SISU Open A Potential Can Of Worms Over Coventry City & State Aid

By on Apr 23, 2013 in Finance, Latest | 4 comments


It was a rumour that had been circulating for some considerable time, with little substantiation, that Coventry City’s dispute with the owners of their stadium, ACL, had little to do with the fairness or otherwise of the amount of money that the club was paying in rent for its use of The Ricoh Arena. Some had suggested that, with this rent money providing the lion’s share of ACL’s income, the true motive of SISU, the hedge fund owners of the club, may trying to starve its owners into administration in order to purchase a very valuable asset on the cheap. This morning’s news that the owners are to take the matter of a bail-out that was made by Coventry City Council to ACL in January to the High Court over a matter of illegal state aid leaves onlookers with little option but to believe that this may indeed have been the aim all along.

It was in January that councillors unanimously agreed the highly confidential deal – to bail out the part council-owned stadium management company ACL by buying out its outstanding mortgage loan with Yorkshire Bank, which allowed ACL to continue to trade when it had looked as if insolvency might become a serious issue to the company, which is half owned by Coventry City Council and half owned by The Alan Higgs Trust charity. After the deal was agreed on the fifteenth of January, council leader John Mutton stated that the council had been ‘forced’ to protect a public asset, not only for the people Coventry, but also to cover tax-payer investment in the construction of the stadium, which opened in 2005.

This action is the latest in a series of legal sidesteps that SISU have put forward over the last few weeks and months. One arm of the club’s business, Coventry City Football Club Limited, was placed in administration last month by the SISU-related Cayman Islands-based hedge fund Arvo Master Fund – less than hours before ACL sought to enforce administration in the High Court. The club sought to argue that CCFC Ltd was just a holding company that responsible for management of – and rent for – The Ricoh Arena alone, but the Football League saw it differently and effectively ended the club’s season by docking it ten points at a time when a place in the League One play-offs seemed a distinct possibility.

CCFC Ltd is, therefore, currently now in administration under the SISU-appointed administrator Paul Appleton with ACL understood to be watching the administration process like hawks. Meanwhile, both ACL and the council are believed to be in favour of a potential takeover of the club and half the stadium company by former directors Joe Elliott and Gary Hoffman, with the possible financial backing of an American property investor, Preston Haskell IV, although Hoffman is understood to be set to become the new chairman of the Premier League, and how that might affect his involvement is, at the time of writing, unknown. Of course, a threat of legal action and renewed uncertainty over whether the club can even continue to play in the city of Coventry or not can only make the company a less attractive proposition than it might otherwise be considered to be. Whether this is part of any SISU plan or not is unclear.

A statement from CCFC (Holdings) Ltd yesterday confirmed it has submitted an application to the High Court in order to ‘determine whether the council acted unlawfully in its use of public funds to financially support ACL and in its actions towards Coventry City Football Club in relation to the dispute with ACL.’In the meantime,’ it continued, ‘we are committed to reaching a negotiated solution to the dispute with ACL. If ACL were prepared to meet with us, we would retain hope of reaching an agreement that will allow the club to continue playing at the Ricoh.’ A spokesman for Coventry City Council replied by stating that, ‘The council has been served with Judicial Review proceedings. Our position is that we have acted lawfully in all respects.’

But what is this concept of State Aid, and why is it becoming such an issue right now? State Aid is a European Commission (EC) term which refers to forms of public assistance, given to undertakings on a discretionary basis, which has the potential to distort competition and affect trade between Member States of the European Union. The State aid rules are set by the EC and comprise various articles of the Treaty, Regulations, Frameworks and Guidelines – which set out what aid can be given and under which circumstances. The EC governs Member States’ compliance with these rules and many aid measures must be notified to the Commission for approval. Ignoring the rules can result in the Commission viewing aid as unlawful and possibly subject to repayment – by the aid recipient. In order to be considered State Aid, four tests – although this number will alter according to interpretation of the statute, which in itself gives some idea of how byzantine these rules can be – are applied, and all four have to be met in order to qualify as State Aid and, therefore, for prior notification and approval by the Commission itself. These are, briefly, as follows:

1. Was it made with state resources?

Support can be direct financial payments like a development grant, or publicly funded support, like free or subsidised consultancy. Definitions of what counts as public rather than private support revolve around the level of government influence.

2. Does it favour a particular undertaking or the production of certain goods?

Definitions of what constitutes an economic undertaking are broad.  Social enterprises are clearly included, as are any elements of charities or other regeneration organisations that are involved in trading activity. The key is the nature of the activity rather than the form of the organisation. What a business does with its profits – whether it distributes them to shareholders, uses them for social aims, or ploughs them back into the company, makes no difference in state aid terms. It is very unlikely that regeneration based support can be shown to be open to all undertakings throughout the country, as there are usually geographical and sectoral targets to public regeneration support.

3. Does it distort or threaten to distort competition?

Although the temptation to define activity as non-economic in many areas is clear, there are substantial limits to what constitutes non-economic activity. All statutory services, including national education, national security and social security are all defined as non-economic, as are the non-economic activities of charities and relief aid organisations – but when such organisations do engage in economic activities the rules do apply, so this cannot be considered a generic opt-out clause. However, it should be remembered that public purchasing of activity or services at commercial rates do not constitute state aid, as the market has not been distorted.  So, for example, Service Level Agreements with a local authority are not state aid.  It is important that a tendering or other such processes can be shown to have delivered an agreement at commercial rates.

4. Does it affect Intra-Community trade?

In other words, does it affect trade between European Union member states – which the majority of regeneration activity would not be expected to do.  However, it only has to be shown that there is the potential to affect trade, rather than it actually being likely.

State Aid is likely to become a serious issue for the whole of European football over the coming years. The European Commission confirmed at the end of last month that it was considering whether to open a formal inquiry into a 2011 property deal between Real Madrid and Madrid City Council, and this followed an earlier announcement that it was investigating five local authorities in the Netherlands for providing illegal state aid to Dutch clubs, including PSV Eindhoven. Since that warning, the commission has started proceedings in the Netherlands and is believed to also be looking at a number of Spanish clubs that have run up huge tax bills or been propped up by soft loans from publicly owned banks. And in addition to this, any claim of illegal state aid can be investigated for a period of up to ten years after the event, so there may well be plenty of other cases that are waiting to rear their heads as well.

All of this raises considerably more questions for Coventry City than could possbly be answered at this stage. The fact that ACL didn’t strictly enforce the club’s non-payment of its rent at the Ricoh Arena, for example, might be considered State Aid, and it may also now be necessary to revisit the specifics of the deal that built the stadium in the first place, as this also falls within the last ten years. In both cases, the club – or one of the legal entities associated with it – might well find that it is considered to be the beneficiary of this aid and might yet find itself having to repay money that it wasn’t expecting to have to repay. It’s too early to say, but by invoking this area of European law, which has only previously been touched upon in relation to the professional game, a can of worms could be set to be opened which may affect not just Coventry City Football Club, but a good number of other clubs as well.

One of the key points about complaints about State Aid is that matters that might otherwise go unnoticed only usually get referred as being potentially illegal should complaints be made about them. We do not know how many incidents of illegal State Aid may have occurred at football clubs over the last ten years, but what we can say with a degree of certainty is that if individuals, companies and rivals feel that they can use it to create problems for rivals in the tribalistic world of professional football, the chances are that they will try. We can also say that any case regarding Coventry City and State Aid will be unlikely to be quickly resolved, especially if the High Court does decide to refer the matter to the European Commission, and that predicting what the result of it will be with any degree of confidence would be foolish. We can, however, say that SISU are invoking the fury of their supporters at a time when season ticket renewals have just come around, and without some sort of revocation of the now increasingly widely-held suspicion that they are deliberately seeking to weaken ACL for their own gain, they may well find that The Ricoh Arena, even if the club does get to start next season there, could be even more empty next season than it was this time around.

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    4 Comments

  1. Coventry City’s new nickname: The Rent Boys

    I think state aid in football is not so straightforward, on one hand there is the argument that clubs are part of the community in the same way that a park might be provided to keep kids off the street and give people green spaces. Funding the local club helps to keep people employed, helps to have a local attraction for outside visitors bringing trade into the region, puts the place on the map etc.

    But on the other hand with private ownership and potential profits on the line, private competition should be fair and equal so having he backing of the taxpayer and having much deeper pockets lends a slope to the playing field. Particularly in areas with multiple teams, where it would be unseemly to support one team but not others. Also should tax payers money be used to help private businessmen get richer? Seemingly not when there are more needy people in the area who have nothing.

    So several things appear to be relevant: one club town? What level of football? Who owns the club? Any league-wide rules?

    One way of limiting the fall out from this would be for FIFA/UEFA to put their own rules in that deal with what state-aid is acceptable and what is not, that way if they deal with it they may head off the involvement of the EC. Perhaps they could add it as an appendix to FFP.

    keith

    April 24, 2013

  2. What about in places like Italy where the city owns the stadium, not the club: is that fair or against the rules?

    Ian

    April 24, 2013

  3. The reason why State Aid law has become such a big issue in football is for 2 reasons:-

    A) Platini has identified it is a good mechanism to apply the Financial Fair Play rules; and

    B) There’s a state aid case called Leipzig Halle, which was decided in December 2012. It says that public sector bodies that operate in markets will be considered to receive state aid when they build infrastructure they then operate such as airports and stadia. In such situations it’s the body that builds the infrastructure that is in trouble with the European Commission. That’s what SISA are trying to argue.

    Axl

    April 26, 2013

  4. I am very surprised that none of the major newspapers have yet cottoned on to this story and the wider implications of state aid investigations into professional football in the UK.

    Take the Championship. The two clubs automatically being promoted are Cardiff and Hull.

    However any Championship club or deep pocketed fan could, with the right lawyer, launch a legal action because they both have benefited from very low rents charged by the public sector owners of their stadiums.

    If successful, the clubs would have to repay the rent due over the seasons plus interest. They would also, surely, be docked 10 points for having been illegally funded. This would probably reverse their promotion.

    So, this could change the outcome of the Championship and the make up of next year’s premier league. Remind me of why no newspapers are covering this? Too complex?

    N. Fenton Beasley

    April 27, 2013

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