Council embroiled in stadium saga

Posted: 5th November 2013

In a case which raises novel issues about the extent of local authority powers to involve themselves in commercial matters outside the scope of traditional public services, the owners of Coventry City Football Club are seeking a judicial review of the City Council’s decision to bail out the operators of the town’s Ricoh Arena with a £14.4 million loan.

Football crowdFormer Premier League club, Coventry City, have been exiled to Northampton Town FC’s ground since leaving the arena in May 2013 after a dispute erupted with the stadium operators, Arena Coventry Limited (ACL), over the club’s £1.3 million-a-year rent. The Council was a 50% shareholder in ACL and owned the Arena’s freehold.

The Council argued that, since April 2012, no rent or licence fees had been paid to ACL for use of the arena by Coventry City Football Club Limited (CCL). However, the consortium of companies that controlled the club – known as Sisu - disputed that, insisting that ACL had received at least £800,000 for the club's use of the arena from a rent deposit account and under a 'pay-per-play' agreement.

In August 2012, ACL – which had a £15 million bank loan secured against its assets - obtained a default judgment against CCL for payment of outstanding rent and licence fees and had subsequently served CCL with a statutory demand for £1.1 million.

The bank had written to ACL expressing concern over its finances and the Council had, in January 2013, resolved to lend the company £14.4 million so that it could repay its debt to the bank. ACL faced a liability of about £4 million on early termination of a hedging arrangement with the bank.

The Council argued that CCL's refusal to pay rent or licence fees to ACL exposed it to 'significant risk' and had a severe impact on the value of its shareholding in the company. It submitted that there was a real risk that the bank or a third party might take control of ACL, and with it the arena, if the bank sought to enforce its security, sold the debt to a third party, or tried to put ACL into administration.

Lawyers representing the Council argued that the loan had been made for ‘an entirely legitimate commercial purpose’ in order to protect its own interests, and that of taxpayers, in circumstances where its investment was under threat.

It was Sisu’s case that the loan amounted to ‘unlawful state aid’ and violated European competition rules. It also argued that the Council had exceeded the legitimate scope of its powers, made irrational use of public funds and ‘acted in bad faith and with improper motive’ to remove them as owners of the club.

In a preliminary hearing, Sisu sought an order requiring the Council to disclose a large number of documents – including the loan agreement itself and the terms of professional accountancy and valuation advice received by the Council – on the basis that its challenge could not otherwise receive a fair hearing.

Refusing that application, the Court noted that Sisu had been refused permission to seek a judicial review by a judge who considered the matter on paper. Although Sisu intended to exercise its right to renew its application in open court, such a wide-ranging disclosure order was unheard of in such circumstances.

The Council had expressed concerns that the case would become ‘excessively expensive and burdensome’ and argued that a disclosure order was not warranted when Sisu's complaints had yet to be declared arguable. The Court found that Sisu had sufficient information to enable it to put forward ‘a respectable case’ on most of the issues and that requiring the council to make further disclosures could not be viewed as necessary.