Vol 1 (2004) - Issue 3

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Government Aid to Failing Businesses: The EU State Aid Rules

Governments and local authorities are frequently called upon to financially favour one company over another on grounds of impending business failure and loss of jobs. The creation of the Common Market in Europe has, however, required the removal of state aids and there are strict rules on the circumstances in which aid can be granted, powers of the European Commission to monitor aid and of aggrieved competitors to challenge aids in the national courts. The possibility of seeking aid should not be overlooked if trying to put together a rescue or restructuring package, but great care must be taken to ensure that a difficult situation is not made worse and much more damaging to the recipient, by the illegal grant of aid.

Introduction

The EU state aid rules will be relevant in many different situations. A company may be experiencing financial difficulties and seeking a rescue package from the Government, whether from Central Government or through a local or regional fund. The technology downturn produced many such cases in the last few years. From a different angle, if the insurer of the company applying for aid is asked to offer cover for the risk of any grant being declared illegal, so as to be liable for making good the payment to the company, the rules will equally be of importance. Alternatively, a competitor may be seeking to complain to the European Commission or raise a challenge in the High Court to strike down and order repayment of aid which was not notified by the Government to the European Commission. Aid may be a straightforward grant, a loan guarantee or tax exemption, or even the exclusive use of a government or EU-funded facility, like a terminal at a port or airport, which only one single company is allowed to use.

The EU rules on state aid are in most respects the most strict in the world, and they require the repayment of aid which was wrongly granted, even if this threatens the existence of the recipient. While the rules are designed to promote efficiency in the EU by preventing governments from supporting the ‘dead wood’, these rules can damage specific industries when their counterparts outside the EU are being subsidized by governments of countries where such subsidies are allowed. One example of this is the aviation industry, where EU airlines have suffered due to aid offered by the US government in the last 2 1/2 years following September 11, though the EU Transport Council is shortly due to adopt a Regulation which will enable airlines to complain to the European Commission with a view to imposing duties on US (or other non-EU) airlines using government funds to operate at abnormally low prices so as to compete unfairly with EU airlines.

This article will focus on the rules applying to EU businesses, which should be of relevance to all readers. Before addressing the specific circumstances of the rescue of ailing firms, it is necessary to discuss the basic prohibition of aid, the market investor principle for assessing aid to public companies, the broad categories of aid which will, or may, or will almost never be acceptable, and the procedural aspects – the duty to notify aid, risks of repayment and the role of the European Commission and the national courts in enforcement. Rescue and restructuring will be discussed in some detail, including proposals to tighten up the rules further, and the final section will address the accession of the ten new member states and likely developments in the law on state aids.

EU prohibition of state aid

The EC Treaty prohibits all governments of the EU member states from illegally subsidizing any individual company or industry. Article 87 (formerly 92) of the EC Treaty provides that any aid from the state to a company or industrial sector will be illegal if it distorts or is likely to distort competition by favouring certain companies or industries over others.