“Phoenixing” and “Zombieing” in the Eastern European sports industry and players collective action as the only viable response | In Principle

“Phoenixing” is a term coined to describe a situation in which stakeholders of an organization which becomes insolvent transfer its operations to a different entity, which continues them while ignoring the predecessor’s debts.

The practice is illegal, because it harms creditors. Rather than being transferred to a fresh entity, the insolvent party’s business should either be restructured under the creditors’ control, so that it can repay them, or sold to the highest bidder, so that creditors can be paid from the proceeds.

Yet phoenixing is apparently common in the sports industry. At least in some jurisdictions. Reportedly, it is quite frequent for bankrupt sports clubs in Eastern Europe to simply cease trading and then re-emerge as essentially the same going concerns, but under the umbrella of a new legal form, with a clean slate.¹

There are several reasons for this.

First, the main victims of the practice are players, who are a dispersed group facing prohibitive challenges when trying to pursue their rights on an individual basis. And although this is changing quite dynamically, there is no tradition in continental sports of strong players associations. Unlike in the American, market-driven model, where sports underwent the process of unionization like any other industry, in Europe the sport federations, which are essentially associations of employers (the clubs) are also meant to look after players’ rights. When they fail to do this – which they inevitably do, given the conflict of interests – the players are left on their own. And the duration and cost of individual legal proceedings can be discouraging even for those among them with the most undisputable claims, due to their, usually, small individual volume.

Second, law enforcement agencies, normally tasked with protecting the interests of dispersed groups of individuals, who are unable to effectively enforce their rights on an individual basis (e.g. consumers or employees), use the autonomy and specificity of sports as a pretext for non-intervention in the sports industry. And they are often not particularly motivated to intervene in the first place, given the important role played by the state and state companies in the organization of European sports and the obvious conflict of interest which arises from this.

Finally, sport organizations (clubs, federations and leagues) often do not have much in terms of equity. Instead, they often hire the facilities they need to operate from state or municipal entities and rely heavily on state or state-company subsidies to finance their continuing  operations. These “venue hirers” and “providers of working capital” do not extend their helping hand to sport organisations out of charity. They benefit from their operations image-wise and politically. And they see their engagement as risk-free – in case of trouble, they can just hire a stadium out and provide working capital to a fresh entity, retaining its key “asset” – the fans’ following – but not worrying about payment of the original organization’s debts. The fans and members of the community do not notice the difference anyway.

As a result, when a sport organization stops paying its creditors, the main victims have a prohibitively hard time in pursuing their rights, the law enforcement agencies are uninterested in assisting them, and there is not much chance for a successful remedy anyway, because the main beneficiaries of the sport organization’s business are not engaged in it on an equity-basis, at least not in the traditional sense. They are – or at least feel – out of reach of legal liability, and can easily withdraw and shift their engagement to continue to derive the same benefits with a fresh entity on the basis of the predecessor’s main “asset”, which is the fans’ following.

Polish ice-hockey is a good example.

Several members of the national ice hockey team are claiming 2 years-worth of compensation from the Polish Ice Hockey Federation for attending training camps and international tournaments. According to the players, for whom this compensation is the only source of any direct income from training and playing for the national team, because the rights to their images as members of the national squad are transferred to the Federation free of charge as a matter of law, the Federation had been putting them off with promises of forthcoming payment, but has recently denied their claims altogether in disregard for earlier statements. The Federation is now in such dire financial straits that it is difficult to anticipate that it might be able to repay the debt anytime soon in any case, even if it were to accept it. Reportedly, it has close to PLN 16 million of other uncovered liabilities – most significantly towards the Minister of Sports and Tourism for repayment of allegedly misused subsidies. Its bank accounts have been seized by a court bailiff.

The Minister, who is supposed to supervise Polish sport federations according to the law, has refused the players’ request to intervene even merely as a mediator in their dispute with the Federation, calling this a “dispute about sporting rules” and invoking sport autonomy to justify this refusal. Whereas the players’ efforts to unite and pursue their claims collectively in common courts are met with the Federation’s objections, which are essentially seeking to push the players into a “legal no-man’s land”, with arguments that when playing for the national team they are neither entrepreneurs nor employees and cannot, therefore, be represented by an association in court proceedings (whereas both, employees and physical persons conducting economic activity can, under Polish law).

The Federation is still essentially continuing business as usual, despite its financial ruin, although through proxy-entities. The Minister of Sports and Tourism and the state-owned companies continue to sponsor the national ice hockey team, which the Federation has the exclusive right to summon and manage, and to present themselves as supporters of the discipline to the general public. Yet the way in which this is done is devised to make sure that the Federation’s creditors would not be able to access the funds essentially being made available to finance the Federation’s main activity. The national team is still being summoned by the Federation, but its management has been entrusted to the Polish Olympic Committee on the basis of agreements between the Federation, the Polish Olympic Committee and the Minister of Sports and Tourism. The funds are thereby funnelled in a way which ensures that only the expenses needed to finance the continuing  operations of the Federation are paid from these, and not the overdue claims of the Federations’ creditors.

This ingenious strategy should be described as “zombieing” rather than “phoenixing”. This is still a ramification of the same problem – the feeling of impunity based on a perverse understanding of the autonomy and specificity of sports. Quite tellingly, the scheme is applauded in the media for salvaging the Polish ice hockey squad as a national asset². Nobody seems to care that the Federation is a “living dead” which is “kept walking” for the benefit of some, at the expense of the unpaid players and other unpaid creditors. This practice blatantly violates the ideals on which sport is meant to be based – fair play and honourable rivalry. In accordance with these values, the Federation and the Minister of Sports and Tourism should have an honest and respectful discussion with all the Federation’s creditors and should at least try to agree to an arrangement which would ensure as swift as possible a repayment of their debts, while salvaging the national team at the same time; especially since the players at least have been showing patience and good will. Instead, the unpaid players are being criticized in the media for finally demanding respect for their rights. This is being described as presenting the Federation with an “ultimatum”, and they are being sent to pursue their claims through the courts, where hurdles are being thrown under their feet.

There is only one possible response to this – players unite! As a matter of human rights, the players must be able to establish organizations which could effectively protect their rights in situations like this or in common cases of wage theft, which, according to various reports, is particularly pervasive in the sports industry, even in developed sport markets³.

According to the established case law of human rights courts⁴, it is every person’s right to establish and join associations for the protection of their interests and to have those associations furnished with rights and prerogatives necessary for their effective operation. In case of such dispersed groups as professional players, this means first and foremost the right to be heard, to protest and to pursue collective redress against their more concentrated and therefore more powerful partners (clubs, federations and leagues), including the right to representative action in court.

The realization that the right to representative court action is a necessary guarantee of effective pursuit of other rights for some social groups has been maturing in Europe at the national and at the EU level for years. It finally found its way to the proposed EU-wide legislation, e.g. in the “Representative Action Directive”⁵, which is meant to protect consumers, or the draft regulation on “Fairness and transparency for business users of online intermediation services”⁶, which encourages representative action by associations of business users of online platforms. Trade union rights to take representative action on behalf of workers have been a feature of employment law for years.

It is the highest time for this to also be fully realized in the sports industry, including first and foremost in the most troubled sports jurisdictions where this is most desperately needed. After all, a sport governing body (a federation or a league) is essentially a platform business as well. Its task is to create the conditions for the real service providers – the players – to perform them, and for the fans to consume them. The SGB, therefore, enjoys a position of power which must be kept in check⁷. And private enforcement of good governance through representative action by players’ associations is the only viable way to do this, given the public authorities reluctance to intervene. International sport federations should be encouraging and instilling good governance if they want to maintain their autonomy, which is in the interest of the entire global society⁸. The reaction of Polish courts and human rights institutions (if needed) to the efforts of the Association of Ice Hockey Players to pursue claims on behalf of Polish national team players will be an important test on where we are on this.

Stanisław Drozd, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners