legal rights.
Estoppel by convention: a defence of estoppel by convention arises where (i) the parties to a contract (e.g. the EFL and SWFC, and the EFL and DCFC) have proceeded on a clear and unequivocal assumed state of facts or law; (ii) this assumed state was shared by the parties, or made by one of the parties and acquiesced by the other and in either event was communicated between the parties; (iii) the assumption was relied upon by the party seeking to raise the estoppel (e.g. SWFC and DCFC). Estoppel by convention operates to prevent a party to a contract from disputing the truth of an understanding of fact or fact and law in respect of the parties’ contractual relationship if it would be unjust or unconscionable to do so. Significantly, it is irrelevant whether or not one or both parties were aware that their assumption was incorrect, or whether or not they believed it to be correct. What matters is that the party raising the estoppel (e.g. SWFC and DCFC) believed and agreed that the assumed version of facts or law should be treated as true.[3]
Considering that (i) SWFC has ‘numerous emails, letters and other documents in which the EFL gave authorisation to the [sale of Hillsborough], and on which authorisation [SWFC] understood it could rely’ and (ii) DCFC ‘discussed the rationale for the stadium sale with the EFL Executive, ahead of the transaction, supplied and discussed the valuation, and bar a small adjustment in respect of its FFP/P&S submissions, the Club was given written approval’, it is easy to see how each type of estoppel explained above can be argued forcefully by SWFC and DCFC respectively. It is this author’s opinion that should such evidence be available to SWFC and DCFC as stated then each club has good prospects of successfully defending the charges made against them in respect of their respective stadium sales and avoiding the sanctions that can be imposed pursuant to EFL Regulations, regulation 92 in respect of the same.
The independent disciplinary commissions’ decision in SWFC’s and DCFC’s cases are expected soon following the EFL’s statement quoted at the beginning of this article. Considering the similarity between the cases, the independent disciplinary commissions’ decisions may be announced at the same time, which would tally up with SWFC’s case reportedly heard in June 2020 and DCFC’s case reportedly heard in the week commencing 13 July 2020.
Footnotes
[1] Cf. R v Football Association Ex p. Football League [1993] 2 All ER 833 (QB); R v Disciplinary Committee of the Jockey Club Ex p. Aga Khan [1993] 1 WLR 909 (CA). Cf. The FA v Jose Mourinho, The FA Regulatory Commission (Ch William Norris QC) 13 December 2018 [33]-[44].
[2] R (Reprotech Ltd) v East Sussex County Council [2003] 1 WLR 348 (HL) (Lord Hoffman) [34]-[35].
[3] Prime Sight Ltd v Lavarello [2013] UKPC 22 (PC) (Lord Toulson) [45].
22 July 2020
On 25 July 2020 Thomas Horton discussed the points raised in this article with Mike McCarthy on BBC Radio Sheffield. That discussion can be listened to by clicking this link.
On 31 July 2020 SWFC an Independent Disciplinary Commission sanctioned SWFC with a 12-point deduction for breach of the CPSR, as explained in this statement released by the EFL on 31 July 2020, and which Thomas Horton discussed with Mike McCarthy on BBC Radio Sheffield and with Tom White on Sky Sports News.
A Football Law Article ‘Pride Park: Because You’re Worth It’ published on 7 September 2020 analyses the Independent Disciplinary Commission’s decision in respect of the charges against DCFC, which were largely dismissed.
On 4 November 2020 SWFC’s 12-point deduction was reduced to a 6-point deduction following an appeal made by SWFC to a League Arbitration Panel.