Private Creditor and the Ability of the Debtor to Repay

There are no rules as to the promptness with which a private creditor must act in order to enforce its claims.

However, a hypothetical private creditor need not demand that a debtor be declared insolvent as soon as it fails, without taking any account of its longer-term potential.

Introduction

When the state accepts to restructure debt owed to it or fails to enforce debt obligations, it may grant State aid to the debtor. But, the existence and the amount of State aid, if any, very much depend on the amount that the state could have recovered by refusing to restructure debt or enforcing debt obligations. In this connection, it must take into account the possibility that the debtor may return to profitability after appropriate restructuring.

On 15 December 2021, the General Court ruled, in case T-565/19, Oltchim v European Commission, that the Commission failed to consider all the options that a private creditor would have taken into consideration.

Oltchim had applied for partial annulment of Commission decision 2019/1144 of 17 December 2018 that found that Romania had granted incompatible State aid to Oltchim.

Oltchim, whose majority shares were state owned, was one of the largest petrochemical companies in Romania and South-East Europe. During the period from 2007 to 2012, it suffer operating losses. Then Romania notified to the Commission a measure involving the conversion of Oltchim’s public debt into shares. In March 2012, by decision 2013/246, the Commission concluded that the debt conversion of RON 1.049 billion (approximately EUR 231 million) did not constitute State aid.

In January 2013, the applicant, at its own request, entered insolvency proceedings.

In March 2015, the applicant’s creditors, some of which were public agencies or state-owned companies, approved a reorganisation plan for the company, which provided, in essence, for the sale of the company to a new investor that would take over its assets or business (the reorganisation plan). The approved plan also provided for the cancellation in part of the applicant’s debt.


The full text of the judgment can be accessed at:

https://curia.europa.eu/juris/document/document.jsf?text=&docid=251283&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=1017300


In December 2018, after a formal investigation, the Commission adopted, decision 2019/1144. In that decision, the Commission examined the following three measures:

  1. Non-enforcement and further accumulation of the applicant’s debts.
  2. Unpaid supplies to Oltichem by state-owned CET Govora.
  3. Cancellation of debt owed to the state under the 2015 reorganisation plan.

The Commission found the measures to constitute incompatible State aid.

Before the General Court, Oltchim did not dispute that measures 1 and 2 involved state resources and were imputable to the state. However, it disputed that state resources were involved in measure 3. It also contented that none of the measures conferred any advantage to it.

Did the three measures make up a single intervention?

The General Court, first, examined and went on to reject a plea by the Commission that the action was inadmissible.

Then, it examined whether the three measures were a single intervention. The General Court concluded that “(137) taking into consideration […] the subject matter and nature of Measures 1, 2 and 3, the different identity of the grantors of those measures, the chronology of those measures, the fact that they were not envisaged or foreseeable at the time of the first intervention, their purpose, the applicant’s situation at the time when each of them was implemented and their context, it must be concluded that, contrary to what the Commission found […], the measures at issue are not so closely linked that it would have been impossible to separate them. Consequently, Measures 1, 2 and 3 must be regarded as being three distinct interventions for the purposes of the application of Article 107(1) TFEU.”

Measure 3 and imputability to the state

The General Court first tackled the issue of whether the partial cancellation the claims of one of the creditors – Electrica – under the reorganisation plan involved a transfer of state resources. Romania held only 49% in Electrica’s shares.

“(147) Article 107(1) TFEU covers all the financial means by which the public authorities may support undertakings, irrespective of whether or not those means are permanent assets of the public sector. Even if sums corresponding to the aid measure in question are not permanently held by the State, the fact that they constantly remain under public control, and are therefore available to the competent national authorities, is sufficient for them to be categorised as ‘State resources’”.

Then the General Court noted that “(149) there is nothing in the file before the Court to support the conclusion that Electrica’s resources used in connection with Measure 3 were constantly under public control, and therefore available to the competent national authorities”.

“(151) The fact that a private undertaking might take into consideration public statements made by the authorities […] when deciding on its market conduct in no way means, in the absence of any other concrete evidence to that effect, that its resources are under the control of the State or at the State’s disposal.”

“(156) It follows from the foregoing that the Commission has not succeeded in demonstrating to the requisite legal standard that Measure 3 involved a transfer of State resources as regards the partial cancellation of Electrica’s claims or, accordingly, that it constituted State aid in so far as it was granted through Electrica.”

Whether the remaining part of measure 3 could be imputed to the state

“(160) It should be noted that, where an advantage is conferred by a public authority, that advantage is, by definition, attributable to the State, even if the authority in question enjoys legal autonomy vis-à-vis other public authorities”.

“(162) The partial cancellation of certain debts in the context of Measure 3 was not a unilateral cancellation, decided separately by each of the creditors in question, but a collective cancellation, made in the context of insolvency proceedings, subject to specific statutory rules concerning, inter alia, the majority required at the creditors’ meeting to approve the reorganisation plan. In other words, the individual vote of a given creditor in favour of the plan could not lead to the approval of that plan unless its claims, by themselves, met the statutory requirements regarding the majority necessary for that purpose.”

“(164) Accordingly, in order to ascertain whether the Commission was right to consider that the reorganisation plan was imputable to the State, it is first necessary to ascertain whether the vote in favour of approving the reorganisation plan on the part of AAAS, the ANE, Salrom and CET Govora was imputable to the State. Second, it will be necessary to determine whether, together, the creditors whose vote in favour of approving the reorganisation plan was imputable to the State had the majority required, under national law, to approve that plan.”

The imputability to the state of AAAS’s vote

“(165) The Commission considered that AAAS’s vote was imputable to the State on the ground, inter alia, that it was part of the public administration and was subordinate to the government.” “(166) This finding is not contested by the applicant.

The imputability to the state of Salrom’s vote

“(169) First, the Court finds that […], the Commission failed to examine whether the vote of Salrom […] was imputable to the State.” “(170) It is not disputed that Salrom was a public undertaking when Measure 3 was adopted. However, according to the case-law, it is not possible to deduce imputability of a measure to the State from the mere fact that that measure was taken by a public undertaking. Even if the State is in a position to control a public undertaking and to exercise a dominant influence over its operations, actual exercise of that control in a particular case cannot be automatically presumed, although it cannot be demanded that it be demonstrated, on the basis of a precise inquiry, that in the particular case the public authorities specifically incited the public undertaking to take the aid measure in question”.

“(171) In the case of advantages granted by public undertakings, it is necessary to examine whether the public authorities must be regarded as having been involved, in one way or another, in the adoption of the measure at issue, it being possible to deduce imputability to the State from a set of indicators arising from the circumstances of the case and the context in which that measure was taken.”

“(179) Consequently, it must be concluded, as the applicant submits, that, in the contested decision, the Commission did not demonstrate to the requisite legal standard that Salrom’s vote in favour of approving the reorganisation plan was imputable to the State.”

The imputability to the state of CET Govora’s vote

“(183) It should be noted that it is not disputed that CET Govora was a public undertaking at the time when Measure 3 was adopted. However, as has been stated in paragraph 170 above, according to the case-law, it is not possible to presume imputability to the State of a measure on the basis of the mere fact that that measure was taken by a public undertaking.”

“(189) Consequently, in the absence of other relevant and contemporaneous indicators in the contested decision, it must be concluded, as the applicant submits, that the Commission has not succeeded in demonstrating to the requisite legal standard that CET Govora’s vote in favour of approving the reorganisation plan was imputable to the State.”

The imputability to the state of the ANE’s vote

“(190) In the contested decision, the Commission based its conclusion that the ANE’s vote in favour of approving the reorganisation plan was imputable to the State on, inter alia, the facts: that the ANE was a public institution of national interest with legal capacity that was coordinated by the central public water authority; that its object was, inter alia, to apply the national strategy and policy in the field of management of water resources, to ensure observance of the regulations in this field, to manage and operate the infrastructure of the national water management system and to ensure that a number of activities of national and social interest were carried out; that the members of its board of administration were appointed by order of the head of the central public water authority and included a representative of the Ministry of Public Finances and a representative of the central public water authority and that the general director of the ANE was appointed, suspended and released from office by order of the director of the central public water authority; and that the income and expense budget of the company were approved by the board of administration with the consent of the head of the central public water authority.”

Interim conclusions

“(196) In the light of the foregoing considerations, it must be concluded that, in the contested decision, the Commission managed to show that AAAS’s vote and the vote of the ANE’s subsidiary in favour of approving the reorganisation plan were imputable to the State. By contrast, it has not succeeded in demonstrating to the requisite legal standard that Salrom’s vote and CET Govora’s vote regarding that plan can be imputed to the State.”

Whether the reorganisation plan could be imputed to the state

“(197) The Commission stated […], in essence, that Measure 3 was imputable to the State because the reorganisation plan could not be approved without the consent of AAAS or CET Govora.” “(198) That conclusion is, however, incorrect.”

“(205) Accordingly, AAAS and CET Govora did not hold the majority required to approve, by themselves, the reorganisation plan.”

“(211) It is admittedly true, as the Commission points out, that the competent court, which is an emanation of the State, must also approve the plan, in accordance with the applicable national law. However, that court cannot approve a plan which has not been adopted by the creditors. In reality, if the Commission’s argument were to be followed, it would be tantamount to considering that any reorganisation plan adopted in the context of insolvency proceedings was imputable to the State solely because of the involvement in the proceedings of a court-appointed receiver and a judge.”

At this point the Commission referred to the cases C-590/14 P, DEI v Commission, and T 15/14, Simet v Commission, in which national courts were found to grant State aid. The General Court, however, considered that those two cases were not relevant because “(212) in those cases, the aid measures in question […], originated from the State, whereas, in the present case, the decision to cancel part of the applicant’s debts was taken […], by the applicant’s creditors and not by the court-appointed receiver or the competent court.”

“(215) It follows from the foregoing that the Commission has not succeeded in demonstrating to the requisite legal standard that Measure 3 was imputable to the State and that, accordingly, it constituted State aid.”

Measures 1 and 2, existence of an economic advantage and the applicability of the private creditor test

The Commission had considered that the private creditor test was not applicable to the present case.

The General Court, first, point out the different roles of the state.

“(226) It is necessary to distinguish between the roles of the State as a shareholder of an undertaking, on the one hand, and the State acting as a public authority, on the other. Thus, the private investor test applies where the Member State concerned confers, in its capacity as shareholder, and not in its capacity as public authority, an economic advantage on an undertaking. In order to determine whether a measure is the act of the State in its capacity as a shareholder, and not in its capacity as a public authority, an overall assessment must be carried out, taking into account, in particular, the nature and subject matter of the measure, its context, the objective pursued and the rules to which that measure is subject”.

“(229) The Court of Justice has stated that the ‘starting point’ for determining whether the private creditor test is to be applied must be the economic nature of the Member State’s action and that, when it appears that the private creditor test might be applicable, it is for the Commission to examine that possibility, irrespective of any request to that”.

“(231) In the present case […], the Commission based its conclusion regarding the inapplicability of the private creditor test, in essence, on the existence of the Memorandum and the public statements. However, since the Commission did not classify that memorandum and those statements as State aid, they must be regarded solely as part of the overall context of the measures at issue.”

“(232) As such, the Commission did not carry out an overall assessment of all the relevant factors, in particular those relating to the nature and subject matter of the measure, the objective pursued and the rules to which that measure was subject”.

It is therefore necessary to examine whether, in the light of all the relevant factors, relating to the nature and subject matter of Measures 1 and 2, their context, the objective which they pursue and the rules to which they are subject, the Commission was entitled to conclude, without committing any error, that the private creditor test was not applicable to Measures 1 and 2.

“(236) Measure 1 concerns, in essence, the appropriateness of enforcing AAAS’s claims and the arrangements and timetable for any such enforcement. Any private creditor could also be faced with such a decision.” “(237) Likewise, Measure 2 concerns the manner in which supplies of raw materials to an undertaking in difficulty should be continued or suspended. Any private supplier may also be faced with such a decision.”

“(238) The nature of Measures 1 and 2 is therefore essentially economic and does not, as such, imply the exercise of public powers.” “(248) Accordingly, the Commission was wrong to take the view that the private creditor test was not applicable to Measures 1 and 2.”

The existence of an economic advantage as regards measure 1

The Commission found that AAAS had conferred an economic advantage on the applicant as a result of the non-enforcement and accumulation of claims during the period from September 2012 to January 2013, on the ground, in essence, that AAAS had not acted as a private creditor would have done. Indeed, although it was aware of the applicant’s difficult and deteriorating financial situation, AAAS did not adopt measures to attempt to enforce its claims or, at least, to achieve a better creditor position.

The General Court held that “(254) when faced with a debtor experiencing a substantial deterioration of its financial situation, each creditor must make a decision as to whether it is possible to recover its claims and, if so, how this might be done. Its decision is influenced by a number of factors, including the creditor’s status as the holder of a secured, preferential or ordinary claim, the nature and extent of any security it may hold, its assessment of the chances of the firm being restored to viability, as well as the amount that it would receive in the event of liquidation. It is therefore for the Commission to determine, for each public body in question, having regard to, inter alia, the abovementioned factors, whether the facilities granted by them were manifestly more generous than those that would have been granted by a hypothetical private creditor in a situation comparable to that of the public body in question vis-à-vis the recipient undertaking and seeking to recover the sums owed to it”.

“(260) However, […] the Commission has not shown that a private creditor in a situation comparable to that of AAAS would necessarily have taken the view, at that time, that no other attempt at privatisation would be conceivable, given that the failure of the latter was not due to the lack of potential investors, to the profitability of the proposed investment or to the applicant’s financial situation.”

“(261) Although, admittedly, the Commission noted that other earlier attempts had also failed and that there was no longer any privatisation project imminent at that time, it has not demonstrated that a private creditor in a situation comparable to that of AAAS would necessarily have expected that the applicant’s privatisation was henceforth ruled out, given not only the specific reasons for that last failure, but also the fact that, barely six months previously, the Commission had itself considered that such a possibility was foreseeable in the short term.”

Then the General Court made an important statement.

“(263) Although there are no rules as to the promptness with which a creditor must act in order to enforce its claims, hypothetical private creditors cannot be expected to demand that the undertaking be declared insolvent as soon as it fails and not to take any account of its longer-term potential, even if it is not, however, acceptable for the public authorities passively to allow debts to be run up over long periods without the slightest prospect of improvement”.

“(264) The private creditor test does not therefore require an application to be made for the immediate winding-up of the undertaking in difficulty, since it could be quite conceivable that a private creditor, with significant resources at its disposal, might have had an interest in maintaining the activity of a debtor undertaking for a certain period, if the cost of immediate liquidation proved to be higher than the cost of granting aid”.

“(280) Moreover, the Commission did not call into question the applicant’s argument that most of its private creditors, like AAAS, did not enforce their claims or adopt other protective measures during the period concerned. […] According to the case-law, it is for the Commission to demonstrate that the conduct of a public creditor did not satisfy the private creditor test and that, accordingly, it granted an advantage”.

“(281) It should also be noted, for the sake of completeness, that the application of the private creditor test may be based on the conduct of a hypothetical private creditor in a situation comparable to that of the public creditor in question … The application of that test does not therefore necessarily require that an actual private creditor in such a comparable situation be identified. However, in the contested decision, the Commission also failed to demonstrate that a hypothetical private creditor in a situation comparable to that of AAAS would have enforced its claims or adopted other protective measures during the period concerned, the duration of which was relatively short.”

“(283) It is important to take into account the fact that almost all of AAAS’s claims were unsecured. In that regard, the Commission has not shown that a private creditor with an exposure similar to that of AAAS would have had an economic interest in initiating insolvency proceedings, given that, by contrast with the secured creditors, it risked losing a greater part of its claims in the context of such proceedings. Thus, for such a creditor, potential privatisation or another solution might, at that time, have appeared to be both conceivable and more attractive […] At the very least, it would be legitimate for such a creditor to assess the options open to it for a certain amount of time instead of rushing into taking action such as that advocated by the Commission.”

“(285) Thus, by way of example, the Commission did not examine the availability of liquid assets or immovable property of sufficient value from among the applicant’s assets that a hypothetical private creditor in a situation comparable to that of AAAS could have seized or over which it could have obtained security. Nor did it examine the procedures to be followed and the conditions required in order to do that and whether, in the light of those procedures, such a hypothetical private creditor would have acted in the manner the Commission advocated”.

According to a study by Raiffeisen Bank “(290) in the liquidation scenario, AAAS would have recovered approximately EUR 23,000,000, whereas, in the debt conversion and privatisation scenario, it would have recovered between EUR 22,000,000 and EUR 79,500,000.”

“(293) The Commission submits that Romania has not established that that analysis had been carried out for or on behalf of AAAS, or even that it had been used by AAAS.”

“(294) However, there is no rule of law requiring a private creditor to carry out its own economic analysis. Such analyses may be commissioned collectively by the creditors and made available to them, as in the present case.”

“(297) Accordingly, it must be concluded that, in the contested decision, the Commission did not demonstrate to the requisite legal standard that, by not enforcing its claims and by accumulating others during the period concerned, AAAS had granted the applicant facilities which it would manifestly not have obtained from a private creditor in a situation as close as possible to that of AAAS, […] The Commission has failed to show that a hypothetical private creditor in a situation comparable to that of AAAS would have immediately enforced its claims or would have taken other measures to recover them or to protect them during the relatively short period from 22 September 2012 to 31 January 2013, or that such enforcement or such measures would have enabled it to recover or protect part of its claims.”

The existence of an economic advantage as regards measure 2

The Commission had found that there was a technological interdependence between CET Govora and Salrom, on the one hand, and the applicant, on the other, in the sense that each of them was at the same time a supplier and a utility client of the other. While CET Govora supplied electricity and steam to the applicant and Salrom provided it with saline solution and chalk, the applicant supplied CET Govora and Salrom with the industrial water necessary for their activities. Thus, those undertakings were captive customers of each other, with the result that the disappearance of one of them would have led to the disappearance of the others. However, the Commission considered that CET Govora’s conduct was not consistent with that of a private creditor. Instead, it conferred an advantage on the applicant, in particular because CET Govora had decided to continue to supply electricity and steam to the applicant “free of charge”, without requesting advance payments in exchange for the resumption of those supplies, or real estate collateral in respect of the previous debts owed to it by the applicant.

By contrast, according to the Commission, Salrom acted as a private creditor would have done and therefore did not confer an advantage on the applicant, since it made the continuation of its supplies conditional on advance payments and demanded collateral secured against immovable property.

The General Court, first, noted that “(304) the Commission based its argument that CET Govora did not act as a private creditor would have done, in essence, on a comparison between its conduct and that of Salrom.”

“(306) The nature and subject matter of the respective conduct of CET Govora and Salrom, namely the continued supply of raw materials to the applicant, were comparable and that that continued supply took place in parallel, during the same period, and thus fell within a similar context.”

“(307) Next, it should also be noted that there was a technological interdependence between CET Govora and Salrom, on the one hand, and the applicant, on the other hand, as the Commission itself found in the contested decision.”

“(308) The figures […] show that the evolution of the applicant’s debts to CET Govora and Salrom were broadly comparable during the period covered by Measure 2.”

“(309) In those circumstances, the Commission was entitled, […], without committing any error, to take the view, implicitly but necessarily, that CET Govora and Salrom were in a comparable situation in the context of Measure 2.”

But “(313) CET Govora and Salrom acted very differently in the context of Measure 2, as the Commission rightly points out in the contested decision.” “(314) While Salrom requested and obtained advance payments for its supplies and secured its claims as far as possible by means of a charge on immovable property, CET Govora did not take comparable measures.”

“(327) It follows that the plea alleging a manifest error of assessment as regards the existence of an economic advantage in the context of Measure 2 must be rejected as unfounded.”

Conclusions

In the light of the above analysis, the General Court concluded that the Commission had not demonstrated to the requisite legal standard that measures 1 and 3 constituted State aid, It also found that the applicant’s pleas relating to measure 2 had to be rejected as unfounded. Consequently, the General Court partly annulled Commission decision 2019/1144 on State aid implemented by Romania for Oltchim.

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About

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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