Why did Coventry City FC’s State aid claim fail?

In this article, Marc Delehanty analyses and reflects on the recent State
aid decision relating to Coventry City FC’s previous stadium, the Ricoh
Arena.

The High Court recently handed down judgment in a challenge brought by the owners of Coventry City Football Club (“Coventry”) against the legality of a £14.4m loan that Coventry City Council (the “Council”) provided to the leaseholders of the Ricoh Arena (“ACL”) – the stadium that Coventry used to play its home games at until 2013.

 

The claim failed; Hickinbottom J held
that provision of the loan was lawful. The action was by way of a
judicial review of the decision of the Council – a public body – to make
the loan and the main substance to the challenge was that the loan
amounted to State aid (i.e., subsidy) within the meaning of Article 107(1) of the Treaty on the Functioning of the EU (“TFEU”).
Any such State aid would have had to have been notified to the European
Commission in advance, as required by Article 108(3) TFEU.

 

Essentially, the claim was that a
rational private investor in the shoes of the Council would not have
made the loan in the amount and on the terms (fixed interest rate of 5%
and a 41 year term) agreed with ACL.

 

The background to the provision of the
loan is the sorry tale of Coventry’s decline following its 2001
relegation from the Premier league (losing to Aston Villa on the final day of the season after taking a two-goal lead).

 

Before that had happened, Coventry had entered into a joint venture with the Council to develop a new stadium, the Ricoh Arena.
The Council was the freeholder of the stadium and ACL, the joint
venture vehicle, was the long leaseholder from whom Coventry itself
would take a lease. Coventry owned half of ACL but a few years after
their 2001 relegation it sold its interest in ACL, encompassing the
right to stadium revenues, to relieve financial pressure (see paragraph 9
of the Judgement). Nevertheless, the development of the Ricoh Arena
went ahead and Coventry began to play home games there from the 2005-6
season.

 

The dispute over the loan in question
was precipitated by Coventry’s ever worsening financial situation
leading up to their catastrophic relegation to League One in 2012. The
judge found that Coventry “had been seriously mismanaged”.
The club’s owners wanted access to the much needed stadium revenues. It
was thought that if ACL were in financial difficulty it would weaken
ACL’s position and allow the stake in ACL – with the attendant revenues –
to be reclaimed a cut price. With this in mind, Coventry went on rent
strike from April 2012. This caused acute difficulties to ACL.

The way out for ACL was the loan from
its 50% shareholder, the Council. This scuppered the owners’ plan.
Ultimately, ACL got judgment for rent arrears and applied to put
Coventry into administration. Its assets were sold by the administrator
and the club was then put into liquidation. The owners wrote-off a £50m
investment. The reconstituted club currently plays its home games in Sixfields Stadium in Northampton (shared with Northampton Town FC).

 

Had the owners succeeded, a favourable judgment would have founded the basis for them recovering some of their losses.

However, in finding that the loan did
not constitute State aid, Hickinbottom J noted the EU caselaw that
private investors can be guided by a longer-term view of profitability.
It was not irrational to loan money to ACL despite it failing because on
the specific facts of the case, “the failure of [ACL] was temporary, brought on by the refusal of [Coventry] to pay any rent”.
The judge also took into account that the Council was not a
disinterested investor but an investor with a 50% stake in ACL and so
with an interest in ensuring a restructuring of ACL’s business. Although
by 2012 the stadium had significantly depreciated in value, he
preferred ACL’s valuation of the lease of the stadium.

The judge found that the major driver
for the Council was the protection of its commercial interest in ACL;
indeed, the owners did not pursue all of their original claims
concerning alleged ulterior motives of the Council vis-à-vis the club’s
owners.

 

While the judgment necessarily focused
on the State aid law argument, in his 46 page ruling, Hickinbottom J
clearly sets out the complex financial arrangements that were put in
place (and subsequently unravelled) and the commercial manoeuvrings
relating to Coventry’s move from Highfield Road stadium and the
operation of the Ricoh Arena. The judgment repays reading for anyone
interested in the financial structures underpinning a modern football
club and the machinations involved in exercising control over its
revenues.

A key lesson for those negotiating
commercial contracts for football clubs that emerges from the factual
background is to craft the terms so as to ensure that the effect of
unwelcome contingencies, such as relegation, are taken into account.