State aid for rescuing and restructuring firms in difficulty
The new guidelines give details of the Commission’s approach in cases where public authorities grant financial support to firms in difficulty. Moreover, the Commission recently adopted a Communication on the application of State aid rules to measures taken in relation to financial institutions in the context of the global financial crisis.
Communication from the Commission - Community guidelines on state aid for rescuing and restructuring firms in difficulty [Official Journal C 244 of 1.10.2004].
The guidelines clarify the Commission's approach in cases where the public authorities grant financial support to firms in difficulty *. Under the general principle of the prohibition of state aid (Article 87(1) of the Treaty establishing the European Community), aid granted to firms in difficulty must not be allowed to become the rule. The exit of inefficient firms is a normal part of the operation of the market and, while rescuing and restructuring aid may keep in existence firms in difficulty, this is generally at the expense of their competitors.
Financial contribution from the beneficiary firm to the restructuring
The guidelines are based on the principle whereby, in any restructuring operation, the beneficiary is required to finance a substantial proportion of its restructuring costs.
Depending on the size of the beneficiary, thresholds determine its contribution to the overall cost of restructuring: at least 50 % for large firms, 40 % for medium-sized firms and 25 % for small firms. The guidelines are, therefore, concerned especially with large firms operating throughout the European Union. Such firms generally have large market shares and the state aid granted to them has a more appreciable impact on competition and trade.
The beneficiary's contribution has a twofold purpose: it will demonstrate that the markets (owners, creditors) believe in the feasibility of the return to viability within a reasonable period of time, and it ensures that the aid is limited to the minimum required to restore viability while limiting distortion of competition.
A substantial contribution from the beneficiary to the restructuring was previously required under the 1999 guidelines. The 2004 guidelines reaffirm with greater clarity the principle that the contribution must be real and free of aid.
"One time, last time" principle
The guidelines also stipulate a uniform period of ten years during which the beneficiary of the aid may not receive any additional rescue or restructuring aid. This "one time, last time" principle is designed to prevent repeated granting of rescue or restructuring aid that keeps firms artificially in business. An important exception to this rule is where restructuring aid follows the granting of rescue aid as part of a single restructuring operation.
Definition of rescue and restructuring aid
The guidelines extend the concept of rescue aid so as to allow the beneficiary to take urgent measures, even of a structural nature. Firms in difficulty may already need to take certain urgent structural measures to halt or reduce down a worsening of their financial situation during the rescue phase.
Under the 1999 guidelines, no restructuring measure financed through state aid could be undertaken during the rescue phase. Admittedly, rescue and restructuring involve the interplay of different mechanisms but are often two phases of the same operation. Such a strict distinction between rescue and restructuring has thus given rise to difficulties.
Accordingly, rescue aid is by nature temporary and reversible. Its objective is to allow time to analyse the circumstances which gave rise to the difficulties and to develop an appropriate plan to remedy those difficulties. Restructuring will be based on a practical plan for restoring a firm's long-term viability. Any aid granted following the adoption and implementation of a restructuring or liquidation plan for which aid has been requested will be considered as restructuring aid.
GENERAL CONDITIONS FOR AUTHORISING AID
Common rules apply to rescue aid and restructuring aid:
- the firm must qualify as a firm in difficulty within the meaning of the guidelines;
- a recently established firm may not receive rescue and restructuring aid for the first three years of its existence.
In order to be approved, rescue aid must:
- be in the form of loan guarantees or loans granted at an interest rate comparable to those for loans to healthy firms;
- be reimbursed within a period of not more than six months after disbursement of the first instalment;
- be warranted on the grounds of serious social difficulties;
- have no unduly adverse spillover effects on other Member States;
- be accompanied, on notification, by an undertaking given by the Member State concerned to communicate to the Commission within six months a restructuring plan, a liquidation plan or proof that the loan has been reimbursed in full and/or that the guarantee has been terminated;
- be restricted to the amount needed to keep the firm in business for the period during which the aid is authorised;
- respect the "one time, last time" principle.
Restructuring aid raises particular competition concerns. The general principle is to allow restructuring aid to be granted only in circumstances in which any distortions of competition will be offset by the benefits flowing from the firm's survival. Authorisation will be granted only if strict conditions are met:
- a restructuring plan must be implemented that restores the firm's long-term viability within a reasonable timescale;
- compensatory measures must be taken to prevent or to minimise the risks of distortion of competition (divestment of assets, reductions in capacity or market presence, etc.);
- the aid must be limited to the strict minimum and the rules on the beneficiary's contribution must be complied with;
- specific conditions may be attached by the Commission to the authorisation of aid;
- the restructuring plan must be implemented in full;
- the Commission must be in a position to make sure that the restructuring plan is being implemented properly, through regular reports communicated by the Member State concerned.
The conditions for authorising restructuring aid are, however, less strict where the aid is granted to small firms since it affects competition less than aid for medium-sized and large firms.
The guidelines are based on Article 87(2) and (3) of the Treaty establishing the European Community, which stipulates that aid falling within the scope of Article 87(1) may be regarded as being compatible with the common market.
They apply to firms in difficulty in all sectors, including agriculture, fisheries and aquaculture, subject to certain conditions. The coal and steel sectors are, however, excluded from the scope of the guidelines.
DATE OF APPLICATION AND DURATION
The Commission will apply the new guidelines with effect from 10 October 2004. Only state aid notified after that date will be subject to them as they do not have retrospective effect.
This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.