Clear blue sky for rescue investment: the High Court’s decision in R(Sky Blue Sports) v Coventry CC

  1. The High Court has now given judgment on the claim by Sky Blue Sports (“SISU”) against Coventry City Council (“Coventry”) (R(Sky Blue Sports) v Coventry CC [2014] EWHC 2089 (Admin)). SISU claimed that Coventry’s decision to lend £14.4 million to ACL, the long lessee and operator of the arena used by Coventry City Football Club (“CCFC”) amounted to unlawful State aid.
  2. Although a number of other grounds for judicial review were advanced, the heart of SISU’s claim was the allegation of State aid. And, in turn, the central issue in State aid terms was whether Coventry was acting in accordance with the market economy investor principle (“MEIP”): Coventry said that it was acting in accordance with the MEIP, on the basis that it owned 50% of the shares in ACL and that the loan was one that a private investor with the same shareholding would also have made.
  3. The litigation took place against what was plainly an acrimonious background. CCFC was owned by SISU: and it appears that SISU had been attempting, as part of its strategy to protect its investment in CCFC (which had not been performing well on the football field), to acquire ACL at a knock-down price. As part of that strategy, CCFC had gone on a rent strike, thereby reducing the value of ACL and placing ACL in a position of financial vulnerability (since it was unable, without rent, to service its bank loans).
  4. Hickinbottom J roundly rejected SISU’s case that the loan was not in accordance with the MEIP: he held that it was made in accordance with the MEIP and hence was not State aid.
  5. Although the law relating to MEIP was not in dispute, a number of interesting points emerge in his analysis of the MEIP issue.
  6. First, although he accepted that a private investor with no shareholding in ACL would not have made a loan of £14.4m, that was not the question before him: he had to compare Coventry’s decision with that of a putative commercial investor which did own 50% of ACL. That point is clearly right.
  7. Second, the Judge discounted a number of contemporaneous statements made by Coventry to ACL’s bank as to the value of ACL (and as to its thinking on the reasons for supporting it) on the basis that Coventry had every incentive in those negotiations to “talk down” the value of ACL and to play down commercial arguments for Coventry to support ACL itself. This is a point well worth bearing in mind: advisers often say (usually correctly) that contemporaneous evidence is particularly valuable in deciding whether or not the MEIP applies – and in general it is worth making sure, if MEIP is to be relied on, that there is a contemporaneous record of the thinking that led to the decision. But not all contemporaneous evidence is necessarily of great weight, and, as always in litigation, attention has to paid to the surrounding context of any statement to see how valuable it is likely to be as evidence of the true thought-process lying behind the decision.
  8. Third, in assessing whether the interest rate charged was in accordance with the MEIP, the Judge noted that the rate was in the same range as the rate set out in the 2008 Commission Communication on the Revision of the Method for Setting the Reference and Discount Rates: he noted that both the Commission and the ECJ appeared to give considerable weight to that Communication.
  9. Fourth, the Judge was not influenced by evidence that Coventry took into account wider public benefits than a purely commercial investor would have taken into account. It was obvious, he thought, that Coventry would base its decisions on its political objectives and its duties to promote the interests of the people living in its area. It would not have made the loan if it had not thought that those objectives and duties would not be advanced. But none of that meant that the MEIP did not apply: even if Coventry also took other objectives into account, the MEIP was satisfied as long as it was the case that a private investor without those objectives could have made the same decision: and the Judge concluded that it could. Since decisions of this kind by local authorities are always (and rightly) taken in a political context, and have to be justified politically, the Judge’s approach is a welcome reminder that just because a decision is taken with an eye on the politics and on wider objectives does not mean that the MEIP will not apply.
  10. Finally, the Judge did not accept the criticism that Coventry failed to obtain an independent report into whether a private investor would have made the loan or that it asked for a business plan from ACL somewhat late in the day: Coventry had had advice from PwC, and the Judge felt that it had done the best it could in the pressing circumstances of the case. This point is welcome confirmation that courts will not expect perfection when deciding whether or not the MEIP applies, and will take into account the often accelerated timetable in which such decisions have to be taken.



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