Sky Blue Sports & Leisure Ltd & Ors, R (On the Application Of) v Coventry City Council

A public authority may act as a market economy operator, including by refinancing a company in which it holds a substantial shareholding. The relevant comparator is a hypothetical private operator with the same characteristics and long-term commercial interests, not an incoming investor. The assessment is objective, based on information available when the decision was made and foreseeable developments. Policy considerations must be excluded when deciding whether a transaction is State aid, although they may inform the authority’s prior choice of transaction. The question is global and permits a wide margin of commercial judgment. An officers’ report need not contain every relevant detail, but must fairly and sufficiently identify the salient matters required for an informed decision.

The claimants, companies within the SISU group associated with Coventry City Football Club, challenged Coventry City Council’s decision to lend £14.4 million to Arena Coventry Ltd, in which the Council held a 50% interest. They alleged that the loan was unlawful State aid under articles 107(1) and 108(3) TFEU, that the Council had failed to take material considerations into account, and that the decision was irrational.

Permission had been granted on the State aid and irrationality grounds. A newly advanced material-considerations ground proceeded on a rolled-up basis. The central questions were whether the loan would have been made by a rational private market operator in the Council’s position and whether the councillors had been given sufficient information to make a lawful decision.

1. State aid. The loan was not State aid. The private market operator test required comparison with a hypothetical private investor having the Council’s characteristics, including its 50% shareholding in ACL and its long-term commercial interest in preserving and improving the value of that investment. A comparison with an outside lender or incoming investor was inappropriate.
2. The assessment was objective and had to be made on the information available in January 2013 and developments then reasonably foreseeable. It was a global assessment, allowing a wide margin for reasonable commercial judgment. The Council could consider ACL’s potential future profitability, cost reductions, increased revenues, the possible retention or replacement of an anchor tenant, the security available, the interest return and wider shareholder benefits. It was not necessary that the loan be fully covered by the immediate asset valuation.
3. Policy considerations had to be left out of account when determining whether the transaction was State aid. They could, however, inform the Council’s prior political choice of whether to pursue the transaction. The Council was entitled to refinance ACL rather than allow insolvency, because a rational long-term investor might regard restructuring as offering a reasonable prospect of future profits.
4. The Council’s failure to take material considerations into account was not arguable. The officers’ report fairly and succinctly described the important risks and benefits. Councillors were not deemed to know information known only to officers, but a report need not reproduce every detail or every underlying valuation. It had to be read fairly as a whole and addressed to a knowledgeable readership.
5. The irrationality ground could not survive the findings on the other grounds. The claim failed in its entirety. The application was refused on Grounds 1 and 3, and permission to proceed on Ground 2 was refused.