Sky Blue Sports & Leisure Ltd and Others v Coventry City Council Arena Coventry Ltd and Another (Interested Parties)

JurisdictionEngland & Wales
CourtQueen's Bench Division (Administrative Court)
JudgeMr Justice Hickinbottom
Judgment Date30 June 2014
Neutral Citation[2014] EWHC 2089 (Admin)
Docket NumberCase No: CO/4432/2013

[2014] EWHC 2089 (Admin)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

ADMINISTRATIVE COURT IN BIRMINGHAM

Birmingham Civil Justice Centre

Priory Courts, 33 Bull Street

Birmingham

Before:

Mr Justice Hickinbottom

Case No: CO/4432/2013

The Queen on the application of

Between:
(1) Sky Blue Sports & Leisure Limited
(2) ARVO Master Fund Limited
(3) Coventry City Football Club (Holdings) Limited
Claimants
and
Coventry City Council
Defendant

and

(1) Arena Coventry Limited
(2) The Alan Edward Higgs Charity
Interested Parties

Rhodri Thompson QC, Christopher Brown and Nicholas Gibson (instructed by Speechly Bircham LLP) for the Claimants

James Goudie QC, Fenella Morris QC and Ronnie Dennis (instructed by the Solicitor, Coventry City Council) for the Defendant

Conor Quigley QC (instructed by Wragge Lawrence Graham & Co LLP) for the First Interested Party

The Second Interested Party not being represented or appearing

Hearing dates: 10–12 June 2014

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Hickinbottom Mr Justice Hickinbottom

Introduction

1

The Claimants are all members of the SISU group of companies. Between them, they own Coventry City Football Club, which, from 2005 to 2013, played its home games at the Ricoh Arena in Coventry ("the Arena") under a sublease and licence from the First Interested Party ("ACL"), the leaseholder of the ground. The Defendant ("the Council") owns the freehold of the Arena, and is the ultimate owner of 50% of ACL.

2

On 15 January 2013, the Council resolved to lend £14.4m to ACL. In this claim, the Claimants seek to challenge the legality of that decision, on the grounds that (i) contrary to European Union ("EU") law, the loan amounted to State aid which was not notified to the European Commission, and (ii) contrary to domestic law, the Council failed to take into account several material considerations and, in any event, the decision was irrational in the sense that no authority could reasonably have come to it.

3

The Claimants seek an order quashing the decision, and that the Council recovers the loan and commercial interest from ACL. The Claimants also claim damages.

4

Before me, Rhodri Thompson QC with Christopher Brown and Nicholas Gibson appeared for the Claimants; James Goudie QC with Fenella Morris QC and Ronnie Dennis for the Council; and Conor Quigley QC for ACL. At the outset, I thank them for their full and helpful submissions.

The Factual Background

5

Coventry City Football Club ("the Football Club") was founded in 1883. From 1899, its home ground was at Highfield Road, Coventry. In 1917, it became incorporated; and, two years later, it was elected to the Football League. Its most successful period on the pitch was from 1967, when it was in the top flight of English football, being a founder member of the Premiership in 1992. The Club won the FA Cup in 1987.

6

No doubt buoyed by this lengthy period of success, in the late 1990s the Football Club looked to move from Highfield Road to a new stadium. In 1999, it obtained planning permission to develop a brownfield site – a former gas works – in Foleshill, North East Coventry. In 2002, the Council decided to adopt the development as part of its regeneration plans for that area, and it purchased the freehold of the site. It was intended that there would be a joint venture between the Council and the Football Club, owned 50%/50%; and the Council would lease the ground to the joint venture which would then grant a licence to the Football Club to occupy it as its home ground. ACL was to be the corporate vehicle for the joint venture. It was proposed that the new stadium would be a multi-purpose arena that, in addition to being the home of the Football Club, would stage a range of sporting and other events including concerts, with facilities including an exhibition hall and conference suites, hotel, casino and health club. As owners of half of ACL, the Football Club would have the benefit of 50% of the revenues derived from the project, including its own licence fee.

7

The Football Club was owned by Coventry City Football Club Limited ("CCFC"), a wholly-owned subsidiary of the Third Defendant ("CCFCH"), which invested in ACL through its own wholly-owned subsidiary, Football Investors Limited ("FIL").

8

In 2001, the Club was relegated to the second flight of English football (the Championship) for the first time in 34 years. On 19 December 2003, following the resultant loss of football revenue coupled with the increasing development costs of the new stadium, CCFC sold its interest in FIL to a local charitable trust, the Second Interested Party ("the Higgs Charity"). The sale agreement had an option, under which CCFC could buy back the shares for an amount to be calculated under a formula based on the sale price and notional interest but with a minimum price of £6.5m. Any sale by the Higgs Charity of its shares in FIL (and, hence, its share in ACL) under the option agreement – or, indeed, otherwise – required the consent of the Council. The result of that sale to the Higgs Charity was that the Football Club had no direct interest in the new ground, because, with the sale of its shareholding, CCFC of course sold its right to Arena revenues; but there was the hope and expectation that the Football Club would repurchase the 50% share of ACL from the Charity when it was able to do so.

9

Nevertheless, despite the decline in fortunes on the pitch and the consequent adverse impact on the Football Club's financial position, the stadium development went ahead. It did so on the following basis:

i) The Council invested in ACL through a wholly-owned company, North Coventry Holdings Limited.

ii) On 19 December 2003 (the same day as it sold its interest in FIL to the Higgs Charity), CCFC entered into a development agreement which effectively committed it to enter into a lease, licence and rent deposit deed in respect of the new ground; and the Council leased the site to Coventry North Regeneration Limited ("CNR") (which was wholly owned by North Coventry Holdings Limited and thus ultimately owned by the Council) to enable that company to build the Arena. The Council provided a £21m short-term loan to CNR for this purpose, on commercial terms. In the lease, the Council had extensive protection in the event that a subsequent tenant failed, e.g. the right of re-entry if the tenant was put into administration or appeared unable to pay its debts (clause 4.1.4).

iii) ACL took a 50 year sublease of the Arena from CNR, with the option of paying a £1.9m per annum rent or a premium of £21m. In addition, "super rent" was payable, based on ACL's net profit before tax, of 10% on profits over £3.75m rising to 50% of profits over £7.75m. In clause 3.18, CNR was essentially given a wide right of veto over assignments of the lease.

iv) On 13 February 2004, CCFC and ACL entered into a rent deposit deed, requiring CCFC (upon completion of the licence to use the ground and the sublease to it of the offices etc at the stadium) to pay and keep £500,000 in an escrow account in ACL's name as security for both rent and licence fees (which, in this judgment, I will refer to together simply as "rent").

v) The Arena was practically completed on 19 August 2005, and the Football Club played its home games at the new ground from the start of the 2005–6 season.

vi) On 2 February 2006, ACL secured finance from Clydesdale Bank plc trading as Yorkshire Bank ("the Bank"), in fact drawn down in June 2006. The loan was of £22m, repayable over 20 years; and was secured by fixed and floating charges over all of the assets of ACL, the main asset being the leasehold interest in the Arena. As a condition of drawdown, clause 5.2 of the facility letter required a valuation report from C B Richard Ellis ("Richard Ellis") of current market value of £37m; and thereafter valuations at regular intervals on various bases, e.g. a valuation of £31m after 20 years, and of £26.9m after 5 years on the basis that the Football Club had ceased to trade. Clause 10 of the loan agreement gave the Bank power to demand repayment of all sums due on any defaulting event. Clause 12.3 allowed the Bank to revalue the security property every three years; and clause 12.5 provided:

"If we [i.e. the Bank] reasonably conclude that the security which we hold for the Facility is no longer sufficient to cover our exposure in respect of the Facility we reserve the right on reasonable notice to require security and/or a reduction in the balance outstanding under the Facility."

The Bank also (a) had the right to transfer the debt, and to approve any arrangements under the sublease and licence with regard to (e.g.) rent and licence fee; and (b) obtained £250,000 guarantees from each of two directors of CCFC.

vii) The loan was used to pay a £21m premium to CNR in respect of the lease. CNR used that money to repay its loan from the Council. CNR assigned its leasehold interests to a new company, Arena Coventry (2006) Limited ("ACL 2006"), a wholly-owned subsidiary of ACL. (In this judgment, I shall use the term "ACL" to refer to ACL and ACL 2006, unless the distinction between the two companies is material.)

viii) The licence and sublease between ACL and CCFC were formally completed on 29 March 2006, and the payment into the escrow account was made.

ix) ACL's loan from the Bank of course had to be serviced. The rate was variable, namely the Bank's base rate plus 1.25%. In addition, in a separate agreement, ACL had hedged changes in interest rates....

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