By: Arunoday Rai
Introduction
Several clubs went into severe financial loss and entered into bankruptcy due to Covid-19. These clubs had incurred debts and the creditors received some of their claims through the creditors’ arrangement in the national bankruptcy proceedings. Some of the new clubs may reemerge as a ‘sporting successor’ of these bankrupt clubs. Whether the creditor can approach FIFA Dispute Resolution Chamber (“FDRC”) to receive the withstanding credit from these successor clubs following the bankruptcy proceedings of the old club remains unclear. It is in this context the author argues that a new club cannot be held liable for the withstanding credit as the creditor cannot approach the FIFA DRC following the bankruptcy proceeding.
Sporting Succession and Bankruptcy
The Court of Arbitration for Sport (“CAS”) has observed in the case of Rangers de Talca that bankruptcy proceedings were used by the old clubs to circumvent their financial obligations and continue their privileges by emerging as a new club. The concept of sporting succession was formally introduced by FIFA in Article 15.4 of the FIFA Disciplinary Code, 2019 (“FDC”) to prevent such circumvention of obligations and ensure financial justice for all stakeholders. It provided FIFA the power to act against the ‘sporting successor’ of the old club making them liable for the debt incurred by the old club to prevent the new club from avoiding mandatory financial responsibilities towards other players, managers, and clubs.
However, the view taken by the panel in the case of Rangers de Talca misrepresents the true nature of bankruptcy proceedings as it views the bankruptcy proceedings as an instrument of circumvention of a club’s financial obligations. This view has been used in recent cases which have allowed players’ claims following the bankruptcy proceeding. However, the true nature of bankruptcy proceedings was correctly highlighted by the CAS panel in Ronny da Silvawhere it held that the bankruptcy proceedings do not accord privileges to a debtor, but are meant for collective negotiation and sound economic reallocation of resources which constrain several rights of the debtor. The lack of economic success cannot be seen as someone’s fault as such likelihood exists while undertaking any business endeavour. The CAS panel noted the above-mentioned stigma in cases involving bankruptcy in Ronny da Silva and observed that such stigma has been rightly overcome in the meantime.
Furthermore, such a view taken by the panel is also reflected in the World Bank guideline on insolvency where a country needs to have a well-functioning insolvency system to receive credit as they are an instrument of good governance. Hence, the view taken by the panel in Rangers de Talca case of the insolvency system being used to manipulate the debts is untenable. Therefore, it is essential to examine the creditors arrangement when dealing with their claim, considering how it impacts their position, as exemplified by the CAS panel in the case of CSKA-Sofia v. FIFA & Civard Sprockel.
Effect of Bankruptcy Proceedings on original debt
The CAS panel in Liga Deportiva Alajuelense v. FIFA observed that most of the national bankruptcy proceedings involve a restructuring of the debt of the club where the creditor’s claim receives a haircut, i.e., the creditor receives a lower amount than claimed. Hence, it is important to understand the effect of such a restructuring plan on the original debt. FIFA regulations are absolutely silent on the issue of bankruptcy with respect to sporting succession. The regulations do not specify whether a player who receives a haircut during the bankruptcy proceedings can approach the FDRC for the remaining claim. There have been divergent views on this by several CAS panels.
Adjudication of Remaining Credit: Conflict between National and FIFA proceedings
The CAS panel in David Bernardo Tengarrinha allowed the player to receive the rest of their claim by holding that CAS decides the liability of the new club and does not rule on the issue of bankruptcy per se. Since the CAS panels adjudicate on the remaining claim, they do not interfere with the decision given in bankruptcy proceeding in any manner. Such a view allows the creditor to recover 100% of his claim as long as he is diligent. Therefore, the panels that have adjudicated upon the claim of the players subsequent to bankruptcy proceedings posits that such adjudication by the CAS would not impede with the decision of the bankruptcy proceeding.
However, such a view is unviable due to its self-contradictory nature. Such reasoning is difficult to follow as the moment when credit is recognised and adjudicated in the bankruptcy proceedings, the whole credit gets extinguished. Hence, even though a part of the claim may be provided to the creditor in the creditors’ arrangement, their whole claim/legal interest has been adjudicated and gets extinguished at the stage of bankruptcy proceedings itself.
It should also be noted that Article 5 of FDC, 2019 provides that primarily, FIFA regulations, and subsidiarily any other law of competent judicial body should be applicable. Since FIFA regulations are silent on the issue of bankruptcy, the primary law should be the national law as bankruptcy proceedings happen within its exclusive domain. Hence, adjudication on the player’s remaining credit will interfere with the decision of the bankruptcy board which goes against the primacy given to the bankruptcy proceedings in the FIFA regulations highlighted in Civard Sprockel.
Therefore, even if FIFA bodies adjudicate on the claim not provided, it will tend to interfere with the local bankruptcy proceedings and harms the primacy provided to the national proceedings. It also violates the principle of par conditio creditorum, according to which all creditors should be satisfied equallyas the other non-football creditors would not have such alternate means to recover the remaining amounts.
Bankruptcy and lex sportiva
In line with David Bernardo Tengarrinha, the panel in Francisco Moreno Ruano observed that Article 15.4 of FDC nowhere explicitly rules out cases arising out of bankruptcy proceedings, hence, sporting succession can be applied regardless of the bankruptcy proceedings. The panels which have taken this view have defined the appropriate context to be lex sportiva which focuses more on equality of competitive conditions and contractual stability. It was observed in Nilson Barros that we should allow such remaining claims of the players to prevent the misuse of bankruptcy proceedings that provides a carte blanche power to the debtor. This perspective suggests that it’s important for CAS to settle these pending claims because the idea of sporting succession was introduced to safeguard players’ credit and maintain level playing field between football clubs, ensuring equal responsibility for their obligations and preventing any circumvention of such obligations.
However, it should be noted that the concept of sporting succession was not brought up to ensure that a creditor receives 100% of their claim. As was observed in Ronny da Silva, a well-functioning insolvency system ensures that a creditor is being protected to a certain extent. Therefore, the FIFA DRC cannot act as an alternate forum to provide a claim to a creditor whose legal interest has already been extinguished as that would interfere with the bankruptcy proceeding even when the creditor’s interest is sufficiently protected. If FIFA DRC adjudicates upon a non-existent legal interest, it becomes an ‘alternate forum’ that dilutes the primacy of bankruptcy proceedings. FIFA DRC in Stanley Elbersobserved that a player should first approach the civil court of Romania instead of approaching FIFA. This approach provides primacy to the bankruptcy boards and once a creditor arrangement has been made, as per Ronny da Silva, FIFA should not adjudicate the creditor’s claim due to the absence of any legal interest. This approach is better as it addresses the apprehensions raised by the panel in Franciso Moreno Ruano by asserting that the player’s credit and equal competitive conditions are being taken into account within an insolvency framework.
Exceptions
This does not mean that the creditors can never receive their claim from FIFA following the bankruptcy proceeding. CAS panels have created two exceptions when FIFA can adjudicate the claim of the creditor even after bankruptcy proceedings. The two exceptions are as follows: i) the presence of abuse or, ii) the presence of limitation in bankruptcy proceedings. The first exception was observed in Rangers de Talca where the panel held that FIFA has the duty to ensure the protection of the creditor when bankruptcy is misused by the old clubs to circumvent their financial obligations. Most countries with a bankruptcy system check for abuse, fraud, or any illegal activity of the debtor. Therefore, there should be a general presumption of good faith once the bankruptcy proceedings have happened. It is only in the rarest of the rare cases, where a prima facie case of abuse has been established by the creditor, FIFA should adjudicate their claims.
The second exception was brought in the case of Soukeyna Ba Bengelloun, where the CAS panel observed that FIFA has the power to adjudicate the player’s claim if there is a limitation or restriction in the national law. In this case, the player’s claim was restricted in the insolvency proceeding as a breach of the employment contract was not recognised under the Bulgarian bankruptcy law. Therefore, the panel held that there was no legal theoretical possibility of recovering such a claim in the national proceedings. This exception should be distinguished from a situation in Edimar Curitiga Fraga where a reduced claim was provided with no such limitation. In this case, a reduced claim was provided because of limitations within the law and the national courts could not even adjudicate on a certain part of the claim. Hence, this exception would only lie in a situation where a claim is not adjudicated by the national courts due to limitations present within the local laws.
Conclusion
The author has argued that a new club should not be held liable for the remaining credit following the bankruptcy proceeding. The piece highlights the true nature of a bankruptcy proceeding and argues that it ensures protection of creditors’ interest. Therefore, the pessimistic view of such proceedings in Talca case is not sustainable. Adjudication on players’ claim by CAS following bankruptcy proceeding would tend to interfere with the latter and would violate the primacy provided to national proceedings in the FIFA regulations. Nevertheless, there can be situations where bankruptcy procedures are employed to evade financial responsibilities. For these rare instances, CAS has rightly carved out two exceptions where the creditor has the right to claim their remaining credit from the new club in the interests of fairness and justice.
Author’s bio:
Arunoday Rai is a third-year law student at National Law School of India University, Bangalore
RMLNLU Arbitration Law Blog 