Court of Appeal rules on State aid in Sky Blue No. 2


R (Sky Blue Sports & Leisure Ltd) v Coventry City Council (No. 2) [2018] EWCA Civ 2252

The Court of Appeal has this morning handed down judgment in the latest State aid challenge brought by the owners of Coventry City Football Club against Coventry City Council.

In earlier judicial review proceedings, the same Claimants had sought to challenge a loan made by the Council to its then half-owned subsidiary, Arena Coventry Ltd (“ACL”): R. (Sky Blue Sports and Leisure Ltd) v Coventry City Council (No. 1) [2016] EWCA Civ 453. ACL operates the Ricoh Arena in Coventry, where CCFC play their home games, under a lease from the Council. In those proceedings, the Claimants argued that the loan was a State aid. The High Court and then the Court of Appeal dismissed this challenge. In doing so, the Court of Appeal approved the summary of relevant legal principles set out by Hickinbottom J (as he then was) in his judgment below. Applying those principles, both Courts found that the loan was not a State aid, because a private market operator in the Council’s position might also have made the loan on the same terms.

Meanwhile, before the Court of Appeal hearing in that case, the Claimants had issued this further application for judicial review. In these proceedings, the Claimants sought to challenge the Council’s decision to extend ACL’s lease of the Arena to 250 years. That decision was taken as part of a wider transaction, in which the Council also sold its 50% share in ACL to Wasps RFC, and Wasps purchased the other 50% share from the Alan Edward Higgs Charity, for the same price.

Permission to seek judicial review was refused at an oral hearing before Singh J (as he then was) in July 2017. Singh J ruled that it was unarguable that the lease extension involved any State aid, because the Council had achieved a price consistent with an independent market valuation from KPMG (see the CoA judgment at [42]). KPMG had valued the lease extension at £0.6 to £1m, and the Council had achieved a price at the top of this range, of £1m.

The Claimants’ appeal was heard by the Court of Appeal in June 2018. In the judgment handed down this morning, McCombe LJ (with whom Sir Brian Leveson and Irwin LJ agreed) dismissed the appeal and upheld Singh J’s decision refusing permission to seek judicial review.

McCombe LJ first recognised the general legal principle that a public authority does not have to use a tender or open marketing process in every case in order to avoid granting State aid. An authority can also avoid doing so if it achieves a price that is consistent with an independent market valuation: see the judgment at [46]-[47].

His Lordship ruled that, when applying this test, the Court must focus on the assets actually sold by the authority, and the market value of those assets. In this case, the only assets sold by the Council were its 50% share in ACL, and the lease extension.

The Claimants had expressly disavowed any intention to challenge the share sale. McCombe LJ noted that this concession was “inevitable”, because the Council had achieved the same price as a direct private market comparator: the other 50% shareholder in ACL ([75]). In doing so, His Lordship affirmed a third basis on which an authority can avoid granting any State aid: if it achieves a price consistent with that of a private market operator in materially the same circumstances.

The Claimants were therefore limited to challenging the lease extension. However, His Lordship noted that they had not adduced any competing valuation of that asset ([59]). Instead, they relied on valuations of ACL’s 250-year lease of the Arena in Wasps’ hands after the overall transaction had been completed ([56]). This was not the correct approach. The State aid rules required the Court to focus on the assets actually sold by the Council, and whether it achieved a market price for those assets.

The Claimants’ approach would require the Court to include in its assessment other assets not even sold by the Council: namely ACL’s prior lease of the Arena and the Charity’s 50% share in ACL ([48]). The Claimants could not rely on valuations of those different assets to challenge the only valuation of the lease extension, which had been provided by KPMG. The Council achieved a price consistent with that valuation, and it was therefore unarguable that it had granted any State aid.

James Goudie QC and Ronnie Dennis acted for the Council, instructed by Julie Newman and Laura Stockin of the Council Legal Department.

Click here to read the judgment.