State Aid

December 4th, 2017 by James Goudie QC in Capital Finance and Companies

The Ricoh Arena saga continues. In JR1 Coventry City Football Club’s owners, SISU, failed up to the Supreme Court in their State Aid challenge to Coventry City Council’s £14.4m loan to the company, ACL, which the Council half owned that operates the Arena. The Market Economy Investor Principle was satisfied.

SISU have now brought JR2, which is to be heard on 2/3 May 2018. This seeks to challenge as State Aid the Council’s subsequent deal with Wasps Rugby Club.  On 28 November 2017 the Court of Appeal gave interlocutory rulings, allowing SISU to amend its claim, provided that the case on State Aid was confined to the lease extension granted by the Council to ACL, and allowing the introduction of expert evidence.

 

Infrastructure projects

November 24th, 2017 by James Goudie QC in Capital Finance and Companies

The Treasury has on 22 November 2017 confirmed that it will lend local authorities in England up to £1 billion at a new discounted interest rate of gilts + 60 basis points, accessible for three years, with a maximum term of 50 years, to support infrastructure projects that are “high value for money”. Details of the bidding process are to be published in December 2017.

 

Capital finance and companies

November 13th, 2017 by James Goudie QC in Capital Finance and Companies

CLG is consulting, from 10 November to 22 December 2017, on changes to the prudential framework of capital finance, set out in the Local Government Act 2003, Regulations and CIPFA Codes, and in particular statutory guidance on local authority investments and guidance on minimum revenue provision, applying to local authorities in England.

The Statutory Guidance on Local Authority investments (“Investments Guidance”) covers proper practices that local authorities are required to follow when making investment decisions. It gains its statutory status from Section 15(1)(a) of the Local Government Act 2003, under which local authorities are required to have regard to such guidance as the Secretary of State may issue.  The Investments Guidance was last updated in 2010, following Parliamentary inquiries into local authority investments in Icelandic Banks. As a result the Investments Guidance was very focused on investments in financial institutions. Read more »

 

Corporate veil

November 1st, 2017 by James Goudie QC in Capital Finance and Companies

In Persad v Anirudh Singh [2017] UKPC 32 Lord Neuberger reaffirmed, at paragraph 17, that piercing the veil of incorporation is justified only “in very rare circumstances”.  It can be justified only where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control, as made clear by the Supreme Court in VTB Capital v Nutritek [2013] 2 AC 337 and Prest v Petrodel [2013] 2 AC 415.  Lord Neuberger further reaffirmed, at paragraph 20, that the fact that a company is a “one man company” is irrelevant: Salomon v Salomon [1897] AC 22.  It is a fallacy to suppose that the Court can pierce the corporate veil where the purpose of interposing a company into a transaction is to enable the owner or controller of the company to avoid liability.  Lord Neuberger said, at paragraph 21, that use of terms such as “front” or “alias” can too easily be invoked to justify a wrong decision.  The company has a distinct legal personality. As Lord Neuberger observed, at paragraph 22, cases such as Gilford Motor Co v Horne [1933] Ch 95 and Jones v Lipman [1962] 1 WLR 832 were distinguishable.

Not only did the person who set up the company in those cases have an existing relevant legal obligation which he was trying to avoid by entering into a transaction involving the company, but also the involvement of the company was unilaterally effected by the person concerned, without the knowledge, let alone the consent, of the other party.

 

State Aid

October 11th, 2017 by James Goudie QC in Capital Finance and Companies

There is an obligation on public authorities to recover unlawful State Aid. The nature of this obligation has been considered by Advocate General Sharpston in an Opinion delivered on 10 October 2017 in Case C-363/16, European Commission v Hellenic Republic. Read more »

 

State Aid

September 29th, 2017 by James Goudie QC in Capital Finance and Companies

For a measure to be classified as aid within the meaning of Article 107(1) TFEU, all the conditions set out in that provision must be fulfilled. First, there must be an intervention by the State or through State resources. Secondly, the intervention must be likely to affect trade between Member States. Thirdly, it must confer an advantage on the recipient by favouring certain undertakings or the production of certain goods. Fourthly, it must distort or threaten to distort competition. The application of Article 107(1) TFEU may entail a verification as to whether an entity should have been regarded as an undertaking, within the meaning of EU competition law. Read more »

 

State Aid

February 17th, 2017 by James Goudie QC in Capital Finance and Companies

Case C-74/16, Congregacion de Escuelas Pias Provincia Betania v Municipality of Getafe , is concerned with whether an exemption for a church school from a municipal tax constituted State Aid.  In an Opinion on 16 February 2017 Advocate General Kokott advises not. The school was pursuant to the church’s educational mission.  It did not constitute commercial provision.  The absence of any economic activity by the church meant that the exemption did not come within TFEU Article 107(1).  She helpfully summarised the test for State Aid as follows, based in particular on the Altmark Trans case:-

“62.    Under Article 107(1) TFEU, ‘save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’. Read more »

 

State Aid

November 30th, 2016 by James Goudie QC in Capital Finance and Companies

The Supreme Court (Lords Mance, Wilson and Hughes) on 28 November 2016 refused the application for permission to appeal in R (Sky Blue Sports and Leisure Ltd) v Coventry City Council (2016) EWCA Civ 453.  This was because the application does not raise an arguable point of law of general public importance which ought to be considered at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal.

 

Structural funds

July 15th, 2016 by James Goudie QC in Capital Finance and Companies

Case C-460/14, brought by the City of Wroclaw in Poland, concerns the award of a public contract for the construction of a ring road in Wroclaw. The project benefited from EU financial assistance. The City stipulated in the tender specifications that the successful tenderer was to perform at least 25% of the works covered by the contract using its own resources. The public authority in Poland competent to verify proper use of the EU funding took the view that that stipulation infringed the principle of fair competition and therefore was inconsistent with Directive 2004/18/EC.  As a consequence, that authority imposed on the City a flat rate correction of 5% of the amount of eligible costs borne by public funds. The City challenged the financial correction before a Polish Administrative Court, which made a reference to the ECJ.

Directive 2004/18 coordinated at EU level national procedures for the award of public contracts above a certain value.  It aimed to ensure the effects of the principles of freedom of movement of goods, freedom of establishment, and freedom to provide services and the principles deriving therefrom, including the principles of equal treatment, non-discrimination and transparency. It also aimed to guarantee the opening-up of public procurement to competition. The Directive contained provisions on subcontracting, in order to encourage the involvement of small and medium-sized undertakings in the public contracts procurement market.  Pursuant to the first paragraph of Article 25 (“Subcontracting”), in the contract documents, the contracting authority might ask or may be required by a Member State to ask the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. Under Article 26 (“Conditions for performance of contracts”), contracting authorities might lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

Article 1(1) of Council Regulation No. 2988/95 provides: “For the purposes of protecting the European Union’s financial interests, general rules are hereby adopted relating to homogenous checks and to administrative measures and penalties concerning irregularities with regard to EU law”. Article 1(2) defines “irregularity” as “any infringement of a provision of EU law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the European Union or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the European Union, or by an unjustified item of expenditure”.  Article 2 provides in particular that administrative checks, measures and penalties shall be introduced in so far as they are necessary to ensure the proper application of EU law. They shall be effective, proportionate and dissuasive so that they provide adequate protection for the European Union’s financial interests.

Regulation No. 1083/2006 lays down general rules governing the Funds, i.e. the European Regional Development Fund, the European Social Fund and the Cohesion Fund, including principles and rules on financial management, monitoring and control on the basis of responsibilities shared between the Member States and the European Commission.

In its Judgment on 14 July 2016 the ECJ held that Directive 2004/18 prohibited a contracting authority such as the City of Wroclaw from stipulating that the successful tenderer for a public works contract was required to perform part of those works, specified in abstract terms as a percentage, using its own resources; and that Article 98 of Regulation 1083/2006, read in conjunction with Article 2(7) of that Regulation, must be interpreted as meaning that the fact that a contracting authority imposed a requirement, in the context of a public works contract relating to a project receiving EU financial aid, that the future contractor perform by means of its own resources at least 25% of those works, in infringement of Directive 2004/18, constitutes an “irregularity” within the meaning of Article 2(7) of that regulation, justifying the need to apply a financial correction under Article 98 thereof, in so far as it cannot be excluded that that infringement had an impact on the budget of the Fund at issue. The amount of that correction must be calculated by taking into account all of the specific circumstances which are relevant in the light of the criteria referred to in the first paragraph of Article 98(2) of that Regulation, namely the nature and gravity of the irregularity and the resulting financial loss to the Fund concerned.

 

Whether loan state aid

May 16th, 2016 by James Goudie QC in Capital Finance and Companies

There will be no State Aid by a public authority if a rational private investor might have entered into the transaction on the same terms, having regard to the foreseeability of obtaining a return and leaving aside all social and policy considerations. Where the authority acts in a way that corresponds to normal market conditions, the transaction cannot be regarded as State Aid.  This is the market economy investor principle.

The principle has been considered by the Court of Appeal in R (Sky Blue Sports & Leisure Ltd) v Coventry City Council (2016) EWCA Civ 453.  The Court of Appeal held that a loan of £14.4 million by the City Council was not State Aid.

The loan was to a company that was at the time the City Council’s half-owned subsidiary, which operates the Richoh Arena, which contains the Stadium where Coventry City Football Club and now also Wasps Rugby Club play. A commercial interest rate in accordance with EU Commission guidelines was charged, the loan was in other respects on commercial terms, and there was a realistic prospect of the City Council’s shareholding in the company acquiring significant value. There was no selective advantage for the company.  A private investor in the position of the Council would not have focussed exclusively on the loan to value ratio.

Tomlinson LJ observed that the analysis of risk involved in the application of the market economy investor principle requires public undertakings, like private undertakings, to exercise entrepreneurial skills which, by the very nature of the problem, implies a wide margin of judgment on the part of the investor: paragraphs 11, 16, and 23-29, especially 25.