Footballers are well paid, but are certainly not impervious to financial difficulties. There have been a number of reports of high-profile players who have been made bankrupt in recent years, and a handful of clubs that have been placed into corporate insolvency procedures.
Whilst nobody wants to contemplate the implications of this level of financial distress, being financially savvy is an indisputably important life skill – irrespective of the level of earnings and wealth involved. Indeed, the well paid have more to lose; and for footballers, financial troubles bring an added risk of detrimental media attention.
Recently, the bankruptcy of former Rangers player, Barry Ferguson, has attracted a great deal of media attention. In particular, reports have commented on the transfer of a "luxury mansion" into Mr Ferguson's wife's name, six years before the bankruptcy. But why is this alleged transfer newsworthy? It actually illustrates some fundamental aspects of insolvency law and practice that are not often considered until it is too late and, in this regard, provides a cautionary tale.
When a person is made bankrupt (by his/her own volition or by a creditor), a Trustee in Bankruptcy is appointed. The Trustee's function is to investigate, recover and realise the assets of the bankrupt's estate, and distribute the realisations to the bankrupt's creditors in accordance with the Insolvency Act 1986 ("Act"). To fulfil this function, the Trustee has a number of statutory powers. For example, the Trustee can seek a Court Order compelling the provision of information relating to the bankrupt's affairs – and such an order can be made against the bankrupt, their spouse or anyone who appears to be able to give such information. Also, the Act provides the Trustee with a number of ways in which to challenge transactions that were entered into by the bankrupt in the years which preceded the commencement of the bankruptcy procedure. Life, pre-bankruptcy, is under scrutiny. Arising from that scrutiny, litigation may be pursued by the Trustee.
Commonly, Trustees would look for instances where:
- During the five year period pre-bankruptcy, when the person was "technically insolvent", there was a disposition of an asset for less than the full value of the asset or for no value at all –
e.g. Person "A" gifts an asset to a family member at a time when A was having financial difficulties severe enough to meet the requirements for the insolvency test in the Act.
- During the five year period pre-bankruptcy, when the person was "technically insolvent", a creditor was paid ahead of other creditors -
e.g. Person "A" pays a debt owed to a close friend, when A also owed other debts, and when A's financial position was such that the requirements for technical insolvency under the Act were met.
- At any time pre-bankruptcy (irrespective of the person's financial position at the time), a transaction was entered with the intention of putting assets beyond the reach of creditors -
e.g. before entering a high risk-investment, person "A" transfers a property to a family member, with the intention that, should the investment go badly, the property will not form part of A's bankruptcy estate and will therefore be beyond the reach of creditors.
These are examples of what are known as "antecedent transactions".
The Act provides for statutory causes of action that the Trustee may pursue against the recipient of the payment or disposition, seeking an order that the bankruptcy estate be restored to the position that it would have been in, had the transaction not been entered. Conceptually, the transactions should not have been entered as they reduce the value of the bankruptcy estate and thereby undermine the recourse available to the bankrupt's creditors. Accordingly, and in the interests of the bankrupt's creditors, the Trustee may seek to undo what has been done by bringing proceedings.
Such claims are complex and involve the application of detailed statutory criteria. However, the basic principles outlined above demonstrate the importance of considering the implications of bankruptcy when undertaking any financial structuring and/or wealth management transactions. There is a risk that such arrangements could be unravelled if bankruptcy happens at some future point, and in particular if bankruptcy happens within five years.
It is obviously important that footballers are cognisant of their financial positions before entering into transactions. Any complacency based upon earning potential, whilst understandable, is potentially imprudent. In sport, we learn to know our opponent, to prepare and to anticipate our opponent's next move. In the same way, understanding the legal and practical implications of insolvency is a constituent part of a holistic wealth management and preservation strategy.