Economic Continuity and Recovery of Indirect State Aid

Special insolvency procedures can confer a selective advantage that constitutes State aid.

A recovery order can be extended to the new owner of a company that had received incompatible State aid.

Introduction

Recipients of State aid that is found to be incompatible with the internal market have to pay it back with interest. This liability for repayment also extend to anyone else who benefits from the aid indirectly. It is relatively easy to identify the direct recipients. It is considerably harder to establish indirect beneficiaries when ownership of the direct recipient is transferred to a third person or assets of the direct recipient are sold to another company.

When ownership is transferred, there are two important elements that need to be considered: whether the transfer is effected at a market price and whether there is economic continuity between the direct aid recipient and the new owner.

On 29 April 2021, in case C‑890/19 P, Fortischem v European Commission, the Court of Justice had to determine whether Fortischem benefitted from incompatible State aid that had been granted to NCHZ, a Slovak chemical company. Fortischem bought NCHZ after the latter became insolvent.[1]

Fortischem appealed against the judgment of the General Court in case T-121/15, Fortischem v European Commission by which the General Court dismissed its action for the annulment of Commission decision 2015/1826 concerning State aid implemented by Slovakia for NCHZ. The judgment of the General Court was reviewed here on 5 November 2019

https://www.lexxion.eu/en/stateaidpost/economic-continuity-in-recovery-of-incompatible-state-aid/

Background

In October 2009, NCHZ entered into insolvency proceedings. In November 2009, Slovakia adopted a law on “strategic” companies requiring insolvency administrators to ensure that such strategic companies continued to operate. The aim of the law was to prevent collective dismissals. In December 2009, NCHZ was classified by the Slovak authorities as a “strategic company”. As it happened, it was the only company to be subject to that law.

In July 2011, NCHZ was sold via auction to Via Chem Slovakia. The sale was finalised on 31 July 2012. A day later, on 1 August 2012, Via Chem sold NCHZ’s chemical division, with the exception of immovable assets, to Fortischem. The immovable assets necessary for chemical production were made available to Fortischem under a lease contract.

In October 2014, the Commission adopted decision 2015/1826. In that decision, it took the view, inter alia, that the granting NCHZ strategic company status constituted a selective advantage in favour of that company, was attributed to the state, led to the use of state resources and distorted competition in a market open to trade between Member States. The designation of the company as strategic prevented public creditors [e.g. the public administration departments collecting taxes, social security, health insurance, etc] from enforcing their claims. The Commission concluded that the measure constituted State aid within the meaning of Article 107(1) TFEU and that the aid was unlawful and incompatible with the internal market. That aid had to be recovered from NCHZ. The recovery order was extended to Fortischem, since it had a connection of “economic continuity” with NCHZ.

Transfer of state resources and advantage as a result of the special insolvency regime

Fortischem argued that the fact that NCHZ was subject to special procedure could not be attributed to the state and did not confer to it any advantage.

First, the Court of Justice recalled that “(32) the application to an undertaking of rules derogating from the normal insolvency rules must be regarded as giving rise to the grant of State aid, where it is established that the undertaking has been permitted to continue trading in circumstances in which it would not have been permitted to do so if the normal insolvency rules had been applied, or has enjoyed one or more advantages, such as, inter alia, a de facto waiver of public debts wholly or in part, which could not have been claimed by another insolvent undertaking under the application of the normal insolvency rules”.

“(34) The classification of NCHZ as a ‘strategic company’, […] led, first, to the continuation of that undertaking’s operations, irrespective of any consideration of its economic situation and its capacity to honour its debts, in particular public debts, and, second, to the retention of its staff, because of the barrier to collective redundancies, which enabled that undertaking to continue to operate with an assurance provided to its customers and suppliers that its operations would continue until the end of 2010.”

Then the Court of Justice agreed with the previous analysis and conclusions of the General Court. “(35) In circumstances corresponding to normal market conditions NCHZ could not have obtained the same advantage as that made available to it through State resources. […] the situation would not have been the same if that company had been subject to the normal insolvency rules and no additional burden had been imposed on the public creditors. “(36) There was an economic advantage conferred on NCHZ, through State resources, as a result of the classification of that company as a ‘strategic company’”. “(43) The continuation of NCHZ’s operations without any reduction in its staff necessarily increased that company’s debt to the public creditors, in particular vis-à-vis the social insurance company and the health insurance company. Since NCHZ was already, at the time of its declaration of insolvency, incapable of settling all of its debts, the increase of those debts with those public creditors amounted, in reality, to an effective waiver, at least in part, of those creditors’ claims”.

The Court agreed with the findings of the Commission that NCHZ derived an advantage from not paying its debt to public creditors and from being able to continue normal transactions with third parties which were assured that it would not suddenly cease operations for as long as the special insolvency procedure was applicable.

Market price

Next Fortischem argued that NCHZ’s assets had been purchased at a market price and, as a result, contained no State aid.

The Court of Justice, first, reiterated the principle that “(58) illegal aid must be recovered from the company which carries on the economic activity of the undertaking which initially benefited from the aid where it is established that that company retains the actual competitive advantage associated with the benefit of that aid”.

“(59) Economic continuity between companies who are parties to a transfer of assets is assessed in the light of the subject matter of the transfer (assets and liabilities, maintenance of the workforce, bundled assets), the transfer price, the identity of the shareholders or owners of the acquiring undertaking and the original undertaking, the moment when the transfer takes place (after the commencement of the investigation, opening of the procedure or the final decision) and also the economic logic of the transaction”.

Then the Court clarified that “(60) where an undertaking that has benefited from unlawful State aid is bought at the market price, that is to say at the highest price which a private investor acting under normal competitive conditions was ready to pay for that company in the situation it was in, in particular after having enjoyed State aid, the aid element was assessed at the market price and included in the purchase price. In such circumstances, the buyer cannot be regarded as having benefited from an advantage in relation to other market operators”.

Then the Court of Justice recalled that NCHZ was first sold to Via Chem and then to Fortischem. The Court of Justice also recalled the reasoning of the Commission and the General Court. “(63) The General Court found, […] that the Commission had not erred in finding, in the first place, that both the scope of the transaction, namely the subject matter of the transfer, and its economic logic could constitute evidence of the existence of economic continuity between NCHZ and the appellant and, in the second place, that it could not be regarded as certain that the two successive sales of NCHZ’s assets had been made at market price. It added, […] that, in that context, in the light of the fact that, in accordance with the case-law, first, even supposing that the transfer price was in line with the market price, it only constituted a single factor in the analysis of the existence of potential economic continuity and, secondly, the payment of a price consistent with market conditions cannot suffice to offset the competitive advantage linked to the receipt of unlawful aid, it had to be held that, on account of the circumstances of the present case, the Commission had been fully entitled to conclude that the obligation to recover the aid in question should be extended to the appellant, irrespective of any finding of an intention to circumvent recovery.”

It is difficult to reconcile the conclusion of paragraph 63 with the unequivocal statement of paragraph 60 that no State aid is passed on to the new owner if the new owner acquires the aided company at market price. In paragraph 60 there is no qualification as to whether there is continuity between the company which is sold and the acquiring company.

It seems that the Court considers that only if a company is broken up or loses its identity, so there is no “economic continuity”, then previously received State aid disappears. But whereas “economic continuity” is a subjective and fluid concept, advantage is not. The relevant issue is whether Fortischem paid less that it would have otherwise paid. The Court did not examine it.

Indeed, Fortischem argued that if assets are sold in the context of insolvency proceedings conducted by a personally liable insolvency administrator, acting under the supervision of an insolvency court and solely in the interests of the creditors, those assets should be considered as being sold at market price.

But the Court of Justice replied that a judgment to which Fortischem had referred in order to back up its argument did not “(65) establish a presumption of general application.” And then it added that “(66) in the case giving rise to that judgment, it was common ground that the sale of the assets of the beneficiary of the aid at issue to another undertaking had been effected at the market price.”

Well, if the sale had been effected at market price and if that fact is stressed by the Court of Justice as being relevant, how can a sale at market price not constitute a presumption of general application?

Burden of proof

The Court of Justice recalled at the outset the fundamental principle that the burden of proof as to the possible existence of economic advantage obtained by the purchaser of assets of the aid beneficiary lies with the Commission. However, it did not accept that Fortischem had demonstrated that the Commission failed to prove the existence of advantage.

The assessment criteria relating to the scope and economic logic of the transaction

The “economic logic of the transaction” is one of the criteria used to assess whether there is economic continuity between the company that is sold and the acquiring company.

The Court of Justice pointed out that “(91) the appellant acquired all NCHZ’s assets, with the exception of the immovable assets necessary for chemical production, which it nevertheless leased, […] It was thus a complete transfer of NCHZ to the appellant which indicates that there was economic continuity between those two undertakings.”

The Court also recalled that “(96) in order to find that there was economic continuity between NCHZ and the appellant, the Commission did not confine itself, […] to examining solely the criteria of the scope and economic logic of the transaction transferring NCHZ’s assets to the appellant, but also analysed other criteria, namely the sale price, the possible intention of evading the recovery decision, any links between the initial owner and the new owner, and the time of the sale.”

It highlighted the finding of the General Court “(97) that it could not be regarded as certain that the two successive sales had been made at market price” and that “(98) none of the criteria analysed made it possible definitively to rule out the existence of economic continuity between NCHZ and the appellant.”

This sounds like presumption of guilt unless innocence can be proven.

“(100) The extension of the obligation to recover unlawful aid depends on whether the company which carries on the activities of the beneficiary of that aid retains the actual benefit of that aid, which is the case if there is economic continuity between that beneficiary and that company. The criterion of the economic logic of the transaction is expressly referred to in that case-law, whereas the criterion of the scope of the transaction corresponds to that of the subject matter of the transfer. […] in essence, those two criteria suggested clearly that there was economic continuity between NCHZ and the appellant.”

“(101) As regards the criterion relating to the sale price, it is clear […] that the General Court, […] considered, in essence, that it had not been established that, in the present case, that price was in line with the market price, with the result that the case-law cited in paragraph 60 of this judgment could not, in any event, apply.”

“(102) In those circumstances, […] even if the appellant’s purchase price for NCHZ’s assets was in line with the market price, that factor would not have sufficed to rule out the existence of economic continuity between NCHZ and the appellant”.

Again this reasoning seems to conflate economic continuity with the presence of advantage. If the payment of a market price is sufficient to eliminate advantage, then it becomes irrelevant whether there is continuity between the direct aid recipient and the new owner.

The Court of Justice went on to reiterate that “(107) the General Court stated […] that the fact that the transfer price of the assets of the beneficiary of the unlawful aid to another undertaking is consistent with market conditions may be insufficient to rule out, in itself, the existence of economic continuity between the aid beneficiary and the purchaser of the assets and does not prevent, in some circumstances, extension, to the purchaser, of the obligation to recover that aid.”

And the Court concluded that “(109) it is apparent […] that the General Court found that it had not been demonstrated that the sale of NCHZ’s assets first to Via Chem, and then to the appellant, was made at market price.”

The appeal of Fortischem was dismissed in its entirety.


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

https://curia.europa.eu/juris/document/document.jsf?text=&docid=240560&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=6890449

Tags

Über

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 presently holds positions at the College of Europe and the University of Maastricht. 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.

Zusammenhängende Posts

01. Jun 2021
State Aid Uncovered von Phedon Nicolaides

The Impossibility of Proving the Absolute Impossibility to Recover Incompatible State Aid

It is not sufficient to claim that is it absolutely impossible to recover incompatible State aid. It must be shown that alternative methods have been actually tried without success. Introduction It is rather impossible for Member States to prove that it is absolutely impossible to recover State aid that has been found by the Commission, and confirmed by EU courts, […]
08. Dez 2020
State Aid Uncovered von Phedon Nicolaides

A Rare Case of Altmark-compliant SGEI (Part II)

For a service to be in the general economic interest, it must be shown to fill a gap in the market or to offer what the market fails to provide adequately. [In case you have missed part I, you can access it here.] Introduction Services of general economic interest [SGEI] are important for the functioning of European societies. However, the […]
01. Dez 2020
State Aid Uncovered von Phedon Nicolaides

A Rare Case of Altmark-compliant SGEI (Part I)

For a service to be in the general economic interest, it must be shown to fill a gap in the market or to offer what the market fails to provide adequately. Introduction Services of general economic interest [SGEI] are important for the functioning of European societies. However, the granting of compensation to an undertaking for the provision of SGEI must […]
14. Jul 2020
State Aid Uncovered von Phedon Nicolaides
report

2019 Competition Report

The Annual Competition Report is a useful document, but it should provide more information on the results of the ex post evaluations and ex post monitoring. Update on Temporary Framework: Number of approved and published COVID-19 measures, as of 10 July 2020: 202* Legal basis: Article 107(2)(b): 20; Article 107(3)(b): 171; Article 107(3)(c): 17 Six Member States have implemented 11 […]
02. Jun 2020
State Aid Uncovered von Phedon Nicolaides
euro coins

i) Investor-State Arbitration ii) Recovery of Incompatible State Aid iii) State Aid Scoreboard 2019

Member States abolish bilateral investment treaties between themselves. When the Commission orders recovery of incompatible State aid, interest has to be added to the recoverable amount for the whole period of illegality regardless of any national limitation rules. In 2018, Member States granted EUR 121 billion to industry and services, EUR 6.3 billion to agriculture and EUR 50 billion to […]
12. Mai 2020
State Aid Uncovered von Phedon Nicolaides
Road sign "Wrong Way"

Advantage Must be Proven, Not Assumed

The European Commission has to consider whether the private investor principle is applicable in cases of state investments. It is for Member States to prove that their investments conform with the private investor principle. Temporary Framework As of 9 May 2020, the European Commission had approved 113 State aid measures to combat covid-19. Their legal basis was: Article 107(2)(b): 10; […]
05. Mai 2020
State Aid Uncovered von Phedon Nicolaides
corona virus poster

Non-recovery of Incompatible State aid Is Costly

Legal and practical difficulties in the recovery of incompatible State aid do not constitute justifiable “absolute impossibility”. Temporary Framework On 1 May, the total number of State aid measures to combat covid-19 approved by the European Commission reached 102. Their legal basis was: Article 107(2)(b): 9; Article 107(3)(b): 86; Article 107(3)(c): 7   Introduction The 2020 Temporary Framework for State […]
31. Mrz 2020
State Aid Uncovered von Phedon Nicolaides

How to Make Good the Damage Caused by a Natural Disaster

Compensation for costs incurred as a result of a natural disaster is State aid. The compensation must be for damage directly caused by the natural disaster. Introduction State aid to make good the damage caused by an “exceptional occurrence” such as the corona virus covid-19 is compatible with the internal market. The legal basis for exemption is Article 107(2)(b). Of […]
05. Nov 2019
State Aid Uncovered von Phedon Nicolaides
Lab test tubes

Economic Continuity in Recovery of Incompatible State aid

The new owner of a company that received incompatible State aid may be liable to pay it back. Introduction   Companies rarely escape from the obligation to repay incompatible State aid. Over the past decade or so, very few companies have successfully argued that they legitimately expected that the aid they received was compatible with the internal market. When a […]
13. Mrz 2019
State Aid Uncovered von Phedon Nicolaides

How Can Incompatible State Aid Be Passed-on from one Company to another to Avoid Recovery?

Introduction State aid that is incompatible with the internal market has to be paid back, unless the repayment would be contrary to a general principle of EU law. Last November the Court of Justice ruled in case C‑622/16 P, Scuola Elementare Maria Montessori v European Commission that “(79) the principle that ‘no one is obliged to do the impossible’ is among the […]