Public authorities often grant guarantees to undertakings so that the latter can borrow commercial loans at lower rates of interest. The 2008 Commission Notice on guarantees sets out four cumulative conditions that create a presumption that a state guarantee is free of State aid:
1. The borrower is not in financial difficulty.
2. The guarantee must be linked to a specific financial transaction, for a fixed maximum amount and limited in time.
3. The guarantee does not cover more than 80% of the outstanding loan.
4. A market-oriented price is paid for the guarantee.
It follows that the first thing that a state guarantor must examine is whether the borrower is not in financial difficulty. This is because an undertaking that is in financial difficulty in the meaning of the Guidelines on State aid for rescue and restructuring has a high probability of going bankrupt with the consequence that the whole loan will not be repaid.
On 12 October 2023, the Court of Justice, in case C-445/22 P, Larko v European Commission, decided that the Greek authorities should have been aware of the financial difficulties encountered by Larko and therefore the guarantee they granted to Larko constituted State aid.1
Larko, a Greek mining company, had appealed against the judgment of the General Court, in case Τ-423/14 RENV, Larko v European Commission, by which the General Court dismissed its action for annulment of Commission decision 2014/539.
Larko had three shareholders. The Greek state held 55.2% of the shares through the Hellenic Republic Asset Development Fund [HRADF]. National Bank of Greece, a private financial
institution, held 33.4% of the shares, and the state-owned Public Power Corporation, the main electricity producer in Greece, held 11.4% of the shares.
In March 2012, HRADF informed the Commission of a plan to privatise Larko. In March 2013, the Commission initiated the formal investigation procedure into the planned privatisation. In March 2014, the Commission adopted the contested decision 2014/539.
The Commission concluded that Larko had received illegal and incompatible aid of about EUR 136 million. The initial appeal of Larko was dismissed by the General Court. However, the Court of Justice found, in case C-244/18 P, Larko v European Commission, that the General Court had committed an error of law, partly annulled the initial judgment and returned the case for its remainder to the General Court.
The Court of Justice held that the General Court erred in its assessment of a 100% state guarantee for a loan of EUR 30 million granted by Greece’s ATE bank. The guarantee was for a term of three years and was provided for a premium of 1% per annum. The General Court wrongly assumed that a private operator in the position of the Greek authorities should have been aware of Larko’s difficulties and would therefore not have granted that guarantee on the same terms. According to the Court of Justice it is the Commission that bears the burden of proving that the conditions for the application of the market economy investor principle [MEIP] did not hold and the General Court had reversed the burden of proof.
When the General Court re-assessed the case, again it dismissed Larko’s action for annulment of Commission decision 2014/539. Larko appealed again and, therefore, this was the second time that the Court of Justice heard the same case.
The obligations and discretion of the Commission
First, the Court of Justice observed that Article 107(1) TFEU does not cover a measure granted in favour of an undertaking through state resources where that undertaking could have obtained the same advantage in circumstances corresponding to the normal market conditions.
Then, it recalled established case law according to which it is for the Commission to adduce evidence of the existence of State aid within the meaning of Article 107(1) TFEU and, therefore, also to prove that the condition for conferring an advantage on the beneficiaries is satisfied. Where the private investor test is applicable, the burden is on the Commission to prove, taking into account, in particular, the information provided by the Member State concerned, that the conditions for the application of the private operator principle are not satisfied, with the result that the state intervention contains an advantage. The Commission has to carry out an overall assessment taking into account all relevant factors. To that end, the Commission must request the Member State concerned to provide it with all relevant information. [paragraphs 29-31 of the judgment]
Since the Commission does not have direct knowledge of the circumstances in which an investment decision was taken, it must rely, for the purposes of applying the MEIP, to a large extent, on objective and verifiable evidence produced by the Member State. [para 32]
Then the Court stressed that even where the Commission is confronted with an uncooperative Member State which does not provide the Commission with the requested information, the Commission must base its decisions on evidence of a certain reliability and consistency which provides a sufficient basis for concluding that an undertaking has benefited from an advantage constituting State aid. [para 33]
At the same time, the Court explained that it is not for the Commission to seek, on its own initiative and in the absence of any relevant evidence, all the information which might be connected with the case before it, even if such information is in the public domain. [para 34]
Lastly, only the information available and the foreseeable developments at the time when the decision to proceed with the investment was taken are relevant, for the purposes of applying the private investor test. [para 35]
The 2008 Commission Notice on guarantees and the obligations of Member States
Next, the Court of Justice examined how the presence of State aid is detected in state guarantees. It recalled that the Commission circumscribed its discretion by issuing the 2008 Notice on guarantees. Section 3.2 of that Notice sets out the conditions which, if satisfied, are sufficient to establish the absence of State aid. In particular, the borrower must not be in financial difficulty and the guarantee must be remunerated with the payment of a premium that corresponds to the market price. More specifically, section 3.2(d) defines detailed criteria to be used in order to determine whether or not the guarantee premium corresponds to the market price.
However, the Court stressed that the criteria in the 2008 Notice cannot alter the allocation of the burden of proof between the Commission and the Member State. Although those criteria limit the discretion of the Commission, they cannot create obligations for Member States. [para 39]
Were Larko’s financial difficulties known to the Greek authorities?
Larko argued that the Greek authorities were not necessarily aware of its financial difficulties when they granted the guarantee.
The Court of Justice, first, observed that point 3.2(a) of the guarantee Notice requires that the borrower must not be in financial difficulty and refers, for the assessment of that condition, to the Guidelines on State aid for rescuing and restructuring, which define, in points 9 to 11, the concept of “firm in difficulty”. The Notice, in point 3.2(d), stipulates that it is necessary, inter alia, to take into account “the probability of default of the borrower”. [para 48]
Then, the Court held that since point 3.2(d), unlike point 3.2(a) of the Notice, does not contain any reference to the Guidelines on State aid for rescuing and restructuring, the possible financial difficulties of the undertaking concerned, need not be assessed by reference to the concept of “firm in difficulty”. [para 49]
I find the statement of the Court in paragraph 49 of the judgment difficult to understand. First of all, section 3.2 of the Notice lays down four cumulative conditions. Even if point 3.2(d) does not refer to firms in difficulty, it must still be applied in conjunction with point 3.2(a). Second, the definition of the concept of the firm in difficulty does not require calculation of the probability of default. It only lays down thresholds such as those concerning capital depletion, high debt level or low liquidity. This means that at any rate, the probability of default has to be calculated even if the borrower is not a firm in difficulty. Of course, a company that is in difficulty need not necessarily go bankrupt. A guarantor may still be willing to provide a guarantee for an appropriately high premium. As the Court has elsewhere held [see C-211/20 P, European Commission v Valencia Club de Fútbol], the methodology in the Notice cannot be applied to firms in difficulty. However, the Notice does not prohibit guarantees for firms in difficulty. Even in such difficult cases, default may not be certain and, therefore, a market operator may still be willing to provide an appropriately priced guarantee.
Next, the Court pointed out that it was not apparent from the judgment in case C-244/18 P, Larko v Commission, that the Court of Justice had considered that there was no evidence to show that the Greek authorities were aware of Larko’s difficulties at the time the guarantee was granted in 2008. That is why, in that judgment, the Court of Justice requested the General Court, when it referred the case back to that court, to ascertain whether there was evidence that the Greek authorities had been or should have been aware of Larko’s difficulties at the time the guarantee was granted. [paras 51-52]
Indeed, the General Court did find that there was ample evidence that Larko had encountered financial difficulties, such as a high debt-to-equity ratio and negative financial results. [para 56]
More importantly, later on in the judgment, the Court of Justice also noted that the fact that the guarantee had been granted in respect of the entire loan should have alerted the Greek authorities that, in accordance with point 3.2(c) of the guarantee Notice, the guarantee could not be presumed to be free of State aid. [para 92] This, of course, does not necessarily mean that the guarantee constituted State aid. But if there was no presumption that it was free of State aid, the Greek authorities should have estimated the premium in a way that it should have reflected the true probability of default.
In relation to establishing a market premium for the guarantee, the Court of Justice observed that the Commission did try to assess the appropriate amount of the premium. The Commission could not find an indication of any reference value for similar guarantee premiums on the market. The Commission had expressly requested the Greek authorities to provide it with all relevant information in order to enable it to assess the adequacy of the 1% premium to remunerate the guarantee that covered 100% of the loan. [para 58]
The Court of Justice also examined a number of other pleas raised by Larko but in the end it dismissed the appeal in its entirety.