Has the Court of Appeal loosened the shackles of State aid for projects and transactions involving public sector financing?

Court of Appeal confirms that loan by local authority was not State aid

The Court of Appeal of England and Wales upheld a High Court judgment that a loan granted by Coventry City Council to the leaseholder of the Ricoh Arena did not amount to State aid.

The crux of the Court of Appeal’s ruling was the application of the so-called Market Economy Operator (MEO) principle. The Court considered whether, in granting the loan, the Council acted as a rational private market investor would have done. It is established law that where a public body acts in a way that corresponds to normal market conditions, the transaction cannot be regarded as State aid under Article 107(1) of the EU Treaty.

The Ricoh Arena is currently the home stadium of Coventry City Football Club and Wasps Rugby Club, and has a capacity in excess of 30,000. Back in 2013, the Council in this case granted a loan of £14.4 million to the leaseholder of the Ricoh Arena, Arena Coventry Limited (ACL). At the time, the Council owned 50% of ACL. The loan was made to support ACL during a period when its primary tenant, Coventry City FC, fell into financial difficulties and so was unable to pay rent.

The Court concluded that, in comparable circumstances, a private market investor in the same position of the Council “might have” granted the loan to ACL, on the same terms, rather than allowing it to go into administration. On this basis, the MEO principle applied to rule out any State aid in favour of ACL.

The Court’s ruling on the application of the MEO principle is particularly relevant for organisations involved in the award or receipt of public funding – particularly debt finance from public sources – because of its emphasis on the “wide margin of judgment” that a public authority should be afforded in determining whether factors including the amount of the loan, security, term, interest rate and rate of return are sufficiently proximate to what a commercial investor or lender would accept.

Somewhat surprisingly, the Court concluded that being out of line with what would be expected to be available in the market does not imply State aid. On the contrary, as explained by Lord Justice Tomlinson: “The test is rather whether [a private investor] could have been prompted to do it, because it is only when such conduct can be entirely ruled out as inconceivable that the only remaining plausible explanation for the provision of the [public] funds is that it must be regarded as State aid.”

This appears to be a relatively generous interpretation of EU case law and guidance on the MEO principle, and it will be interesting to see whether future rulings at EU level confirm, or cast doubt, on the apparently high threshold for intervention set by the Court of Appeal in this case.

For the time being at least, businesses planning projects and transactions involving public sector financing or investment may feel that the State aid shackles should be loosened.