Whether loan state aid

May 16th, 2016

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.

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