They also claimed ACL was close to insolvency at this point – hence why they reached the conclusion that the Higgs Charity’s shares in the Ricoh Arena firm were worthless.
It was a message pushed publicly by Tim Fisher again when speaking on BBC radio in June 2013.
He said: ‘Now, when we started the due diligence, we got into the numbers and we drilled down, we realised the business was nothing short of appalling, so actually there is no real business there.
‘Half of something very small is very, very small and if you think the football club is struggling, I will tell you ACL is likely struggling and this is the point: two turkeys don’t an eagle make.
‘We would not strap ourselves to an ailing business and that is why we have to create our own.’
The club not paying its originally agreed rent had clearly made the business weak and other evidence was presented which showed the business could do a lot better.
But Sisu’s own document outlining their case quoted Yorkshire Bank, which had the loan to ACL, as saying: ‘With appropriate cost savings, a solvent debt restructuring could be agreed.’
In other words, it would appear that the bank thought the company could carry on in business and pay off its loan.
But this was early in 2012 – and we subsequently learned that, as time went on without the club paying the £1.3m agreed rent, ACL’s financial difficulties would become critical. It subsequently emerged that, without an anchor tenant, it wouldn’t be able to wash its face.
The rent issue was a big one, and one that would have disastrous effects for the club in the coming months. Perhaps only those directly involved in conversations at that time will truly know what was and wasn’t agreed – but one piece of communication from 2012 which did become public came from the charity’s Peter Knatchbull-Hugessen.
He wrote to Tim Fisher on 11 March 2012, making it clear that City failing to pay rent was a non-starter and demanding guarantees of funding for the club before any sale of the charity’s stake in ACL.
Sisu argued that they had continued to make ongoing ‘pay as you play’ payments to ACL during 2012 – payments which eventually totalled in the region of £230,000 for the 12 months the club was not paying the agreed rent.
Sisu lawyers have also argued that ACL also received £750,000 from the club in escrow [money kept by a third party and released only when specified conditions have been fulfilled] payments between August and December 2012.
Those escrow payments came after the club was taken to court by ACL in August over the unpaid rent.
At the time of the August legal proceedings, Tim Fisher said: ‘I can confirm that there is a legal process currently being followed.
‘The ACL board of directors are required to follow this process to satisfy their fiduciary responsibilities and duties.
‘It is absolutely correct that the ACL directors act in a fit and proper manner.
‘During our on-going rent negotiations to date, there have been no twists, turns or surprises.
‘It has been a straightforward financial negotiation.
‘The board of Coventry City has been kept fully informed by ACL of all developments – legal or otherwise – at all times.
‘It is our expectation that the discussions will be concluded before the start of the season.
‘Both sides are confident that we will reach an agreement on a rental structure that is fair and reasonable and reflects the interests of both Coventry City and ACL’
But by December, and after ten months of negotiations, the atmosphere had changed. No solution had been found over the rent, and ACL said it was now owed £1.1m.
That prompted ACL to issue a statuary demand to the owners of the football club, giving them 21 days to settle the debt or face a winding-up order.
The rent row had reached a critical point – and the club had until Boxing Day to find a solution. Not the ideal Christmas present.
An ACL statement at the time read: ‘The board feels that all other avenues to resolve this issue have been exhausted and is astonished that the club’s owners have allowed matters to come to this sorry pass.
‘Responsibility for this situation lies completely with Sisu, a Mayfair hedge fund which has let CCFC fail under its direction.’
But Jacky Isaac, ACL’s interim chief executive, told the Coventry Telegraph the company could survive without the football club.
She said: ‘We would like them to pay but we are a strong business and football is a tiny part of what we do. We are a strong, ongoing business.
‘We’d rather have the football club playing here but, yes, it can survive.
‘We would like them to be playing here and it is very sad we have had to do this, but it is down to Sisu.
‘I used to work at the club and I feel very sad for all the people who work for the club. I feel genuinely sad for the fans and the people at the club.
‘We would like to reach a negotiated settlement and have the club playing here.’
Coventry City’s statement in response made a startling claim that few could take seriously at the time. It was the first public indication that the club might look to move into an alternative ground. But that would never happen... would it?
The club statement read: ‘While we have been seeking to normalise the rent, we have continued to pay matchday costs to ensure that ACL is not left out of pocket.
‘These costs amount to over £250,000 per season, much more than the average rent paid by League One clubs.
‘The club remains committed to the city and people of Coventry. However, its viability depends on it finding an alternative home ground where it can afford to play.’
Chapter Seven
Keeping council
BY the end of December 2012, the relationship between the club and its owners with the Higgs Charity and Coventry City Council was almost completely broken.
Almost a year of negotiations had produced no new rent deal, and the club was seemingly as far away as ever from securing a share in the Ricoh Arena.
On one hand, there was a profit-driven hedge fund with negotiations being led by no-nonsense investment bankers. They are trying to find common ground with a not-for-profit charity, led by individuals who have pledged to act selflessly to improve the city and the life of its people.
Then, just to add another ingredient to the cocktail of chaos we have the public sector in the shape of Coventry City Council, a local authority led by public servants tying themselves in knots and red tape while dedicating huge amounts of time and energy to the bureaucracy associated with making sure they act appropriately.
So we have the private sector, the public sector, the third sector and we need them to work together and come to mutually beneficial agreements. As you can imagine, this is a challenge at the best of times – and is almost impossible when the relationship appears to already have disintegrated. On 10 December 2012, a meeting was held between Sisu, ACL and Coventry City Council to try to find a solution to the stadium ownership and rent issues.
Importantly, at this time, the council was conducting parallel negotiations with Yorkshire Bank about buying out ACL’s loan itself – of which about £15.25m still needed to be paid.
Sisu insists it did not know that the council was pursuing this deal with Yorkshire Bank.
On 17 December, Yorkshire Bank indicated to the council that they were unwilling to settle the loan at a reduced level. They believed it could be repaid in full subject to ACL being restructured.
But by 21 December, that stance had changed and the bank agreed to sell the loan to Coventry City Council for £14m having previously rejected offers of £6m and £12m.
The council’s decision to purchase the debt and authorise a new £14.4m loan from the local authority to ACL was agreed unanimously by councillors during a private vote on 15 January.
Sisu insists this was a deliberately orchestrated ‘perverse and secret’ attempt by the city council to scupper any chance of the football club e
ver owning a stake in the Ricoh Arena. The hedge fund insists the council was trying to force them out as owners of the club and that the deal the council struck with Yorkshire Bank and ACL was unlawful. They say that no rational commercial lender would have agreed to make that loan on the same terms and that it amounted to ‘state aid’. They complain that it was an agreement motivated by malice from the council towards Sisu.
It was also argued that Sisu’s original offer to buy out the debt was clearly a better option and in the best interests of taxpayers. They also argued they could not afford to continue to pay the £1.3m annual rent – and most parties seemed to agree that a compromise needed to be found in this area.
The council, however, argues that it acted entirely within European state aid regulations. It says it had to act to protect its investment in ACL which was under threat as a direct result of the club’s rent strike.
They say Sisu’s offer was not better because it was based on securing the Yorkshire Bank debt at an unrealistically low level.
Sisu made the decision to challenge the loan agreement in court via a judicial review. That meant an extremely intelligent and highly qualified judge by the name of Lord Justice Hickinbottom had the pleasure of poring through the evidence during a three-day High Court hearing held at Birmingham High Court in June 2013.
He subsequently reached a judgment which has since been upheld by three senior law lords at the Court of Appeal. At the time of writing, the judgement had been sent to the Supreme Court by the football club’s owners – but not before the three law lords praised the original judgement from judge Hickinbottom as ‘impressive’.
The key aspects of the arguments from both sides, as covered by the informed legal mind of Judge Hickinbottom, warrant closer inspection.
Sisu claimed that they knew nothing of Coventry City Council’s plan to buy out Yorkshire Bank’s debt. The judge said he did not believe this to be the case because the bank had appointed Deloitte to look at ACL’s cash flow and consider future lending options and that the organisation had contacted Sisu in November 2012 – before the council loan was agreed in January.
Judge Hickinbottom said: ‘As part of their investigations, in November, Deloitte met Sisu; so that, from then, Sisu were aware that the council was making its own attempt to purchase the bank debt.
‘Mr [Chris] West [the council’s finance director] gave the council cabinet an update on 14 November, and told them that it must be assumed, “Sisu know all.”‘
One thing all sides did seem to agree on was that the level of rent was too high. At £1.3m a year, it was obvious a third tier level football club would struggle to meet payments of over £100,000 a month.
But evidence heard in court gave some interesting context to the rent figure.
In his judgment, Mr Hickinbottom said the rent spending totalled less than ten per cent of the club’s annual outgoings.
He said: ‘The football club had been seriously mismanaged. By April 2012, it was in a truly parlous state. CCFC was balance sheet insolvent, incurring regular substantial annual losses, and a loss of £5m on the annual turnover of £10m in 2011/12.
‘The contractual rent and licence fee for the Arena of £1.3m per year was significant, but less than ten per cent of total expenditure.
‘Relegation to League Division One [sic] and the introduction of the financial fair play rules compounded these difficulties.’
The key part of this judicial review was Sisu’s claim that the council’s loan was ‘unlawful’ and amounted to illegal state aid.
Much argument was had over the value of ACL and its business performance in the run-up to the council’s loan deal. Various valuations of the ACL business were produced, including a valuation scale from financial experts PriceWaterHouseCoopers (PWC) which took into account varying levels of rent from the club.
At March 2011, it valued the Arena with no rent at £6.4m, with a rental of £200,000 at £8.6m, and with a rental of £400,000 at £10.8m.
The PWC report also said that these figures ‘could be discounted by up to 30 per cent in an insolvency scenario’.
It said that a commercial loan would typically be 60 to 65 per cent loan to value, at a rate of five per cent or above and an average of seven to ten years repayment period.
The January 2013 Coventry City Council loan to ACL was for £14.4m and would be repaid over 40 years.
It was set at a rate of five per cent per annum for the first five years, and could then be altered at the discretion of the council. But it could not be altered to less than five per cent – or more than two per cent – above the interest rate at which the council could borrow money.
The annual repayments amounted to approximately £800,000, compared with the £1.6m ACL had been paying and the £1.3m they would have paid under the bank’s restructuring proposal.
So, at first glance, you can see the council’s loan rate seems to be incredibly generous – and perhaps risky deal bearing in mind ACL’s uncertain financial performance.
Sisu also questioned the legal advice given to councillors ahead of the decision to vote on the loan, suggesting a report by councillor officer Barry Hastie had been misleading and overestimated the potential for ACL to pay back the council loan. That criticism was later labelled as ‘unfounded’ by Justice Hickinbottom, who also said the report was ‘to be commended’ .
The judge ultimately decided the loan was reasonable to make and in line with European state aid laws because there were other important factors to consider – not least the fact that the local authority was a partner in ACL.
Justice Hickinbottom said: ‘I must compare the council’s action in making the loan on the terms that it did with a hypothetical private market economy investor with the same characteristics as the council. Those notably include the fact that the council was not a new investor: it was also a 50 per cent shareholder in ACL.
‘Much of the evidence [including the PwC Report] concerns the criteria by which a new investor would or may have made a loan to ACL in January 2013.
‘I have little doubt that a new investor would not have made a £14.4m loan to ACL on the terms that the council did, but that is not the question that I have to consider, which is whether a private market economy operator, with a 50 per cent shareholding in ACL, would have effectively restructured its business by making a £14.4m loan to ACL on the terms that the council made the loan.’
Another issue raised by Sisu was that they believed they could have secured a better deal than the council when buying out the Yorkshire Bank loan.
We know Sisu had secretly approached Yorkshire Bank about taking on the ACL loan away from talks with Coventry City Council and the Higgs Charity in 2011. As previously mentioned, that seems to somewhat undermine Sisu’s argument that the council had acted inappropriately by discussing a deal with the bank in private itself.
But, despite there being little evidence of progress made with the bank, Sisu remained adamant that they would have secured a better deal than the council ultimately did when they bought out the remaining £15.25m of the Yorkshire Bank loan for £14m.
It appears Sisu thought they could negotiate the bank down to sell the loan for between £2m and £5m.
Coventry City Council QC James Goudie appeared to poke fun at Sisu for this assumption in the High Court when he said the hedge fund had approached this case as if they were the only viable option available to the council.
He said: ‘Sisu may believe that they are God’s gift to Coventry, but others are entitled to be sceptical and to form their own opinions.’
Judge Hickinbottom seemed to agree that the alternative Sisu put forward seemed doomed to fail. He said: ‘Sisu considered that they may have been able to purchase the ACL debt – for which the bank was exposed to the tune of £19m – for perhaps as low as £2m, but no more than £5m.
On the other hand, the bank were satisfied that ACL could in fact service the entire debt, albeit restructured, and were not prepared to accept any figu
re in that area.
‘The bank appears to have considered that ACL could service a restructured loan of at least £15m, and that the debt was worth more than £12m.
‘The bank had not made any provision for any of the debt. In the circumstances, it is inconceivable that the bank would have accepted an offer to purchase the debt for £5m.
‘In considering the bank would [or might] accept an offer of £2m to £5m for the debt, Sisu had entirely unrealistic expectations.
‘They were not prepared to offer more. Thus, this element of Sisu’s plan, too, was doomed to fail.’
Now we move on to the thorny issue of the club’s decision to withhold the legally agreed £1.3m rent.
The owners of the club have previously been very touchy about this being referred to as a ‘rent strike’ and even instructed lawyers to send legal letters to then British Sports Journalist of the Year, David Conn, for use of the term in an article for The Guardian. Coventry City’s largest supporters group, the Sky Blue Trust, was also on the receiving end of one of these letters simply for linking to that article.
But, anyway, it turns out Mr Conn was right to use the term after the withdrawal of rent by the club was categorically defined as a rent strike by senior High Court judge Justice Hickinbottom in his judgment.
The judge’s assessment of what had gone on during 2012 didn’t stop there. His judgement was utterly damning of the football club owners’ conduct – and perhaps goes some way to explaining why it has been dragged, unsuccessfully, through the Court of Appeal and (at the time of writing) is heading to the Supreme Court. It is, therefore, understandable that the hedge fund would seek to protect its damaged reputation in this way.
During 2012, council officials believed Sisu wished to obtain an interest in (if not control over) ACL and thus the Arena, cheaply and at the council’s expense, by purchasing the Higgs Charity share of ACL and the company’s Yorkshire Bank loan. They believed Sisu were deliberately distressing ACL to drive down the value and price of that share and that debt.
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