Sky Blue Sports & Leisure Ltd & Anor, R (on the application of) v Arena Coventry Ltd & Anor

A public transaction does not confer an advantage for state aid purposes where a comparable private economic operator could have entered into it on the same terms. The inquiry allows a wide margin for entrepreneurial judgment, including permissible optimism, calculated risk-taking and a long-term view of profitability. State aid arises only where comparable private finance was manifestly unavailable and no plausible commercial explanation remains.

The comparator must share the public body's relevant operational characteristics, including its shareholding and property interests. The assessment is objective, uses information available when the decision was made and excludes public-policy considerations. Independent expert advice is not invariably required. A transaction is not unlawful merely because another qualified adviser might reasonably have reached a different commercial judgment.

Coventry City Council owned the freehold of the Ricoh Arena and, through a subsidiary, held 50% of its operating company, Arena Coventry Ltd. Following the football club's withholding of rent, the operating company defaulted on its bank borrowing. The Council resolved to lend it £14.4 million on commercial interest terms, secured against its assets, thereby enabling the bank debt to be discharged.

The appellants sought judicial review on the ground that the loan was unnotified state aid contrary to Articles 107 and 108(3) of the Treaty on the Functioning of the European Union. Hickinbottom J dismissed the claim in [2014] EWHC 2089 (Admin), holding that the loan fell within the permitted margin of commercial judgment. The appeal concerned whether that evaluation rested on demonstrably erroneous findings or fell outside the bounds of reasonable decision-making.

1. The appeal was dismissed unanimously. The appellants had not come close to showing that the judge's conclusion was impermissible. His findings were supported by the evidence and his overall evaluation remained within the bounds of reasonable decision-making.

2. The judge had incorrectly treated the market economy operator inquiry and distortion of competition as the same issue. They are distinct cumulative elements of Article 107(1) of the Treaty on the Functioning of the European Union. The error did not affect his essential analysis because he had separately undertaken the correct inquiry: whether a comparable private investor could have been prompted to enter the transaction.

3. The market economy operator principle allows a wide margin of entrepreneurial judgment. It was insufficient to show that the loan differed from ordinary market expectations or that a prudent investor would not ordinarily have made it. The relevant question was whether the transaction was commercially conceivable for a rational private operator. State aid would arise only where comparable facilities were manifestly unavailable and no plausible explanation remained other than the provision of aid.

4. The hypothetical comparator had to share the Council's relevant characteristics. It was therefore a private operator that owned the Arena's freehold, had invested in its development and held 50% of the operating company. Such an operator could adopt a long-term view, accept calculated risk and seek to preserve an undertaking reasonably capable of returning to profitability. Public-policy benefits had to be excluded from the comparison, but the existence of political motives did not make an otherwise commercially explicable transaction state aid.

5. The Council had an adequate contemporaneous commercial basis for its decision. Its business plan indicated that the operating company could service the loan even without rent from an anchor tenant. The Council could also consider the commercial interest rate, security, anticipated future profitability, its freehold and shareholding interests, interest income and acquisition of the remaining car park interest. The plan's assumptions were optimistic in places, but they were not demonstrably irrational.

6. Comparable economic evaluation did not invariably require independent expert advice. The sophistication required depended on the transaction. Independent advice might corroborate an assessment, but the appellants could not establish state aid merely by showing that other qualified advisers might have reached a different view.

• Court of Appeal (Civil Division): In [2016] EWCA Civ 453, the court unanimously dismissed the appeal and upheld the conclusion that the loan was not state aid.
• High Court, Administrative Court: Hickinbottom J dismissed the judicial review claim in [2014] EWHC 2089 (Admin). He held that the loan fell clearly within the wide margin of judgment permitted by the market economy operator principle and was not state aid.