Competition Appeal Tribunal dismisses second challenge brought under Subsidy Control Act

The Competition Appeal Tribunal (CAT) issued a judgment on 24 July dismissing a challenge brought under the Subsidy Control Act (the “Act”) against a decision of Greater Manchester Combined Authority ("GMCA") to provide approximately £120m in loans to property developer Renaker.

Background

GMCA provides loans to developers under the Greater Manchester Housing Investment Loans Fund (the “Fund”), which in turn is financed by the UK Government’s Department for Levelling Up, Housing and Communities. The purpose of the Fund is to support the creation of new homes in the Greater Manchester area. This challenge concerned the terms on which GMCA had advanced loans from the Fund to Renaker, and was brought by another, competing, property developer, Weis Group. The interest rates that the GMCA sets on loans are determined through a combination of the EU’s State aid rate together with an additional rate based on a risk assessment of the borrower.

The GMCA cross-checks the interest rate that it has determined against the rates set out in the Subsidy Control (Gross Cash Amount and Gross Cash Equivalent) Regulations 2022 (the “Cash Equivalent Regulations”).

Subsidy Control Act

The Act regulates “subsidies” which it defines as any financial assistance that meets all of the following conditions:

It is given by a public body or otherwise out of public funds;
It confers an advantage on an enterprise (i.e. a person who conducts activities on a market);
It is specific to that enterprise (i.e. not available to everyone on the same terms); and
It is liable to have an effect on international trade or competition within the UK.

Assistance will not therefore be a subsidy if it does not confer an advantage on the recipient (or another enterprise). Section 3 of the Act makes clear that where the enterprise could reasonably expect to receive the same benefit from a private organisation (such as a private lender, guarantor or counterparty to a transaction), the financial assistance will not be conferring any advantage and will not qualify as a subsidy. This is called the “Commercial Market Operator” or “CMO” rule (and formerly under State aid law the “Market Economy Operator Principle” or “MEOP”).

When Weis Group wrote to GMCA to query whether the loans to Renaker were a subsidy, GMCA stated that they were not because the CMO rule applied. GMCA’s view was that because the interest rates had been determined with regard to the Cash Equivalent Regulations, they were at market rate.

The legal challenge

Weis Group challenged the loans on the basis that GMCA had misdirected itself in law when it concluded that the loans were not a subsidy without regard to key material factors relevant to whether or not they were being given on market terms.

The CAT’s decision

The CAT concluded first that GMCA had taken a “subsidy decision” within the meaning of section 70 of the Act (a decision that may be challenged under the Act) when the GMCA committee approved the granting of the loans subject to due diligence and contract (and not only later when Renaker gained an enforceable right to receive the loans when the agreement was signed).

The CAT then assessed the process that GMCA had followed and concluded that it was “perfectly rational” and “not inherently defective” (though it commented that it would have been better if GMCA had been clear in writing that initial “indicative” discussions with Renaker on interest rates were not binding). Nonetheless GMCA did not have to undertake any sort of CMO analysis before giving those indications.

The CAT was strongly influenced by the experience and commerciality of those operating the Fund, in particular observing that their expertise in assessing risk and track record of turning a profit on their loan book were both indicative of the Fund acting as a commercial lender. Between that, and the clear evidence presented by GMCA regarding the loan to value and loan to cost ratios, and security taken over the relevant assets, the CAT was persuaded that the GMCA acted as a CMO.

The CAT noted that “the mere fact that the rate may have been compliant with the 2022 Regulations is not in itself determinative of whether the rates adopted were market rates within the meaning of s.3(2) of the Act.” That will be an important point to note for any authority that is relying on the Cash Equivalent Regulations as providing a proxy for market rates. However, the CAT was more persuaded of the relevance of the EU’s Reference Rate Communication, which it considered provided “a useful cross-check” notwithstanding the UK’s exit from the EU.

The CAT also noted that one of Weis Group’s complaints – that a commercial market operator would not have lent so heavily to a single borrower (51% of all Fund lending) – missed the point because Weis had presented no evidence that GMCA had other, better, lending opportunities. A CMO lender might spread its lending across multiple borrowers to mitigate risk, but can only do so if it has a range of potential borrowers to choose between.

Ultimately the CAT concluded that GMCA had acted reasonably, and had not made any manifest errors of assessment, when it concluded that the terms of the Renaker loans represented market terms and accordingly were not a subsidy based on the CMO rule. A failure to rigidly follow the statutory guidance, or to consider certain specific factors in relation to the appropriate commercial interest rate, did not in itself render the decision irrational because the GMCA had taken other reasonable steps and considered other relevant evidence to satisfy itself on the CMO point. The CAT further noted, perhaps unexpectedly, that it agreed with the merits of the GMCA’s conclusions – that is, that the loans were at market rate.

Key takeaways

As we mentioned in our recent blog on challenges under the Act, the Weis Group challenge is only the second challenge to be decided by the CAT since the Act came into force in January 2023. Two other challenges are currently in front of the CAT. This slow start means that each new judgment offers a potentially very significant insight into how, if at all, the courts will apply the UK’s new subsidy control regime differently from the EU State aid regime that preceded it.

There are seven key points in particular that public authorities (and those receiving assistance from them) should take away from this judgment:

The Cash Equivalent Regulations are not a reference point for whether a loan or guarantee satisfies the CMO rule, but the EU’s Reference Rate Communication may be. Authorities looking to conclude that a loan is being given on market terms, and is therefore not a subsidy, can use the Reference Rate Communication alongside other means such as benchmarking or pari passu lending.
More broadly, and contrary to indications given in its previous Durham judgment, the CAT may be more willing to have regard to EU State aid decisions and guidance when considering questions of how to interpret the Act (since the Act gives effect to the UK-EU Trade and Cooperation Agreement). That may provide more comfort to those authorities that have been approaching the Act in the same way as State aid.
The CAT will apply a reasonableness test to the public authority’s conclusions, including a conclusion that financial assistance satisfies the CMO rule (and presumably a conclusion regarding any other element of the legal test for a subsidy to be present). As long as that conclusion does not contain any manifest errors the CAT will not overturn it even if it thinks the conclusion could have been more robust.
It will therefore be important for a public authority to base its decisions on clear evidence. GMCA succeeded because it could point to a broad range of factors that it considered, similar to what a private lender would consider. Had it not done so, the decision might well have gone the other way.
It seems that the CAT will not hesitate to give its opinion on the merits of a given decision, even if it will not overturn a decision as long as the authority’s own view of the merits is a reasonable one. The presence of economic experts on CAT panels puts it in a better position to analyse the economic factors that underlie many subsidy decisions than an ordinary court in a judicial review scenario. That may be helpful if it means that the CAT is willing to provide more of a steer to authorities on the economic questions that lie at the heart of many such decisions. Authorities should make sure that they take account of CAT judgments just as much as they do the statutory guidance.
The Statutory Guidance is helpful, and public authorities must have regard to it, but it does not need to be followed religiously and can be departed from where the authority has a reasonable basis for doing so, for example where it has taken account of other relevant factors, not mentioned in the guidance, in reaching its conclusion.
In terms of timing, there is a distinction between when a subsidy is given (which is when the recipient gains an enforceable right to it ) and when a subsidy decision is taken (which is when a decision is taken to provide funds, even if that remains subject to contract). This will be important for the timing of any challenges to such decisions as time-bar periods for subsidy control challenges are fairly tight.

If you would like to discuss how this judgment may affect your organisation, please contact Jamie Dunne, Charles Livingstone, or your usual Brodies contact.