Pari Passu Is not Static

When comparing the behaviour of public and private creditors, it is necessary to ensure that their situations and interests do not diverge over time.


When an undertaking owes money to a public authority the latter must use all available legal means to recover the money, including the liquidation of the undertaking and the sale of its assets. However, a private creditor may not seek to liquidate the debtor and may even consent to a reduction of the debt, if, by reducing the debt and allowing the debtor to continue its operations, it can recover a larger amount than if it had closed it down and sold it assets.Similarly to the private investor test, the private creditor test determines whether a public creditor acts as a private creditor on pari passu terms. Both tests require a comparison with the behaviour of a private actor who is the same situation as the public authority which considers investing or recovering debt owed to it.As shown by the judgment of 13 December 2018 in case T-284/15, AlzChem v European Commission, the correct benchmarking of the behaviour of public creditors is not an easy task. The General Court annulled Commission decision 2015/1826 concerning State aid implemented by Slovakia for NCHZ, a chemical company, because the Commission did not take into account that the situation and interests of some of the public creditors changed over time and diverged from those of some of the private creditors.[1]This unusual case shows that the concept of pari passu is time sensitive. If the situation of public and private creditors evolves over time, it may cease to be pari passu.BackgroundAlzChem was a German chemical company that was active in several countries, including Slovakia. NCHZ was also a producer of chemical products in Slovakia. NCHZ entered into insolvency in October 2009. In December 2009, Slovakia granted NCHZ the status of “strategic company”. The creditors of the company did not immediately seek its liquidation and allowed it to keep operating.

Following a complaint, the Commission initiated the formal investigation procedure in July 2013. In October 2014 it adopted a decision finding that Slovakia, by conferring to NCHZ the status of strategic company, it had granted incompatible State aid to that company.

However, in the same decision, the Commission also found that by allowing NCHZ to continue its operations rather than seeking to sell its assets, the Slovak authorities, to which NCHZ owned money, had acted in the same way as the other private creditors.

AlzChem contested the Commission decision and claimed that the Commission committed an error in law by finding that the behaviour of the Slovak authorities were in conformity with the private creditor principle.

This case was complicated because of the following three factors. First, some creditors held securities while other did not. Second, some of the creditors were represented on a creditors’ committee. Third, while NCHZ was in administration and the insolvency procedure was being adjudicated before a local court, NCHZ still accumulated debts towards certain of its creditors.


The case law on private creditor

The General Court began its analysis by reviewing the relevant case law.

“(60) When a public creditor grants payment facilities in respect of a debt payable to it by an undertaking, that assessment is made by applying, in principle, the private creditor test”. The General Court cited extensively the following judgments:

  • Frucona Košice v Commission, C‑73/11 P
  • Commission v Buczek Automotive, C‑405/11 P
  • Rousse Industry v Commission, C‑271/13 P
  • Fondul Proprietatea, C‑150/16


“(61) Such payment facilities constitute State aid where, taking account of the significance of the economic advantage thereby granted, the recipient undertaking would manifestly not have obtained comparable facilities from a private creditor who is in a situation as close as possible to that of the public creditor and is seeking to recover sums due to it by a debtor in financial difficulty”.

“(63) All information liable to have a significant bearing on the decision-making process of a normally prudent and diligent private creditor, …, must be regarded as being relevant … The decisive factor is whether the measure in question satisfied an economic rationality test, so that a private creditor, who counts on maximising his chances of recovering his claim or, at the very least, most of that claim, might also agree to take such a measure … It appears undeniable that the prospect of restoring the debtor’s viability is a decisive factor for the decision-making process of a private creditor in the context of the choice of appropriate measures to obtain the recovery of sums due”.

Then the General Court reiterated well-known principles that when the Commission examines the application of the private creditor test it carries out complex economic and legal assessment and, therefore, enjoys wide discretion which implies that the review by EU courts is limited. However, the EU courts may still question whether the Commission followed the correct procedure, reasoned sufficiently clearly, relied on accurate facts, did not commit any manifest error and did not misuse its powers.

“(68) In order to establish that the Commission made a manifest error in assessing the facts capable of justifying the annulment of the contested decision, the evidence adduced by the applicant must be sufficient to render the factual assessments used in the contested decision implausible”. “(69) The EU judicature must, inter alia, establish not only whether the evidence relied on is factually accurate, reliable and consistent but also whether that evidence contains all the relevant information which must be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn from it”. “(73) The reasoning [of the Commission] must be logical and must not disclose any internal contradictions.”

After examining the facts of the case, the General Court concluded that the Commission’s “(95) statement of reasons for the contested decision is contradictory in that the Commission gave inconsistent explanations, both within the decision and before the Court”.

Because the reasoning of the Commission that was found defective by the General Court dealt with issues which were specific to the case and not of wider interest, these issues are not examined here. However, as will be seen below, the Court resumed later on its assessment of the application of the private creditor principle by the Commission. What the Court has to say at that point is indeed of wider interest.


Role of national courts

Then the General Court went on to examine a plea alleging that the Commission had not assess correctly the role of the local court that had been involved in the insolvency proceedings.

One of the main reasons why the Commission had concluded that the Slovak authorities had acted in the same way as the other private creditors by allowing NCHZ to continue its operations was that other private creditors did agree not to liquidate NCHZ.

The General Court noted that in its decision that “(101) the Commission stated that ‘all creditors on the creditors’ committee and the secured creditors agreed in January 2011 that NCHZ should continue to operate’ and that ‘this decision was subsequently confirmed by the … Regional Court of Trenčín in accordance with the Slovak [law on insolvency] and thus became binding for the administrator’.”

“(102) The Commission examined the question whether the creditors’ committee and the secured creditors had a right of veto and concluded, in that regard, that ‘no state entity could have enforced its interests in stopping further accumulation of the debts’.” “(103) The Commission stated that ‘it can therefore be concluded that the continuation of NCHZ’s operations was based on a decision determined by the private creditors, as the public creditors were not in a position to veto NCHZ’s continued operation’, and that, ‘for [that] reason, the decision to continue operating NCHZ after the [law on insolvency] expired cannot be considered imputable to the State’.”

At this point the General Court observed that “(104) the Regional Court of Trenčín formed part of the relevant committee responsible for deciding whether to continue the operation of NCHZ and that, in accordance with Article 83(4) of the law on insolvency, the administrator was bound by the decision of 17 February 2011.” “(105) However, it should be noted that, …, the Commission did not clearly indicate how it had considered the role of the Regional Court of Trenčín in the decision-making process.” “(107) In addition, …, it cannot be ruled out that a measure may be regarded as a decision attributable to the State within the meaning of Article 107(1) TFEU because of a decision of a national court”.

It should be pointed out that the case law cited by the General Court in paragraph 107 on the role of national courts is from 2016 while the contested Commission decision dates to 2014. The Commission could not have known that national courts could also be regarded as capable of granting State aid. Nonetheless, the General Court held that “(108) the Commission should have explained, in the contested decision, the reasons which led it to conclude that the decision to continue NCHZ’s operations was not attributable to the Regional Court of Trenčín.” “(110) Consequently, [because the Regional Court was member of the relevant committee] …, the Commission failed to set out in the contested decision the reasons why the decision of the Regional Court of Trenčín had no impact on its analysis of whether the measure under examination was attributable to the State.”

The seminal case on how national courts may become grantors of State aid is C‑590/14 P, DEI and Commission v Alouminion tis Ellados.

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Application of the private creditor principle

AlzChem alleged that the Commission applied the private creditor test incorrectly. In particular it claimed that there was an inherent contradiction in the reasoning on what constituted conduct conforming to market conditions; that there were capital ties between certain creditors and the owners of NCHZ; and that public creditors were not in a legal and financial situation which was comparable to that of NCHZ’s private creditors.


Conduct conforming to market conditions

The General Court examined the benchmark used by the Commission to determine market-conform behaviour. “(161) The Commission took the view that the decision of the public creditors actively to support the operation of NCHZ in the second insolvency period, during which NCHZ was subject to the application of the law on insolvency, was consistent with the market economy creditor principle in that it ‘was taken at the same time and under the same conditions (pari passu) as the decisions of the comparable private creditors’. … the Commission stated that ‘the main public creditors to whom the amounts owed mounted up during the [insolvency] proceedings, in particular the public health and social security insurance companies, were not represented on any of the creditor bodies deciding on the continuation of NCHZ’s operation’ and that ‘they had no possibility of directly influencing the decision-making and thus could not prevent NCHZ’s continued operation’. … , the Commission concluded that ‘those public creditors did all they could to recover the debts by registering their claims with the [insolvency] administrator and using all the enforcement mechanisms available under the [law on insolvency]’. …, the Commission took the view that ‘the behaviour of the different state entities was in line with the private creditor test’.”

In the next few paragraphs of the judgment, the General Court discussed the Commission view that there were two classes of public creditors – those who were members of the creditors’ committee and those who were not – and that it had to assess them separately. This view was endorsed by the Court which in the end found no contradiction in the benchmark used by the Commission and in its reasoning.


Alleged ties between the private creditors and the owners of NCHZ

The General Court noted that the Commission had doubts as to whether established capital ties could have influenced the decision of the creditors’ committee by considerations other than the maximisation of debt recovery.

The Court found that “(174) the Commission did mention the majority shareholders in the private creditors which were members of the creditors’ committee, and that only one of them had a close link with NCHZ. Although it is true that the Commission could have further clarified its assessment, it must be held that it can be inferred from that statement that it took the view that the capital ties were not so significant as to entail a difficulty taking into account the decision of the private members of the creditors’ committee, in particular Invest-Kredit, for the purpose of examining the conduct of public creditors which are members of that committee, in applying the private creditor test.”

Because other creditors in that committee did not have capital ties with NCHZ, the Court dismissed the plea.


The comparability of the situation of the public and private creditors

AlzChem claimed that the Commission should have considered the interests of all the public creditors together.

The General Court pointed out that that argument was “(184) based on the premise that the Commission should not have taken account of each public creditor individually, but of the Slovak Republic as the sole public creditor, representing all the public creditors concerned.” “(186) It should be noted at the outset that the applicant does not cite any case-law in support of that argument”.

Then the General Court recalled the case law that established that creditors had to be examined individually, according to the claims and securities they possessed against debtors. “(187) In the judgment of 11 July 2002, HAMSA v Commission (T‑152/99, EU:T:2002:188), …, the EU judicature held that it was for the Commission to determine, for each of the public bodies in question, whether the debt remission it had granted was manifestly more substantial than that which would have been granted by a hypothetical private creditor who was, vis-à-vis the applicant, in a situation comparable to that of the relevant public body and who was seeking to recover the sums owed to it. Thus, according to the EU judicature, each creditor is required to make a choice with regard to the amount offered to him under the proposed agreement on the one hand, and the amount he believes he can recover following the possible liquidation of the company on the other, its choice being influenced by a number of factors, such as its status as a preferential or unsecured creditor, the nature and extent of any security it holds, its assessment of the company’s chances of being restored to viability and the amount it would receive in the event of liquidation”.

“(188) Accordingly, … the EU judicature called for an examination of the individual situation of the public creditors, in particular based on its status as a preferential or unsecured creditor, to determine, in essence, whether the choices made by them went beyond what was justified by commercial constraints or if it could be explained by the desire to confer an advantage on the undertaking concerned. It follows that the EU judicature found that the public creditors should not be considered as a single entity, but that their specific characteristics should be taken into account.”

“(192) It must be recalled that, …, the Court indicated the need to take account, when applying the private creditor test, of a private creditor which was in a situation as close as possible to that of the public creditor and seeking to obtain payment of the sums owed to it by a debtor experiencing financial difficulties, which entails not having to look at the State as a single creditor, bringing together all the public creditors concerned.”

“(193) It is necessary in certain situations to distinguish between the role of the State as an economic operator and its role as a public authority … It follows that, in the field of State aid, the State should not necessarily be considered a single entity.”

Consequently, the General Court rejected AlzChem’s argument that the Slovak authorities had to be considered as having a single claim against NCHZ.

Then the General Court observed that “(207) according to the Commission, there were two classes of creditors involved in the decision to continue NCHZ’s activity in 2011: (i) unsecured creditors, members of the creditors’ committee, representing all of the unsecured creditors, and (ii) secured creditors.” The Commission also “(208) noted that, both within the creditors’ committee and among the secured creditors, private and public creditors had all, at the same time, taken the view that it was in their interests that NCHZ’s operations be continued.” Consequently, “(209) the Commission inferred the absence of an economic advantage, because the public and private creditors concerned, both unsecured and secured, which were in a comparable situation, had adopted the same approach …, the comparability of their situation resulting from their status as pre-insolvency creditors”.

“(210) According to the Commission, [creditors] had to choose between two options. On the one hand, they could opt for bringing NCHZ’s operations to an end and, accordingly, its immediate sale, which implied the probable loss of the total amount of their pre-insolvency claims. On the other hand, they could opt for its operations to be continued and thus have the opportunity to recover at least part of that amount.”

At this point, the General Court began its explanation of why the Commission analysis was inconsistent.

“(211) It must be noted that it is also apparent from the contested decision that, during the ‘insolvency period’, NCHZ’s debt increased in respect of at least some private creditors …, whose names are not specified, and that the claims of certain secured public creditors, members of the relevant committee, namely the Environmental Fund and the municipality of Nováky (Slovakia), increased during the second insolvency period”.

“(212) The Commission indicated that the reference to the increase in claims of certain private creditors …, in respect of which it stated that they were unsecured creditors, members of the creditors’ committee, followed from its intention to show that the risk of increasing claims did not concern only the public creditors.”

“(213) For the two public creditors which saw their claims increase during the insolvency period …, those claims increased both during the first insolvency period and during the second insolvency period. Therefore, it must be held that, at the time of taking a decision at the meeting of 26 January 2011, their position was already no longer that of a creditor with only pre-insolvency claims and, thus, in the situation described in paragraph 210 above.”

“(214) It follows from the foregoing that the explanations in the contested decision, confirmed by the Commission before the Court, according to which the decisions of the public and private creditors were pari passu … and that those creditors were placed in a risk-free situation … are not consistent with the indication … that some of those public creditors were in a different situation, as a result of the fact that their claims had increased during the first insolvency period. Moreover, it should be noted that the Commission did not state, …, that, as a result of NCHZ’s continued operations during the second insolvency period, the potential increase in their claims was inconceivable at the meeting of 26 January 2011.”

“(215) In addition, the Commission admitted in its responses in the context of measures of organisation of procedure and at the hearing, that a pre-insolvency creditor which runs the risk that its claims increase during the insolvency period could have a different perspective to that of a creditor not running such a risk.”

“(219) Neither the considerations set out in the contested decision nor the explanations given by the Commission in its replies to the measures of organisation of the procedure or at the hearing, in response to questions from the Court, make it possible to verify how, when applying the private creditor test, the Commission had taken account of the specific situation of the public creditors … (see paragraph 213 above).”

“(222) It must be held that certain essential information does not appear in the contested decision, and in particular in the aforementioned recitals. Substantiated indications regarding the extent of the increase in creditors’ claims, private and public, compared to the initial amount of those claims, are not therefore mentioned; nor is the fact that the position of those creditors was comparable.”

“(223) It follows from all of the foregoing that, although the Commission had established the existence of a risk for certain secured public creditors of their claims increasing in the event of NCHZ’s continued operation in 2011 and although it took the view that that factor had to be taken into account when applying the private creditor test, the answer to the question whether the Commission had taken that factor into consideration in its analysis of the existence of an economic advantage, and, a fortiori, the manner in which the Commission took it into account are not sufficiently clearly apparent from the contested decision so as to enable the Court to verify the legality thereof. Furthermore, it must be observed that, at the hearing, even though the Commission was questioned on the issue by the Court, it was unable to provide information making it possible to understand its reasoning in the contested decision.”

“(224) In those circumstances, it must be held that the contested decision is not coherently reasoned to the requisite legal standard with regard to the assessment of whether the conduct of the public creditors mentioned in the first sentence of recital 110 of the contested decision satisfied the private creditor test so as to make it possible to establish that all the relevant elements had been taken into consideration in the contested decision in that regard.”


The relevance of the economic analysis

AlzChem argued that the Commission should not have relied on the economic analysis of the prospects of NCHZ that had been carried out by the administrator.

The General Court pointed out at the outset that “(236) the applicant, the Commission and the Slovak Republic all agree that the merits of the decision [of the creditors] to continue the operation of NCHZ are immaterial when examining the relevance of the economic analysis. It is necessary to consider whether that analysis made it possible to assess whether the conduct of the public creditors was consistent with the private creditor test, and not whether they had made the right decision.”

The General Court found that “(240) the Commission correctly held that the economic analysis could serve as a basis for the decision of the pre-insolvency unsecured public creditors.” But then it noted that “(241), in contrast, to the extent that it has previously been indicated, in the context of the assessment of the conduct of the creditors which were party to the decision of 26 January 2011, that the Commission should take account of the fact that some of the pre-insolvency secured public creditors had claims which increased during the insolvency period, and to the extent that, moreover, the applicant alleged a breach of the duty to state reasons with respect to the relevance of the economic analysis in that regard (see paragraph 205 above), it must be noted that, in the contested decision, there is no indication that the economic analysis took account of the cost to those creditors of the continued operation of NCHZ during the second insolvency period.”

“(245) It follows that the contested decision is vitiated by an inadequate statement of reasons as to the relevance of the economic analysis … for the purposes of the Commission’s analysis of the position of the public secured creditors which are members of the relevant committee, referred to in recital 110 of the contested decision.”

In conclusion, the General Court annulled Article 2 of Commission decision 2015/1826, which had found that Slovakia, by allowing the continuation of NCHZ’s operations on the basis of the decision of the creditors’ committee, did not grant State aid.


[1] The full text of the judgment can be accessed at:



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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