Private Creditor v Private Investor

Private Creditor v Private Investor - m 4

A private investor never agrees to an unprofitable transaction while a private creditor may agree to a loss in order to avoid a bigger loss from non-recovery of debt owed to it. A public authority acting as a private operator must disregard any losses it may incur from State aid it granted in the past.

A question that is often asked is whether the same company may receive several awards of State aid. The answer is that a company which is not in difficulty may obtain State aid on multiple occasions as long as the different amounts of aid support different eligible costs and are in compliance with the relevant rules.A related question is whether the state can inject capital as a private investor in a company to which it has already granted State aid. The answer is in the affirmative, provided that the capital injection is likely to generate a return that would satisfy a market operator.The situation becomes more complicated when the state provides repayable funding to a company in its capacity as a public authority. Now, the question that arises is whether the state can subsequently act as a private creditor seeking to minimise its potential loss.This was the question that the Court of Justice answered on 6 March 2018 with its judgment in case C-579/16 P, Commission v FIH Holding.[1] The Commission had appealed against the judgment of the General Court in case T-386/14, FIH Holding v Commission, by which the General Court annulled Commission decision 2014/884.FIH is a Danish bank. As a result of the financial crisis, FIH received State aid in 2009 in the form of a capital injection and a state guarantee on new bond issues, both of which were approved by the Commission as compatible with the internal market.Because FIH continued to face problems, in 2012, Denmark notified to the Commission a new intervention that consisted of the following: 1) transfer of FIH’s most problematic assets to a new subsidiary [NewCo]; 2) purchase of NewCo’s shares by the Financial Stability Company [FSC], a public body; 3) the eventual winding up of the NewCo; 4) repayment by FIH of the 2009 capital injection to FSC to enable the latter to buy NewCo; 5) the granting of a loan by FIH to NewCo to help it absorb its expected losses. The loan would be paid back to FIH only if the liquidation of mortgage loans and derivatives transferred to NewCo would exceed a certain threshold; 6) the granting by FIH of another loan to NewCo that was intended to expire when FIH’s state-guaranteed bonds would mature, and the sums recovered by FIH from the loan would be used to redeem its state-guaranteed bonds. In addition, FIH would provide an unlimited loss guarantee to FSC so that when NewCo would be dissolved the FSC would recover all losses that it would have incurred, if any, as a result of the acquisition and winding up of NewCo.It should be noted that in July 2012, FIH repaid to Denmark the capital it received in 2009 and began a restructuring process.Although Denmark argued that the 2012 measures were free of State aid, the Commission concluded in March 2014 that they did contain State aid which, however, was compatible with the internal market [decision 2014/884]. The Commission applied the private operator principle and found that the level of remuneration that was expected to be obtained by Denmark was insufficient.In May 2014, FIH lodged an appeal against the Commission decision. The judgment of the General Court that was rendered in September 2016 was reviewed on the StateAidHub on 15 November 2016. (View article here:

The General Court agreed with FIH and annulled the decision of the Commission on the grounds that the Commission applied the private investor principle instead of the private creditor principle. A private investor is solely concerned about future profitability. The Commission had found that the 2012 measures were unlikely to generate a sufficient return. By contrast, FIH argued that Denmark’s objective was to maximise the amount it could recover from the funds it granted to FIH in 2009. Therefore, the Commission should have applied the private creditor principle. The Commission was of the opinion that the amount that could be recovered from the 2009 funds had to be ignored because the funds were granted in the first place by the state acting in its capacity as a public authority.

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When should the private operator principle be applied?

The Court of Justice first explained that “(45) the definition of ‘aid’, […], cannot cover a measure granted to an undertaking through State resources where it could have obtained the same advantage in circumstances which correspond to normal market conditions. The assessment of the conditions under which such an advantage was granted is therefore made, in principle, by applying the private operator principle”. “(46) Furthermore, the private operator principle is one of the factors that the Commission is required to take into account for the purposes of establishing the existence of aid and is not, therefore, an exception that applies only if a Member State so requests, when it has been found that the constituent elements of ‘State aid’, as laid down in Article 107(1) TFEU, exist”. “(47) Consequently, when it appears that the private operator principle might be applicable, it is for the Commission to ask the Member State concerned to provide it with all the relevant information enabling it to determine whether the conditions for applying that test are satisfied”.

Then the Court distinguished between the different roles of the state. “(48) Where a Member State confers, in its capacity as shareholder and not in its capacity as public authority, an economic advantage on an undertaking, the applicability of the private operator principle does not depend on the means used to place that undertaking at an advantage nor on the nature of the means used, which may fall within the State’s public powers”. “(49) Moreover, […] the applicability of the private operator principle to an amendment to the conditions for the redemption of securities of an undertaking is not compromised because the acquisition of securities giving the State the status of an investor in that undertaking was financed by means of State aid in favour of that undertaking”. The Court referred at this point to the ING case [C-224/12 P] in which early redemption of ING’s shares held by the Netherlands, at a less favourable rate than the initially agreed rate was not considered to be State aid because the Netherlands obtained a benefit in the form of avoiding the risk to which it was exposed as an investor in a bank.

The private operator principle covers both the private investor test and the private creditor test, each applying at a different point in time in relation to the underlying investment. The former applies before the investment, while the latter applies after the investment. Therefore, the Court turned its attention to the question whether FSC’s investments in NewCo ought to be assessed on the basis of the private investor test or the private creditor test.

The Court recalled that “(55) in order to assess whether the same measure would have been adopted in normal market conditions by a private operator in a situation as close as possible to that of the State, only the benefits and obligations linked to the situation of the State as a private operator, to the exclusion of those linked to its situation as a public authority, are to be taken into account”. “(56) Thus, in the assessment of the economic rationality of a State measure, required by the private operator principle, the Court has found it necessary to disregard the costs incurred by the State as a result of redundancies, unemployment benefits and aid for the restructuring of the industrial infrastructure […] and also from guarantees granted and loans held by the State, in so far as they constitute State aid”.

At this point the Court cited two cases: Germany v Commission, C‑334/99, paragraphs 138 and 140, and Land Burgenland and Others v Commission, C‑214/12 P, C‑215/12 P and C‑223/12 P, paragraphs 55, 56 and 61. As will become more obvious later on, it is important to understand the background to these two cases. With respect to the first case, Germany had granted aid to GS, a company in financial difficulty. The Court of Justice ruled in paragraphs 138 and 140 of that judgment that the amount of aid in the state guarantee was “equal to the amount” of the underlying loan and that shareholder loans were State aid in their “entirety”. With respect to the second case, Bank Burgenland benefited from a guarantee that was unlimited in amount and time. Hence, the amount of State aid was equal to the amount of the guaranteed liabilities.

This is an important point because when a public authority grants, say, a loan at zero interest rate, which is secured against sufficient and high-quality collateral, the amount of aid is only the difference between the market rate and the zero rate of the loan. Therefore, that public authority expects to receive back the principal of the loan. If subsequently, the borrower gets into financial difficulty and that authority does not demand repayment of the loan, it will in fact be granting new State aid to the borrower. However, if the value of the collateral also declines as a result of the financial difficulties of the company, the public authority may be justified to write off part of the loan in order to maximise the amount that it can recover. Whether it should actually write off part of the loan depends purely on the amount to be written off, on the one hand, and the amount it can recover in a reasonable period of time and without much legal difficulty, on the other. At any rate, it will be acting as a private creditor rather than a private investor.

In the current case, the issue at hand was the 2009 guarantee that Denmark had granted to FIH to enable it to issue bonds. The guarantee was assessed in Commission decision N 31a/2009. The guarantee was offered to solvent institutions and was priced according to the risk rate of each bank, as measured by its corresponding spreads of “credit default swaps”. Therefore, the guarantees were priced for a certain risk. If subsequently, the risk increased, Denmark would be faced with a higher possible loss. It follows that Denmark would be in principle justified to minimise the potential loss by taking measures to stabilise the condition of FIH. Of course, whether it was actually in its interest as a private creditor to do so depended on the size of the potential loss, the amount of the new funds it committed and the terms under which the new funding was provided.

At any rate, the Court of Justice reiterated that “(57) since by granting aid, a Member State pursues, by definition, objectives other than that of making a profit from the resources made available to undertakings, it must be held that those resources are, in principle, granted by the State exercising its prerogatives as a public authority”. “(58) It follows that the risks to which the State is exposed and which are the result of State aid that it has previously granted are linked to its actions as a public authority and are not among the factors that a private operator would, in normal market conditions, have taken into account in its economic calculations”. At this point the Court again cites the case Germany v Commission. As already noted above, in this case the full amount of the public loans constituted State aid because the recipient was in financial difficulty. So the Court of Justice seems to ignore the possibility that the amount of state aid [i.e. the gross grant equivalent] can be less that the amount of public funds which are put to the disposal of an undertaking, as, for example, when a secured loan is granted.

However, the Court went on to state that “(59) This consideration applies, in particular, to the obligations arising for the State from loans and guarantees previously granted to an undertaking and constituting State aid. Taking those obligations into account in the assessment of State measures adopted in favour of the same undertaking would be liable to prevent those measures from being classified as State aid even though they do not satisfy normal market conditions, on the sole ground that they prove economically more advantageous for the State than if they had not been adopted. Such a consequence would compromise the objective of ensuring undistorted competition”. True, but again the Court seems to ignore that the GGE of State aid in a loan can very well be less than the nominal amount of the loan.

“(60) In the present case, […] the Commission, like the Danish Government itself, considered that the [2009] measures […] constituted State aid, since a private investor would not have decided to make, to a comparable extent and in similar circumstances, the capital increases and the grants of guarantees at issue.” “(61) In those circumstances, it must be held that there is nothing in the file to show that the 2009 measures were not, at least in part, State aid.” But if they were only “in part” State aid, it necessarily follows that Denmark was forgoing resources that were less than the underlying nominal amounts.

Nonetheless, the Court of Justice insisted that “(62) it follows that, in the present case, the Commission was fully entitled, when applying the private operator principle, not to take into account risks related to State aid granted to FIH by the 2009 measures. Consequently, the General Court erred in law when it held, in essence, in paragraphs 69 and 71 of the judgment under appeal, that the Commission had, by failing to take those risks into account, incorrectly applied the private operator principle in the contested decision.”

However, the General Court seemed to have conducted a more astute economic analysis of the situation facing the Danish government. In paragraph 66 of its 2016 judgment it observed that “it may be economically rational for the Kingdom of Denmark to accept measures such as a transfer of impaired assets, in so far as they have a limited cost and involve reduced risk and that, without such measures, it would be highly likely that it would have to bear losses in an amount greater than [the guaranteed amount].”

And, crucially, paragraph 70 of the 2016 judgment of the General Court states that the Commission had “to draw the appropriate conclusions from the fact that the 2009 measures constituted State aid declared compatible with the internal market, possibly establishing, for the purposes of that analysis, whether the aid-equivalent was equal to the total amount of those measures or to only part thereof. It follows from the case-law that, where a State grants a guarantee for a bank loan to a company in difficulty without adequate consideration, the guarantees must be regarded as aid equal to the amount of the loan guaranteed. In those circumstances, that aid cannot be included in the calculation of the normal cost for the State of winding up the company in question […]. In that context, it is to be noted that it is clear from the decision of 2009 that the aid scheme was open to fundamentally sound and solvent banking establishments and that the guarantee could only be granted in exchange for payment of a market oriented premium.”

In other words, the General Court did not deviate from the principle of the case law cited by the Court of Justice according to which previously granted State aid had to be disregarded. The General Court did acknowledge that principle but subsequently considered that only the remaining non-State aid element had to be taken into account. The Court of Justice did not address this issue in its judgment.

Instead the Court of Justice responded to several other arguments put by FIH. The main points made by the Court are as follows.

“(65) The applicability of [the private operator] test to a State measure cannot, in principle, be excluded from the outset merely because of the links that may exist between the disputed State intervention and the exercise of public authority in the form of the earlier grant of State aid.” “(68) A private investor might accept an amendment to the repayment terms of the earlier capital injection in order, in particular, to increase the prospects of obtaining the repayment of that injection. However, that does not mean that when analysing the inherent economic rationality of a measure in order to determine whether a private investor would have behaved in the same way as the State concerned, risks arising for that Member State from the previous grant of State aid may be taken into account.” “(73) The risks to which a Member State is exposed because of a debt originating from the grant of State aid to an undertaking, where those risks are inextricably linked to its role as a public authority, cannot be taken into account when the private operator principle is applied to a subsequent measure adopted by that Member State in support of that undertaking.”

On the basis of the above findings, the Court of Justice annulled the judgment of the General Court and referred the case back the General Court to examine whether the amount of State aid in the 2014 measures was correctly calculated.



Both courts agree that previously granted State aid has to be disregarded when applying the private investor principle. Both courts also agree that a private investor is motivated by future profitability while a private creditor is willing to accept a loss in order to avoid a bigger loss from non-recovery of debt owed to it.

Whereas the General Court thought that the non-State aid element of a loan or guarantee could be taken into account, the Court of Justice, whose interpretation of EU law always prevails over that of the General Court, excluded in its totality any measure containing State aid.


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

[Photo credit: svklimkinn from]



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.


  1. by Dr. José Antonio Rodríguez Miguez

    Undouble a very interesting case. Are very interesting and important your comments about the different between the Private Investor Test and the Creditor Investor Test even now both are presented under the general title of Private Operator Test. I am not sure this new general category (Private Operator Test) was the more useful; basically because under this umbrella it possible to think wrongly that all the test are the same and all have to be applied in the same way. The only common element is the market reference to a predicable behavior of a theatrical private operator but every test is different from the other because the perspective are different too. Probably in this very case the point of view of the General Court was more subtle and sensitive with this evidence. Obviously, as I always do, all we have to thanks Prof. Nicolaides for his excellent selection of cases and his brilliant comments. After reading many of them the only conclusion that appears clearly is the enormous complexity of State Aid practice and how many questions remain unsolved or almost not definitely solved at all.

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