On the 13 May, the Court of Appeal in R (Sky Blue Sports & Leisure Ltd & Ors) v Coventry City Council upheld a High Court judgment which found that a £14.4m loan by Coventry City Council to a subsidiary company it jointly owned did not constitute State aid.

Applying the market economy operator test, the Court of Appeal agreed with the High Court’s finding that a hypothetical rational private investor in the same position as the Council might have made the loan to its own subsidiary on the same terms, rather than letting the subsidiary go into administration. As the Council acted in a way that corresponds to normal market conditions, the transaction cannot be regarded as State aid. In particular, the courts noted that in the circumstances:

  • the Council was entitled to take the view that the subsidiary was capable of repaying the loan over the course of the loan term and that there was adequate security for the loan;
  • it was reasonable for the Council to accept a 41 year term for the loan;
  • the interest rate was in line with the European Commission’s proxy for the market rate; and
  • there was no other viable alternative available to the Council.

The case is a reminder to public authorities that State aid issues need to be considered when they are offering loan financing, even if it is to a subsidiary company. However, like private operators, public authorities have a wide margin of discretion when investing in a subsidiary company. If it can be shown that a rational private investor, in the same circumstances, might have invested on the same terms then the investment will not be regarded as State aid.