Restructuring State Aid

Restructuring State Aid - State Aid Uncovered photos 12

Introduction

State aid to failing undertakings is the most distortionary form of public subsidies. They prevent the market exit of inefficient companies. For this reason, State aid for rescue or restructuring of undertakings in difficulty must always be notified to the Commission which examines each case very carefully and allows this kind of aid only when, among other things, the closure of the company would cause economic or social hardship and the aid is capable of returning the company to commercial viability.

However, on 8 May 2024, in case T-28/22, Ryanair v Commission, the General Court annulled Commission decision SA.63203 by which it had authorised restructuring aid to the German airline Condor. The General Court annulled the decision not because Condor was a relatively small airline whose default would not cause any significant disruption to air travel, but because the Commission failed to ensure adequate sharing of the cost of restructuring.1

Condor operates charter flights. During the period 2019-2021 Condor benefited from several State aid measures which aimed to resolve its financial difficulties caused by the insolvency of its former parent company, Thomas Cook Group, and to compensate it for damage it had suffered as a result of the covid-19 pandemic and related travel restrictions.

The Commission approved rescue aid for Condor in October 2019 [SA.55394]. Ryanair challenged that decision, but in May 2022, the General Court, in case T-577/20, Ryanair v Commission, dismissed Ryanair’s action.

In April 2020, the Commission approved compensation for the losses that Condor incurred as a result of the covid-19 closures [SA.56867]. In June 2021, in case T-665/20, Ryanair v Commission, the General Court annulled Commission decision SA.56867 on the grounds that the Commission failed to justify properly its finding that Condor’s problems did not predate the impact of the pandemic. Following that judgment, the Commission re-opened the case and in July 2021 concluded again that the aid was compatible with the internal market on the basis of Article 107(2)(b) TFEU.

In addition, in July 2021, by decision SA.63617, the Commission approved, also on the basis of Article 107(2)(b), a second measure that compensated Condor for the damage it suffered as a result of the pandemic. At the same time, the Commission adopted decision SA.63203 by which it authorised restructuring aid for Condor.

In the present case, after finding that Ryanair had legal standing to challenge the Commission decision, the General Court examined Ryanair’s arguments that its procedural rights were violated because the Commission should have had doubts as to the compatibility of the aid with the internal market and should have opened the formal investigation procedure.

Ryanair’s arguments centred on the application of the Commission’s Guidelines on Rescue & Restructuring aid.

Eligibility for aid under the R&R Guidelines

Ryanair submitted that Condor was not eligible for restructuring aid under point 22 of the R&R Guidelines.

Point 22 of the R&R Guidelines states: “A company belonging to or being taken over by a larger business group is not normally eligible for aid under these guidelines, except where it can be demonstrated that the company’s difficulties are intrinsic and are not the result of an arbitrary allocation of costs within the group, and that the difficulties are too serious to be dealt with by the group itself.”

The Commission had considered that Condor was not part of a larger business group. Condor’s sole shareholder at that time, SG Luftfahrt, was merely a trust company created solely to hold Condor’s shares pending their sale to an investor, while SG Luftfahrt did not hold shares in other undertakings.

The Court noted that “(44) Attestor’s [the eventual new owner] purchase of Condor was conditional on the grant of the measure at issue and was thus de facto suspended until approval of that measure. The applicant has, moreover, failed to offer any evidence or indication capable of demonstrating that, without the measure at issue, Attestor would have purchased Condor in any event.”

“(45) In those circumstances, the partial write-off of Condor’s debt to the German State, which is the subject matter of the measure at issue, should be analysed, in essence, as being a negative factor incorporated in the price to be paid by Attestor for the acquisition of Condor, with that price necessarily reflecting the amount of Condor’s debt written off following the adoption of the measure at issue and which will therefore no longer have to be repaid.”

Here a “negative factor” is an increase in the offered price. In contrast, a positive factor would reduce the price.

The General Court explained that “(46) where a business group is willing to purchase a company only on condition that that company receives State aid in order to improve its financial situation, with the result that that aid could be analysed as being a negative factor incorporated in the price paid by the group for the acquisition of that undertaking, that undertaking cannot be regarded as being in the process of being taken over by that group, for the purposes of point 22 of the R&R Guidelines”.

“(47) The objective of that prohibition [in point 22 of the R&R Guidelines] is therefore to prevent a group of undertakings from having the State bear the cost of a plan for the restructuring of one of the undertakings belonging to the group, when that undertaking is in difficulty and the group itself has created those difficulties or has the means to deal with them on its own”.

“(48) In that context, the purpose of extending the prohibition of the benefit of restructuring aid to undertakings in difficulties which are in the process of being ‘taken over’ by a group is to prevent a group of undertakings from circumventing that prohibition by taking advantage of the fact that an undertaking which it is in the process of buying does not yet formally belong to it at the time of payment of the restructuring aid in favour of the undertaking being purchased”.

“(49) However, such a situation cannot be assimilated to that of the present case, where the acquisition of Condor by Attestor is conditional upon the grant of the measure at issue, with the result that that measure constitutes, in essence, a negative element forming part of the price to be paid by Attestor for the acquisition of Condor.”

Contribution of the aid to an objective of common interest

Ryanair contended that the Commission failed to demonstrate that the aid contributed to an objective of common interest. According to Ryanair, the service provided by Condor could not be classified as important and it was not a service that was hard to replicate, as required by point 44 of the R&R Guidelines.

The General Court, first, noted that “(58) Member States may show, in particular, in accordance with point 44(b) of the R&R Guidelines, that ‘there is a risk of disruption to an important service which is hard to replicate and where it would be difficult for any competitor simply to step in (for example, a national infrastructure provider)’.”

In response to Ryanair’s argument that Condor’s service was not important, the Court observed that “(61) the R&R Guidelines do not provide any definition of the concept of ‘important service’. Nevertheless, it is apparent from an overall interpretation of point 44 of the guidelines that, in order for a service to be regarded as ‘important’ within the meaning of point 44(b) of the R&R Guidelines, there is no requirement for the undertaking that provides that service to play an important systemic role in a particular region or sector, or that it be entrusted with a service of general economic interest (SGEI), those two latter situations being covered respectively by point 44(c) and (d) of the guidelines”.

“(62) Furthermore, the mere fact that point 44(b) of the R&R Guidelines refers ‘for example’ to ‘a national infrastructure provider’ does not in any way mean that the scope of that point is limited to services that are of importance at the national level”.

“(63) Similarly, a service may be regarded as ‘important’ within the meaning of point 44(b) of the R&R Guidelines even if the size of the relevant market is relatively small”.

“(64) In the contested decision, the Commission found that Condor played an important role as a facilitator and ‘consolidator’ on the German leisure travel market, owing, in essence, to the specific features of its services, provided to approximately 11 000 independent tour operators and travel agencies, many of which were small and medium-sized enterprises (SMEs).”

“(65) In addition, according to the Commission, Condor has gained considerable expertise in opening and developing tourist destinations, and has built technical capacities with regard to consolidating demand and flexible bookings and flight schedules by means of proprietary, customised IT programmes and processes that it had developed in-house.”

“(66) It follows from those elements that the Commission was entitled to take the view that the service provided by Condor was an ‘important service’ within the meaning of point 44(b) of the R&R Guidelines.”

Ryanair also contended that the service provided by Condor was not hard to replicate, nor was it difficult for any competitor simply to step in.

However, the General Court held that “(79) the Member State concerned is not required to demonstrate that, in the absence of the aid measure, certain negative consequences would necessarily arise as a result of the aid beneficiary’s failure, but only that such consequences might arise […] There is thus no requirement for the Member State to demonstrate that, following the hypothetical failure of an aid recipient, it would be impossible for its competitors to replicate and ensure the service provided by it, but only that it would be complicated or difficult to do so.”

“(80) The Commission found in the contested decision that it was highly unlikely that Condor’s competitors would be both willing and able to build the required expertise, networks and technology within a reasonable time frame to take on Condor’s role as facilitator and ‘consolidator’ for around 11 000 independent tour operators and travel agencies on the German leisure travel market.”

“(81) The technology needed to operate the interfaces provided by Condor to its clients had largely been developed by that company and could not be replicated in the short to medium term, and that Condor’s exit from the market would cause the loss of technical knowledge and expertise, which would take time and investment to rebuild.”

“(83) The mere fact that another airline operates on part of the routes served by Condor or that it aggregates demand from tour operators and travel agencies is not capable of establishing that a competitor would easily replicate Condor’s service in the event of the latter’s failure.”

The need for state intervention and its incentive effect

Ryanair claimed that the Commission did not show that the aid was necessary and had an incentive effect, as required by the R&R Guidelines to do.

The Commission had found that the only credible scenario in the absence of the measure at issue was that of Condor’s liquidation and that, in such a scenario, the objectives of the measure could not be attained.

The General Court, first, recalled that “(96) in order for aid to benefit from one of the derogations contained in Article 107(3) TFEU, it must not only comply with one of the objectives set out in Article 107(3) (a), (b), (c) or (d) TFEU, but it must also be necessary for the attainment of those objectives. That aid must in fact induce the beneficiary to adopt conduct likely to assist attainment of those objectives […] Accordingly, in the context of Article 107(3)(c) TFEU, in order to be compatible with the internal market, the planned aid must have an incentive effect and thus be necessary to ‘facilitate the development of certain economic activities or of certain economic areas’”.

“(98) According to point 8 of the R&R Guidelines, undertakings should only be eligible for restructuring aid when they have exhausted all market options and where such aid is necessary in order to achieve a well-defined objective of common interest. In addition, it is apparent from point 53 of those guidelines, and from point 3 of the second paragraph of Annex II thereto, that the Member State concerned must provide a comparison with a credible alternative scenario not involving State aid, demonstrating how the objective pursued by the aid would not be attained, or would be attained to a lesser degree, in the case of that alternative scenario; such a scenario may, for example, include debt reorganisation, asset disposal, private capital raising, sale to a competitor or break-up, in each case either through entry into an insolvency or reorganisation procedure or otherwise. Lastly, under point 59 of the R&R Guidelines, Member States that intend to grant restructuring aid must demonstrate that in the absence of the aid, the beneficiary would have been restructured, sold or wound up in a way that would not have achieved the objective intended by the aid, while that demonstration can form part of the analysis presented in accordance with point 53 of the R&R Guidelines.”

“(100) The Commission found in essence in the contested decision that the only credible scenario in the absence of the measure at issue was that of Condor’s liquidation and that, in such a scenario, the objectives of the measure at issue could not be attained”.

“(102) Since the Commission based its analysis on just such an alternative scenario, as is apparent from paragraph 100 above, the applicant’s argument must be rejected.”

Condor’s long-term viability

Ryanair argued that the Commission did not show that the restructuring plan was realistic, coherent and capable of restoring Condor’s long-term viability.

The General Court recalled that “(123) in accordance with points 45, 47, 48 and 50 to 52 of, and point 9 of the second paragraph of Annex II to, the R&R Guidelines, restructuring aid must tackle the reasons for the losses suffered by the beneficiary. […] The beneficiary’s return to viability should derive mainly from internal measures, entailing in particular withdrawal from activities which would remain structurally loss-making in the medium term and should be demonstrated in a baseline and in a pessimistic scenario. An undertaking is considered to have achieved long-term viability when it is able to provide an appropriate projected return on capital after having covered all its costs.”

The General Court agreed with the Commission’s analysis and rejected Ryanair’s plea.

The proportionality of the aid and burden sharing

Ryanair submitted that the Commission did not demonstrate that the aid was proportionate, contrary to points 61 to 64 and 67 of the R&R Guidelines, and that there was sufficient burden sharing.

Points 61 to 64 of the R&R Guidelines require the aid beneficiary or new investors to contribute to the restructuring costs from their own resources. An own contribution should at least cover 50% of the restructuring costs.

The General Court recalled that “(199) the Commission identified three sources of own contributions within the meaning of the R&R Guidelines, namely (i) the financing provided by Attestor in connection with the acquisition of Condor, (ii) write-offs of claims by Condor’s creditors as part of the insolvency plan endorsed by the insolvency court and (iii) permanent cost reductions as part of the restructuring plan.”

Then the Court observed that “(201) the applicant has not disputed the Commission’s assertion […] that Attestor’s own contribution already by itself amounted to 77% of the financing of the restructuring plan, that is to say, more than 50% of the restructuring costs”.

Next, the Court pointed out that “(204) it is apparent from point 65 of the R&R Guidelines that where State support is given in a form that enhances the beneficiary’s equity position, for example where the State provides grants, injects capital or writes off debt, that can have the effect of protecting shareholders and subordinated creditors from the consequences of their choice to invest in the beneficiary; that can create moral hazard and undermine market discipline. Consequently, aid to cover losses should only be granted on terms which involve adequate burden sharing by existing investors.”

“(205) In accordance with point 66 of the R&R Guidelines, adequate burden sharing normally means that incumbent shareholders and, where necessary, subordinated creditors must absorb losses in full. Subordinated creditors should contribute to the absorption of losses either via conversion into equity or write-down of the principal of the relevant instruments. Therefore, State intervention should only take place after losses have been fully accounted for and attributed to the existing shareholders and subordinated debt holders.”

“(206) Under point 67 of the R&R Guidelines, adequate burden sharing also means that any State aid that enhances the beneficiary’s equity position should be granted on terms that afford the State a reasonable share of future gains in value of the beneficiary, in view of the amount of State equity injected in comparison with the remaining equity of the company after losses have been accounted for.”

“(207) In that regard, it should be observed in the first place that the Commission failed in the contested decision to assess whether the measure at issue complied with the requirements set out in point 67 of the R&R Guidelines. There is nothing in the contested decision to suggest that the Commission addressed the question of whether the measure at issue had been granted on terms that would afford the Federal Republic of Germany a reasonable share of future gains in value of Condor.”

“(210) In that respect, first, as regards the literal interpretation of point 67 of the R&R Guidelines, it should be pointed out that, according to the wording of that point, the requirement to provide for terms that afford the State a reasonable share of future gains in value of the beneficiary applies to ‘any State aid that enhances the beneficiary’s equity position’.”

“(211) Point 65 of the R&R Guidelines provides three examples of State aid given ‘in a form that enhances the beneficiary’s equity position’, namely grants, injections of capital and write-offs of debt.”

“(212) In the present case, the measure at issue is in the form, inter alia, of a partial write-off of debt, such that it must be classified as ‘State aid that enhances the beneficiary’s equity position’ within the meaning of point 67 of the R&R Guidelines.”

“(216) The wording of point 67 of the R&R Guidelines thus appears to be somewhat inconsistent since, on the one hand, its introductory part states that it is to apply to ‘any State aid that enhances the beneficiary’s equity position’, namely grants, capital injections and debt write-offs, while its final part refers, on the other hand, to ‘State equity injected’.”

“(218) In any event, the inconsistent wording of point 67 of the R&R Guidelines referred to in paragraph 215 above, which is, moreover, attributable to the Commission, as it drew up those guidelines, should have raised doubts on its part as to whether the measure at issue fell within the scope of point 67 of the R&R Guidelines and led it to examine that provision more thoroughly in the light of its context and objectives, which it failed to do.”

“(219) Indeed, where the wording of a provision of EU law causes difficulties of interpretation, it is necessary to examine that provision in the light of the objectives of the act of which it forms part and, where it is open to several interpretations, preference must be given to that interpretation which ensures that the provision retains its effectiveness”.

“(224) It follows that points 66 and 67 of the R&R Guidelines lay down two autonomous requirements, the content and application of which relate to different points in time. First, the requirement in point 66 concerns absorption of the beneficiary’s losses by existing shareholders and subordinated debt creditors, which must be implemented prior to intervention by the State. Second, point 67 refers to a situation in the future, namely that of future gains in value of the beneficiary, and provides that, in such a case, the State must obtain a reasonable share of those gains in value.”

“(225) The obligation to absorb losses before the State intervenes and the necessity to ensure that it is afforded a reasonable share of future gains in value of the beneficiary are mutually reinforcing and complementary, since dealing with the beneficiary’s losses and the support of the State are an essential condition for ensuring the beneficiary’s subsequent return to viability and, therefore, its profitability. There thus appears to be no legitimate reason to justify excluding certain forms of aid from the scope of the obligation set out in point 67 of the R&R Guidelines.”

“(226) It is apparent in particular from points 9, 11, 65, 87 and 90 [of the R&R Guidelines] that the provisions on adequate burden sharing are intended inter alia to prevent moral hazard.”

“(227) According to point 65 of the R&R Guidelines, such a risk arises for any State support given in a form that enhances the beneficiary’s equity position, such as grants, injections of capital and debt write-offs.”

“(228) Furthermore, […], the risk of moral hazard consists of the fact that undertakings anticipating that they are likely to be rescued or restructured when they run into difficulty may embark upon excessively risky and unsustainable business strategies.”

“(229) It follows that the underlying objective of point 67 of the R&R Guidelines cannot be fully achieved if certain types of aid measure, such as the write-off of debt, were to be excluded from its scope, even though they enhance the beneficiary’s equity position and give rise to the same moral hazard as that resulting from a capital injection.”

“(231) Even where the State does not have a shareholding in the capital of the beneficiary and is thus merely one of its creditors, it could in any event benefit from future gains in the value or the future profits of the beneficiary which are, at least in part, generated owing to the aid, by stipulating, for example, where there has been a partial write-off of debt such as that in the present case, that there be a variable rate of interest on the portion of its claim that has not been written off that increases in line with a rise in the value or profits of the beneficiary.”

“(233) It follows that, taking account of the literal, contextual and teleological interpretation of point 67 of the R&R Guidelines, the Commission was not entitled, without having any doubts, to find that the measure at issue did not fall within the scope of that point and fail to examine whether that measure complied with the requirements set out in that point.”

Consequently, the General Court annulled Conclusion decision SA.63203 on the grounds that the Commission should have had doubts as to the extent of burden sharing and the possible negative impact on competition and should have opened the formal investigation procedure.

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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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