In Brief: Case C‑672/13, OTP Bank Nyrt v Magyar Állam, Magyar Államkincstár

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A quick look at the latest ruling of the CJEU from Thursday 19th March.
 
In Case C‑672/13 OTP Bank the CJEU responded to preliminary ruling questions from the Hungarian Fővárosi Törvényszék relating to the categorisation of an agency agreement concluded in 2008 between the the Ministry of Local Government, the State Treasury and OTP Bank on the basis of Paragraph 24(15) of the Hungarian Decree of 2001 concerning aid intended to facilitate access to housing. Under. Under this agreement, the Ministry entrusted OTP Bank with the task of making payment of State aid for housing, and in return was OPT was reimbursed for this. Under the 2001 Decree the Hungarian State was, under certain conditions, also required to ‘reimburse the credit institution 80% of the amount of the loan paid by that institution and, which had become irrecoverable in accordance with the provisions of the Law on accounting, together with interest and expenses on that loan’ (para 16). In addition, it provided that the ‘State also had to guarantee the repayment to the credit institution of the amount of the capital, the interest and the expenses of the loan paid in the form of advance by the credit institution under Paragraph 5/A and which had become irrecoverable’ (para 17).OTP Bank requested implementation of the agency agreement, specifically for the third quarter of 2009 and the quarters of the following years, but its requiest was not followed through by the Hungarian State. The State argued that due to an amendment in 2011 of the 2001 decree, it was discharged from the obligations referred to above . The provision at issue provides that: ‘The obligations to reimburse the State referred to in Paragraph 25(1) and (2) of the Decree [of 2001] are not enforceable if they concern loan agreements concluded on or after 1 May 2004’ (1 May 2004 being the date of accession of Hungary to the EU). Essentially, the argument of the Hungarian State was that the guarantee provided under the 2001 decree constituted illegal State aid under EU law, that the 2011 decree was adopted to comply with EU law and that OTP Bank’s action for payment. The referring court, Fővárosi Törvényszék (Budapest Municipal Court), formulated reference questions at the behest of OTP Bank, which argued that ‘if that court were to consider that the State guarantee falls within Article 107(1) TFEU, it should ask the Court of Justice whether that guarantee is compatible with the internal market, in accordance with EU law, in particular taking account of the exception relating to aid having a social character referred to in Article 107(2)(a) TFEU, and the fact that the recipients of the type of aid at issue are individuals and not credit institutions.’ (para 22). As such, the referring court asked the following of the CJEU:‘(1)      Does a State guarantee undertaken before the accession of Hungary to the European Union and granted under [the Decree of 2001] constitute State aid and, if so, is it compatible with the internal market?(2)      If the State guarantee granted by that Decree is incompatible with the internal market, what remedies are available under EU law for any damage to the interests of the persons concerned?’

Recalling the extensive EU case law, the CJEU reformulated these questions in order to provide the referring court with a useful answer to consider ‘whether the State guarantee may be classified as ‘State aid’ within the meaning of Article 107(1) TFEU and, if so, whether it was subject to the obligation of notification laid down in Article 108(3) TFEU and, if appropriate, what are the consequences arising from the failure to fulfil that obligation.’


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Existence of Aid and Selectivity

The Court first ascertained that the State guarantee could constitute State aid within the meaning of Article 107(1) (paras 41-42) and that, because the 2001 Decree provides that it is for the credit insituttions to implement that decree and benefit from the State guarantees, there appears to be exclusivity ‘favouring certain undertakings or the production of certain goods’ (para 48) even if it covers the whole economic sector and also favours recipients who are not credit instiutions (ie those benefiting from the housing aid) (paras 49-50). Reggards the extension of the decree in 2008 to allow other economic operators to implement it, it is for the referring court to determine if this calls into question the selective nature of the aid (para 52).

Effect on Trade between MS

Recalling Case C-148/04 Unicredito Italiano, the CJEU noted that that the State guarantee ‘enables the credit institutions to conclude loan agreements without having to assume the financial risk’ meaning they do not have to assess the solvency of borrowers or provide a guarantee fee. Borrowers will also usually request additional banking services from such institutions, which confers an advantage as it increases the number of clients and consequently their revenue (para 57). As to the effect on inter-State trade, the Court underlined that this strengthening through the State guarantee ‘makes it more difficult for operators established in other Member States to penetrate the Hungarian market’. Prima facie there is therefore State aid within the meaning of Article 107(1), although ‘it is for the referring court to ascertain more specifically the selective nature of such a guarantee by determining, in particular, whether, following the amendment of the Decree of 2001 which is supposed to have taken place in 2008, that guarantee may be granted to economic operators other than credit institutions and, in the affirmative, whether that fact may call into question the selective nature of that guarantee’ (para 59).

Categorisation as New/Existing Aid and the Need for Prior Notification

In order to determine the lawfulness of this (presumed) aid, the Court then turns to the question of whether the guarantee was subject to the notification procedure laid down in Article 108(3) TFEU, ie whether it constitutes new or existing aid. The Decree of 2001 was not notified to the Commission as existing aid at the time of accession and must therefore be considered as new aid and subject to the obligation of prior notification.  ‘It is for the referring court to verify whether the Member State concerned has complied with that obligation and, if that is not the case, to declare that guarantee unlawful’ (para 68).

If there is indeed an infringement of Article 108(3) TFEU, ‘it is for the national courts to draw the necessary conclusions […]with regard to both the validity of the acts giving effect to the aid and the recovery of financial support granted in disregard of that provision’ (para 69). Except in exceptional circumstances, unlawful aid will be removed by a recovery order to eliminate the distortion of competition and the competitive advantage; in this case the CJEU can see no such exceptional circumstances and so in this situation the MS is bound to order the repayment as per the national law (paras 72-73).

The Court noted that the Commission alone can determine if the State guarantee is compatible with the Treaty and if it can benefit from the exemption on aid having a social character laid down in Article 107(2)(a) TFEU. Nonetheless if a future decision of the Commission in this respect did find the guarantee compatible, the national court must still order the recovery of that State aid: ‘If the direct effect of the last sentence of Article 108(3) TFEU is not to be compromised or the interests of individuals, which are to be protected by national courts, are not to be disregarded, the Commission’s final decision does not have the effect of regularising ex post facto the implementing measures which were unlawful by reason of their having been adopted in continuation of the prohibition laid down by that article. Any other interpretation would encourage the Member States to disregard the prohibition laid down in the last sentence of Article 108(3) TFEU and would deprive it of its effectiveness’ (para76).

No Remedies for Beneficiaries under EU Law

Lastly, the Court underlined that the beneficiaries of the State guarantee ‘may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in that article and, second, a diligent economic operator should normally be able to determine whether that procedure has been followed. In particular, where aid is implemented without prior notification to the Commission, so that it is unlawful under Article 108(3) TFEU, the recipient of the aid cannot have at that time a legitimate expectation that its grant is lawful’ (para 77)

Conclusion

The CJEU responded to the preliminary ruling questions that (1) the State guarantee granted exclusively to credit institutions prima facie constitute ‘State aid’. It is for the referring court to ascertain more specifically the selective nature of such a guarantee by determining, in particular, whether, following the amendment of the Decree of 2001 which is supposed to have taken place in 2008, that guarantee may be granted to economic operators other than credit institutions and, in the affirmative, whether that fact may call into question the selective nature of that guarantee; (2) if the referring court classifies the State guarantee at issue in the main proceedings as ‘State aid’ within the meaning of Article 107(1) TFEU, such a guarantee must be regarded as new aid and is, on that ground, subject to the obligation of prior notification. It is for the referring court to verify whether the MS concerned has complied with that obligation; (3) the beneficiaries of an State guarantee granted without regard for Article 108(3) TFEU do not have any remedies available in accordance with EU law.

 

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