When Does a Public Loan Amount to an Unlawful Subsidy?

Overview of the Subsidy Control Act 2022 (“SCA”)

UK subsidy control law is the successor of EU state aid law. It is designed to ensure that public bodies do not distort competition by subsidising certain economic operators (‘enterprises’), typically national operators, over others save where necessary to address market failures or achieve strategic public objectives. Although this is a post-Brexit law, it is still driven by international treaty obligations, particularly the Trade and Cooperation Agreement with the EU.

The SCA came into force on 4 January 2023. Pursuant to section 2(1), the SCA applies to financial assistance which: 

“(a) is given, directly or indirectly, from public resources by a public authority,

(b) confers an economic advantage on one or more enterprises, 

(c) is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services, and 

(d) has, or is capable of having, an effect on— 

(i) competition or investment within the United Kingdom …”

Public financial assistance which confers an economic advantage may take various forms, including grants, over-compensation for a public service contract or loans below market rates. Under section 3(2), a loan or other financial assistance is not treated as conferring an economic advantage on the recipient (“enterprise”) unless “the benefit to the enterprise is provided on terms that are more favourable to the enterprise than the terms that might reasonably have been expected to have been available on the market”. This is called the commercial market operator (“CMO”) test. If a loan, for example, fails the CMO test because it is at an interest rate below that which the market would demand, it will be treated as conferring an economic advantage under section 2(1)(b).

Where the four section 2 criteria for a subsidy are met, the public authority must satisfy itself that it has complied with certain principles before providing it (unless there is a specified exemption). These are set out in section 12 and Schedule 1 and include: 

• The need to pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale.
• Proportionality of the subsidy to its specific policy objective.
• Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.
• Subsidies should not normally compensate for the costs the beneficiary would have funded in any event.
• The objective cannot be achieved through other, less distortive, means.
• The need to minimise any negative effects on competition and investment within the United Kingdom.
• The beneficial effects of the subsidy should outweigh any negative effects, e.g. effects on competition and investment within the United Kingdom, and international trade and investment.

If a subsidy is given without satisfying these principles, an interested party, such as a competitor, can apply to the Competition Appeal Tribunal (“CAT”) under section 70 to seek what is effectively a judicial review of the subsidy decision. This can lead to orders requiring the repayment of the subsidy.

However, if a loan or equity investment meet the CMO test and is thus on commercial market terms, it is not treated as a subsidy and there is no need for the public authority to satisfy itself of the Schedule 1 principles.

Aubrey Weis v Greater Manchester Combined Authority [2025] CAT 41

So far only a handful of cases have been brought under section 70. Aubrey Weis is only the second published CAT judgment in the area. It addresses key questions as to the definition of a subsidy, timing of review applications and the application of the CMO principle. 

Mr Weis, a property developer, challenged two residential developer loans totalling £140 million granted by the Greater Manchester Combined Authority (“GMCA”) to the Renaker Group under the Greater Manchester Housing Investment Loan Fund (“GMHILF”). 

Mr Weis argued the loans would not have been granted by a commercial operator, were on non-market terms and distorted the Manchester property development market. He sought a declaration of unlawfulness and an order quashing the loans. 

The CAT set out the due diligence and multi-layered governance process followed before awarding GMHILF loans. It explained that loans were priced by reference to the minimum State Aid reference rate (set by the European Commission in its Reference Rate Communication) and a risk margin is then applied. A cross check is then made against the rates set out in the Subsidy Control (Gross Cash Amount and Gross Cash Equivalent) Regulations SI 2022 No 1182 (the “2022 Regulations”). The 2022 Regulations provides a mechanism for calculating the market interest rate of a loan to a person according to whether they have a strong, good or satisfactory level of credit worthiness, determined by reference to credit ratings.

The CAT set out redacted extracts from the GMCA’s decision making process, showing reference to credit rating, security provided, financial ratios, the assessment of various risks and cross checks made against the 2022 Regulations. The GMCA approved the loans in principle on 22 March 2024, although a later report (finalised in November 2024) entitled the Interest Rate Setting Proposal (“IRSP”) provided a further risk analysis and concluded that it was compliant with the 2022 Regulations. 

The CAT then summarised the legal framework, identified the issues and set out its decision.

Legal Principles

The CMO principle was summarised in Sky Blue Sports & Leisure Limited v Coventry City Council [2014] EWHC 2089 (Admin), a case under the state aid rules:

• The court assesses objectively whether a rational private investor, creditor or vendor might have entered into the transaction in the same circumstances on the same terms, having regard to the foreseeability of obtaining a return and leaving aside all social and policy considerations.
• The comparator is a rational private operator with similar characteristics to the public authority. For example if the authority is a shareholder in the beneficiary the comparator investor would be assumed also to be an investor and this may mean that he is guided by long term objectives.
• Public authorities have a wide margin of judgment, given the spectrum of commercial responses.
• In practice, state aid arises only where no rational operator would have entered into the transaction on those terms.

Applications under section 70 are determined by the application of ordinary judicial review principles:

• Decision-makers must consider only relevant matters and exclude irrelevant ones.
• They must take reasonable steps to inform themselves of relevant information adequately.
• A decision is irrational if it falls outside the range of reasonable outcomes or there is a demonstrable flaw in the reasoning, such as significant reliance on irrelevant factors, unsupported reasoning or a serious logical or methodological error.
• The view of officers or third parties are irrelevant unless they were communicated to the decision maker and taken into account during the decision-making process

The United Kingdom Subsidy Control Regime statutory guidance (the “Guidance”) published in January 2025 supplements this. Annex 1, Limb B2 states that:

• If there is any doubt as to whether financial assistance confers an economic advantage, public authorities should carry out a detailed analysis of the market in question.
• The CMO analysis will consider the market at the time at which the financial assistance is given. Policy considerations will not be relevant.
• Public authorities should obtain sufficient evidence, such as benchmarking, profitability analysis or third-party reports, to demonstrate that financial assistance could have been provided in the market by a private operator on the same terms.
• Compliance may be shown by using evidence that is specific to the financial assistance in question. For example, where financial assistance is given at the same time and on the same terms as a significant investment by a private operator (‘pari passu’ investment). Other evidence-based assessments may be undertaken, including the use of benchmarking and profitability analysis.
• Any evaluation of compliance with the CMO should be undertaken with input from experts with appropriate skills and experience. In cases where the commercial assessment is not straightforward, it is recommended that the public authorities commission a reputable third party to conduct a report as evidence.

The GMCA had a duty to have regard to the Guidance and apply it unless there was good reason to depart from it. The CAT also referred to the 2022 Regulations and the Commission reference rate.

Issues

Although seven grounds were raised, the CAT distilled them into three key issues: 

a. Has a subsidy decision been made by the Respondent within the meaning of section 70 of the Act? If so, when was the decision taken? 

b. Would a CMO have approved the loans, and did the rates of interest and other charges applied reflect the market rate? 

c. Did GMCA breach its duty of candour?

Decision

The CAT dismissed the appeal, finding the loans were granted on commercial terms and thus did not constitute subsidies within the meaning of section 2(1)(b). The process followed was held to be a rational one and not inherently defective, with various layers of governance and due diligence conducted by officers experienced in making lending decisions

a. When was the subsidy decision made?

Under section 70(7) a subsidy decision means a decision to give a subsidy (as defined in section 2(1). Section 2(5) treats financial assistance as “given” where an enforceable right is acquired. 

However, the CAT held that a section 70 application does not require assistance to have been given under section 2(5). Although enforceable rights arose only in November 2024, the relevant decision was made on 22 March 2024 when the GMCA approved the loans in principle.

b. Would a CMO have approved the loans?

Yes. The CAT found the loans would have been approved by a CMO and were on market terms. Key factors included:

• The terms, security for and conditions of the loans.
• GMCA’s awareness of the need to comply with the CMO principle and section 3(2) of the SCA.
• While the GMCA did not conduct any profitability or benchmarking analysis, nor obtain any third-party report (routes suggested by the Guidance), the CAT was satisfied that the GMCA could reasonably conclude that there was no subsidy base on the extensive experience of its lending team and various governance bodies.
• While the IRSP post-dated the loan decision it reflected the thinking of the investment team as to why the rates were appropriate, which informed the papers before the GMCA at the time of the decision.
• GMCA’s recent experience in lending for other Renaker schemes on a club basis where there was an independent report on the market.
• Analysis under the 2022 Regulations produced a low reference rate (5.3%) and was not used as the basis for the pricing of the loans. The rates ultimately adopted were in excess of that calculation and took into account the Commission’s Reference Rate Communication.
• The final rates in all the circumstances were within what the CAT would expect to be available on the market and reflected the low-risk nature of the lending, given the terms, security and conditions.

c. Did the GMCA breach its duty of candour in the appeal?

The CAT dismissed claims that the GMCA breached its duty of candour.

• While a February 2024 meeting between the GMCA and Renaker was not addressed in witness statements, the existence of the meeting was disclosed and the CAT was confident that if any notes had been made, they would have been produced.
• The GMCA had made available a considerable volume of documentation and provide witness statements and the suggestion that the witness statements of the Director of Strategic Finance & Investment of GMCA with operational responsibility for the GMHILF were unsubstantiated and/or misleading was rejected. No application had been made to cross examine that witness and there was no reason to believe that her statements were misleading or untruthful.

However, this case may differ from other potential subsidy cases such as equity investments or below market sales as there are specific rules set out in the 2022 Regulations and the EU Reference Rate Communication for loans. Demonstrating compliance with these requirements was not sufficient in itself to satisfy the CMO principle but took the GMCA a long way. In addition, the GMCA had a sophisticated governance process and significant expertise on the market. Public authorities should assume that in most cases the Guidance ought to be followed rigorously and prepare an evidence-based case showing that the CMO principle, if relied on, is satisfied.

Thirdly, the CAT clarified that the trigger point for a section 70 challenge is once the decision to give financial assistance is made, even if enforceable rights have not yet arisen. Interested parties should be alert that time will start to run once a decision to give the subsidy has been made, not once the subsidy has been given. The rules on time limits are set out in section 71 of the SCA 2022. There is a one-month period after the date when the interested party first knew, or ought to have known, of the making of the subsidy decision within which it needs either to make a pre action information request or submit a notice of appeal.

Fourthly, an applicant alleging breach of the duty of candour based on a suggestion that a witness is making unsubstantiated and misleading statements may wish to seek permission to conduct cross examination to make good that allegation. Annex 1 to the judgment contains a detailed rebuttal by the GMCA of the specific allegations made and this was accepted by the CAT without hearing live evidence.

Finally, it is notable that while the CAT acknowledged that a principle of judicial review is that matters and opinions are irrelevant unless they were communicated to the decision maker and taken into account during the decision-making process, but referred extensively to the IRSP, which was not finalised until some eight months after the subsidy decision was taken. The CAT was satisfied that the investment team and decision makers were mindful of the considerations set out in the IRSP, which was an evolving document, when the decision was taken. But possibly this is another matter which could have been tested by cross examination. It would be prudent as a general rule for public authorities to ensure that any supporting reports and documentation are put before the decision-maker before the potential subsidy decision is made.

By way of a post-script, the Court of Appeal on 28 October 2025 granted permission to appeal on all grounds, namely:

• Failure to apply established principles of judicial review in reviewing the respondent’s decision to grant financial assistance.
• Error in law in concluding that the respondent had lawful regard to the statutory guidance on providing a subsidy where there was said to be no evidence that the relevant decision-making body had any such regard.
• Interpretation and application of the EU Commission Reference Rate Communication.
• Failure to take into account relevant considerations, including the terms of comparative commercial loan, concentration of risk in respect of the SPV’s beneficial owner and the respondent’s reliance (to obtain exemption from affordable housing requirements) on projections that the scheme was unviable / high risk.