This is an important interlocutory judgment, which provides guidance on: (a) the legal test the Court will apply when determining whether a measure is consistent with the Private Investor Test (the “PIT”) in judicial review proceedings; and (b) what evidence the Court will allow to be admitted in order to challenge a public body’s contention that it has acted consistently with the PIT.
The case arises out of a dispute between the shareholders in Coventry City Football Club (“CCFC”) and Coventry City Council (“the Council”), relating to financial arrangements entered into between the Council and the operating company (“ACL”) that leases CCFC’s stadium (“the Arena”) from the Council.
At the time the Arena was developed, ACL was a 50:50 joint venture between the Council and the (then) owners of CCFC. In order to finance the development of the Arena a £22m loan was obtained from Yorkshire Bank (“YB”). ACL’s shareholders were later unable to service their share of the loan, which led them to sell their 50% stake in ACL to the Council. The Claimant subsequently acquired CCFC.
In 2012, the Claimant wished to effect a transaction whereby it would assume responsibility for ACL’s debts in return for receiving a 50% shareholding in ACL, which would entitle it to a direct share in match day revenues. A transaction on these terms was negotiated between the Claimant and the Council. The discussions progressed to the term sheet stage but ultimately were not concluded.
Subsequently, the Council granted ACL a £14.4m loan, with a 42 year term, at a reduced interest rate. The loan was used by ACL to repay its remaining debt to YB.
The Claimant brought judicial review proceedings against the Council’s decision to grant the loan to ACL. Amongst other things, the Claimant alleged that the loan amounted to a grant of unlawful State aid contrary to Art. 108(3) TFEU. In particular, the Claimant alleged that the loan was not consistent with the PIT because of: (i) the degree of risk involved in granting the loan, (ii) the low (allegedly non-market) rate of interest, (iii) the inadequacy of the security granted, and (iv) the term of capital repayment that was agreed.
The case came before Hickinbottom J as an application for specific disclosure and permission to rely upon expert evidence in support of the State aid challenge.
The Claimant had obtained a 45 page report on the terms of the loan from a chartered accountant who was described as “an expert valuer in the business context, including expertise in the valuation of loans”. The report was described by the Judge as setting out a “forensic” analysis as to why the terms of the loan were not consistent with the PIT: §41.
Hickinbottom J held that the expert evidence was not “relevant – and [is] certainly not necessary – for the fair and just determination of the issues with which the court has to grapple.” (§44).
The Judge based this conclusion on his analysis as to the nature of the test, and standard of review, which the Court is required to apply in judicial review proceedings when it is alleged that a measure constitutes unlawful State aid.
The Judge held that the role of the Court in applying State aid law is confined to conducting a “review” of the public body’s decision: §42. While the applicable standard review is “more rigorous” than ordinary Wednesbury irrationality the Judge emphasised that in his view: “it is not for the Court to impose its judgment as to whether a particular private investor would or would not have entered into this transaction”: §42.
The Court would therefore not enter into determining a conflict between competing experts as to whether or not a particular investment was or was not consistent with the PIT: §42.
The only reference to any external material by Hickinbottom J in support of his reasoning is a citation to §27 of the Commission’s 1993 communication regarding undertakings in the manufacturing sector (93/C307/03), which states (in relevant part):
“In turn, the Commission realises that [the] analysis of risk requires public undertakings…to exercise entrepreneurial skills, which by the very nature of the problem implies a wide margin of judgment on the part of the investor. Within that wide margin the exercise of judgment by the investor cannot be regarded as involving State aid.”
Hickinbottom J’s approach to the analysis of whether a measure is consistent with the PIT, and in particular the applicable standard of review, will obviously be welcomed by public bodies and those advising them. His approach to the admissibility of expert evidence is also of great practical importance.