Contract – Loan – State aid – Respondent local authority owning freehold of arena site – Arena operating company holding sublease – Operating company experiencing financial difficulties and defaulting on bank loan – Respondents making loan to operating company to repay bank and safeguard sublease – Whether loan constituting state aid such that unlawful for respondents to make loan without reference to European Commission – Appeal dismissed
The respondent council was the freehold owner of the site of the Ricoh Arena in Coventry. The arena comprised a high-quality sports stadium, which was used as a venue during the 2012 Olympic Games and which could also host concerts, plus an exhibition hall, conference suite, hotel, casino and health spa. The stadium was the home of Coventry City Football Club.
The arena site was subject to a 50-year lease in favour of the developer of the arena, who had, in turn, sublet it for a similar term to the arena’s operating company, in which the respondents had a 50% shareholding. The sublease gave to ACL the option of paying either an annual rent of £1.9m or a one-off premium of £21m. ACL had chosen the latter option, which it funded by taking out a bank loan for £22m in 2006, repayable over 23 years.
The football club occupied the stadium pursuant to a licence granted by ACL in 2006 for a period of 25 years; it also held a sublease of offices at the stadium. The overall payment to ACL in licence fee and rent was roughly £1m pa. However, the football club did not prosper; over the years, it was relegated from the Championship to Football League Division One, resulting in a significant loss of income. In 2012, the club’s payments to ACL ceased.
That, in turn, meant that ACL was unable to meet its loan repayments to the bank, which accordingly served a notice of default under the loan agreement. The bank had extensive security and step-in rights under the loan agreement, with the result that the operating sublease of the arena was at risk.
In those circumstances, the respondents resolved in January 2013 to make a loan of £14.4m to ACL, enabling it to pay off the bank, safeguarded the operating sublease of the arena and, in the respondents’ view, protected their interests and the value of their shareholding in the operating company. The loan was repayable over a term of nearly 41 years, similar to the unexpired term of the sublease, at an interest rate of 5% for the first five years and variable thereafter, and it was secured by a charge over the sublease. The annual payments were considerably less than ACL had been making to the bank and the deal was more favourable to ACL than a restructuring deal that the bank had offered.
The appellants brought judicial review proceedings to challenge the lawfulness of the loan. They contended that it amounted to state aid in terms of article 107 of the Treaty on the Functioning of the European Union which, by reason of article 108(3), was incapable of lawful implementation without notification to the European Commission. That claim was dismissed in the court below: see [2014] EWHC 2089 (Admin). The appellants appealed.
Held: The appeal was dismissed.
(1) So far as the judge’s conclusions involved an assessment of a number of different factors that had to be weighed against each other, and where such assessment or evaluation was a matter of degree on which different judges could legitimately differ, the Court of Appeal should proceed with great caution and only interfere with the judge’s evaluation if it fell outside the bounds of reasonable decision-making: Assicurazioni Generali SpA v Arab Insurance Group (Practice Note) [2002] EWCA Civ 1642; [2003] 1 WLR 577 and Datec Electronic Holdings Ltd v United Parcels Service Ltd [2007] UKHL 23; [2007] 1 WLR 1325 applied.
(2) The characteristics of state aid were that: (i) there was a selective advantage in favour of certain undertakings or the production of certain goods; (ii) state resources were used; (iii) the aid distorted or threatened to distort competition; and (iv) it affected trade between member states.
A “selective advantage” for that purpose was any economic benefit that an undertaking would not have obtained under normal market conditions, in the absence of state intervention. It was necessary to determine whether the state had granted an advantage to an undertaking by not acting like a market economy operator with regard to a certain transaction. That required an assessment of whether, in similar circumstances, a private investor of a comparable size operating in normal conditions of a market economy could have been prompted to make the investment in question.
The analysis of risk involved in the application of the “market economy investor” principle required public undertakings, like private undertakings, to exercise entrepreneurial skills. Owing to the very nature of the problem, a local authority was afforded a wide margin of judgment when making an entrepreneurial investment decision. An investment would be state aid only where there were no objective grounds reasonably to expect that an investment would give an adequate rate of return that would be acceptable to a private investor in a comparable private undertaking operating under normal market conditions. For that purpose, it was not enough that the terms of the transaction in question were out of line with what would ordinarily be expected to be available in the market. Many prudent investors were moved to trade risk for reward. The touchstone was not that a prudent investor would not ordinarily be expected to have entered into the transaction; the test was rather whether an investor could have been prompted to do it, because it was only when such conduct could be ruled out entirely as inconceivable that the only remaining plausible explanation for the provision of the public funds was that it had to be regarded as state aid: Proceedings relating to Déménagements-Manutention Transport SA (Case C-256/97) [1999] ECR I-3913 applied.
(3) The loan extended by the respondents to ACL would only be state aid if it would not have been entered into, on the terms in fact agreed, by any rational private market operator in the circumstances of the case. The notional private investor here was: (i) the freeholder of the arena; (ii) had invested sums in the development of that arena; and (iii) had a 50% shareholding in ACL, which, even if it had no value as at January 2013, was not without reasonable prospect of acquiring value and delivering a return in the future. That prospect was not to be analysed without reference to permissible optimism, nor to the exclusion of calculated risk-taking, unless the risk was one that no prudent investor would conceivably countenance: Neue Maxhütte Stahlwerke GmbH v European Commission [1999] ECR II-17 applied.
(4) The appellants could not show that the loan was state aid by pointing to possible flaws in the respondent’s business plan. Flaws in the assumptions underlying a business plan might assist in showing that there was no plausible explanation for the provision of public funds other than considering them as state aid. However, if the reasonableness of the assumptions was a matter on which views might legitimately differ, or which were dependent on the degree of optimism that it was considered appropriate to attribute to the hypothetical MEO, then it did not advance the appellants’ case to show that a different view could have been taken. Assuming that the assumptions in the business plan were optimistic, it was still not possible to conclude, on the strength of mere assertion, that no MEO could have considered it reasonable to assess the future profitability of the arena operating company (ACL) on the basis set out in the business plan.
(5) Further, the respondents had not been obliged to seek independent advice before entering into the loan transaction. It was not compulsory to seek independent advice in order to satisfy the MEO principle, although it might provide corroboration of the credibility of the assessment. In any event, it was the function of the respondents’ professional officers, such as their director of finance, to provide independent advice to the elected members of the council
(6) The judge had been entitled to conclude that he could not rule out the possibility of a private market operator entering into the loan transaction. Although the value of the operating company was less than the amount of the loan, a private investor in the position of the respondents would not focus exclusively on the loan-to-value ratio. An MEO would also have regard to the rate of return on the proposed loan. It was accepted that the interest rate charged by the respondents was commercial in nature and satisfied the relevant commission guidelines. The cash injection that the loan represented was, in the overall scheme of things, a relatively modest sum, but, according to the business plan, produced a situation in which, after losing money for several years, the operating company would return to profitability in the following year. The injection of working capital was plainly carefully judged. Since it was an integral part of the proposed overall loan, it was entirely in accordance with prudent business practice for the putative 50% shareholder MEO to assess the revenue generating potential of the business with the benefit of the whole of the proposed facility. The business plan indicated that, over the ensuing three-year period, ACL could meet the proposed loan repayments irrespective of whether it received any rent either from the football club or from any other anchor tenant of the stadium. Moreover, it was also highly relevant to the decision to make the loan that, in the event that ACL failed, the lease would revert to the respondents rather than to a third party, and that the respondents, with the benefit of their freehold, would be able simply to re-let the arena. In all the circumstances, the judge had been entitled to conclude that the loan was not state aid.
Rhodri Thompson QC and Nicholas Gibson (instructed by Brown Rudnick LLP) appeared for the appellants; James Goudie QC and Ronnie Dennis (instructed by the legal department of Coventry City Council) appeared for the respondents.
Sally Dobson, barrister