2.3.3. State Aids in Insolvency c~ Insolvency Low as Stole Aid

Public demand for the .state to intervene and provide for relief through aids may be

considerable in cases where (large) businesses face financial distress. The social and

economic consequences for owners, employees and creditors as well as the impact on

local or regional industry and competition mean that there may be a wide variety of

groups with strong interests in the rescue of the particular business."" The scope of

state aid control remains in principle unaffected by insolvency proceedings. That is,

a state measure will not escape the prohibition of Article 87 FX', simply because the

aid is granted during insolvency proceedings regarding the debtor/beneficiary.

However, state aid control in insolvency extends beyond those instances where Member

States provide financial support during insolvency proceedings but not as port of

the insolvency proceedings itself. More in particular, both a Member State's creditor

behaviour and even the application of insolvency law itself may amount to state aid

in the sense of Article X7 HC.

According to consistent case law, a transfer of state resources will escape the prohibition

on state aid when it conforms to the 'private investor' criterion."1 Only if a

Member State makes available funds which would not have been available under

normal market conditions will a transfer qualify as state aid. 'This means in particular

that a Member State must act having 'regard to the foreseeability of obtaining a return

and leaving aside all social, regional-policy and sectoral considerations'."" In other

words, a Member State must act as a 'commercial actor' would. An analogous 'private

creditor' criterion applies to the behaviour of Member States in their quality of a

creditor in insolvency p r o c e e d i n g s . ' T h e proper yardstick, however, is not so much

the 'private investor' pursuing a policy guided by the longer-term prospects of

profitability of the capital invested but rather that of the private creditor 'seeking to

obtain payment of sums owed to it by a debtor in financial difficulties'."4 Consequently,

like any other creditor, a Member State is free to agree to reorganisation plans and debt

restructuring. However, in doing so, a Member State must apply 'ordinary commercial

criteria' and disregard 'other considerations of a social, political or philanthropic

nature'."' In case a Member State's creditor action is not in accordance with that of

a private creditor it would qualify' as state aid and would only be allowed under strict

conditions. As a result, considerations of a social or political nature, such as employment

or (national or regional) economic infrastructure, would appear not to be

available for the Member States without their action coming within the scope of the

concept of state aid."" It should be noted that where a Member State fails to act as a

'private creditor' its behaviour is likely to qualify as state aid but that this in itseltdoes

not mean that the aid, in light of the objectives pursued by it, is incompatible with the

common market.

The application of insolvency law itself may under certain circumstances also be caught

by the prohibition of state aids. In this context, it must be realised that insolvency law

by its nature is prone to provide an insolvent company with a competitive advantage.

Insolvency law typically provides for the suspension of execution ol pre-insolvency

debts by individual creditors. If the insolvent debtor-company ceases to do business,

no question as to the existence of state aid arises as i t no longer operates on the market.

However, insolvency law, particularly where accommodating the debtor's reorganisation,

usually also provides for the possibility for the insolvent business to continue

trading for a certain period of time. Then, however, protection against enforcement

by individual creditors of pre-insolvency debt results in a significant competitive advantage over companies that are solvent. The non-payment of debts is a luxury they

cannot afford."

This advantage does not on its own render the application of the insolvencv laws of

the Member States contrary to the prohibition on state aids of Article 87 EC. For one

thing, it lacks the necessary degree of selectivity. InSotirstahlAC i.K. the Commission

considered that the situation of an undertaking in insolvency proceedings, which continues

to do business without paying its debts, results in a measure ol a general nature

which does not favour specific undertakings or certain goods." The general nature

of insolvency law does not mean that no distortion of competition takes place. 1 lowever,

to the extent that it does, the national insolvency laws are to be subject to harmonisation

rather than to the prohibition on state aids."" Furthermore, the advantage

conferred by allowing a debtor to continue trading under suspension ofpre-insolvencv

debt will not in itself result in a transfer of state resources. It does not necessarily come,

either directly or indirectly, at the Member State's expense. 1 1 However, as the following

judgments in Ecotnnle and Piaggio illustrate, the application of insolvency law is not

by definition beyond the concept of state aids in the sense of Article 87 EC.

Both cases concerned preliminary references by Italian courts to the Court of Justice

regarding the lawfulness of the application of Italian Law 9 5 / 7 9 on the extraordinary

administration for large firms in difficulty. ' Law 9 5 / 7 9 established a special insolvencv

regime tor large firms with a minimum number of employees and level of debt. A

company could be placed under special administration by ministerial decree, after being declared insolvent by a court. T h e Minister would also decide, having due regard

to the interests of the creditors, whether the company was allowed to continue trading

for up to two years. The extraordinary administration proceedings were governed by

the normal rules of insolvency law insofar as Law 9 5 / 7 9 did not provide otherwise.

Thus, for instance, the owners would no longer control the assets; enforcement byindividual

creditors would be suspended as would be the interest on debts; and debts

arising from the continuation of business would be accorded priority in distribution.

In addition, however, the extraordinary administration provided for the possibility

of state guarantees, a token tax of o n e million lire instead of the normal three per cent

rate for transfer of part or whole of the undertaking, as well as an extension of the suspension

of debt to fiscal claims and exemption from tines and penalties tor the nonpayment

of social security benefits.

The two preliminary references were made in the course of proceedings which themselves

had little to do with state aids. In F.eotrade the question arose in proceedings

between F.eotrade Sri. and Altifonu e Meniere di Scrvohi SpA (AFS). Lcotrade had

executed on a debt owed to it by AES. By the time of execution AFS had been declared

insolvent and placed under extraordinary insolvency proceedings by ministerial decree

as provided for by Law 9 5 / 7 9 . AFS therefore claimed repayment of the sum transferred

on the basis that this execution was contrary to the prohibition on execution by individual

creditors in insolvency. Subsequently, Lcotrade initiated proceedings seeking

a declaration that the claim was unfounded because it was based on a decree which

constituted unlawful state aid under Article 4 ECSC. ; In the second case of Piaggio

it was the company Dormer LuftfahrtCnibll (Hornier) that faced repayment of a sum

of money. In 1992 Industrie Aeronaittiche e Meeehantehe Riualdo Piaggio SpA (Piaggio)

had bought three aircraft from Uornier. From December 1992 onwards, Piaggio had

made various transfers and assignments in payment to Dornier. In 1994 Piaggio was

declared insolvent and placed under extraordinary administration proceedings. Early

in 1996 Piaggio applied to the court for a declaration that all payments and assignments

made during the two years preceding the openingofextraordinary administration

proceedings vveRMuillaiulvc)id regarding the creditors and that the c()rresp()iiding

sums were to be repaid with interest. In its defence Dornier claimed that the action

of avoidance was based on a law which constituted state aid and was unlawful under

Article 87 EC.

The Court f i r s t examined whether the application of Law 9 5 / 7 9 benefited 'specific

undertakings or goods' or whether it should be regarded as a measure of a general

nature beyond the scope of state aids. According to the Court the extraordinary proceedings

were sufficiently selective for two reasons. On one hand, theproceedings were

he concept ol"'slate aid' under the 1 CS< C treaty and the LC treaty is interpreted u m l o r m b . only available in respect of a particular category of undertakings, while on the other,

the scope of discretion enjoyed by the Minister when authorising an insolvent company

to continue trading meant that application of l aw 9 5 / 7 9 was sufficiently selective

in the sense of the law on state aids. ' Advocate-General Fennelly had observed that,

even it the l aw would not have been limited to a particular class of debtors, the level

ot discretion left would still have been sufficient to bring a decision to continue trading

within the ambit of state aids. '

The measure being sufficiently specific, the Q u i r t continued by examining whether

the application of Law 9 5 / 7 9 , allowing an insolvent company to continue trading,

conferred any benefits on the insolvent undertaking at the Member State's expense.

The extension of t he prohibition and suspension of all actions for enforcement of tax

debts and penalties, interest and increases for the belated payment of corporation tax,

release from the obligation to pay fines and penalties in case of failure to pay social

security contributions and the application of a preferential tax rate, clearly constituted

advantages at the expense of public funds and thus came within the ambit of state

aids. This could be otherwise only, according to the Court,

if it were established that placing the undertaking under special administration

and allowing it to continue trading did not in fact entail or should not entail an

additional burden for the State, compared to the situation that would have arisen

had the ordinary insolvency provisions been applied. "

The Court, however, went beyond these specific benefits and also considered that

[ i ] n view of the priority accorded to debts con nected with the pursuit of economic

activity, authorisation to continue to pursue that activity might, in those circumstances,

involve an additional burden for the public authorities if it were in fact

established that the State or public bodies were among the principal creditors of the undertaking in difficulties, all the more so because, by definition, that undertaking

owes debts of considerable value. "

In its final dicta the Court therefore concluded that the application of a system as Law

9 5 / 7 9 is to be regarded as 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 rules of ordinary law relating to insolvency had

been applied/11

The Court appears to have omitted that the State or public bodies must in fact be

among the creditors. This must nevertheless be considered necessary. The Court recently

and unequivocally affirmed that a transfer of resources from the state to the recipient

i s a constitutive element of the concept of state aids."1 Without the Member State

being a creditor, such a transfer does not occur by allowing the debtor to continue

trading. For the same reason the Court also rejected the Commission's argument that

by reducing the dividend for private creditors the state accepts a reduction of taxrevenue.*"

On the other hand, it is not necessary that the Member State is among the

principal creditors. Advocate-General Fennelly stressed that state aid could be established

even if t he Member State were only a minor creditor or when private creditors

would be obliged to sustain the same l o s s ."

In holding the application of Law 9 5 / 7 9 as constituting state aid, the Court draws a

distinction with the 'ordinary rules' of insolvency law. In his Opinion in Pia^io

Advocate General Colomer expressed some doubt concerning the correctness of this

comparison with the 'normal' rules of insolvency law. Indeed, the outcome should

not be different if the measures had been incorporated in the ordinary rules of insolvency

law, assuming that a sufficient degree of discretion in applying those measures

would remain." On closer analysis, the Court's distinction appears to relate to the

objectives pursued by allowing a debtor to continue trading, rather than the requirement

of specificity. Generally, whether a measure constitutes state aid does not depend on the measure's

objectives but on its effects." In both Pia^to and lieotrade the Court declared that

(\v)hatever the objective pursued by the national legislature, it would seem that

the legislation in question is liable to place the undertakings to which it applies in

a more favourable position than others, inasmuch as it allows them to continue

trading in circumstances that would not be allowed if t he ordinary insolvency rules

were applied, since under those rules protection of creditors' interests is the determining

factor.""

This somewhat paradoxical consideration - insolvency law's objective is not relevant

but the objective of creditors' interests is? - can only be understood in light of the likely

effects - which have to be established in fact - of pursuing these interests. In the case

of the continuation of trading aims at the maximisation of value for the creditors the

advantage will not result in state aid. The Member State would generally act in accordance

with the private creditor criterion. Moreover, the advantage cannot be said to

impose an additional burden on the Member State or its resources. However, where

the decision is based on the wider concerns of the law of insolvency continuation of

business will usually imply a redistribution of value from the creditors to the insolvent

company or other interests." Where the Member State is among those creditors it is

therefore likely to suffer a loss of return.

The general rule that may be inferred from the above cases appears to be that any

insolvency proceeding in which the Member State participates as a creditor and in

which the debtor is allowed to continue trading upon the exercise of discretionary

powers by the Member State, including its judiciary, not solely motivated by maximising

return, is likely to constitute state aid in the sense of Article 87 EC In particular,

the judgments in Ixotrade and Piciggio may raise concern in respect of an insolvency

regime such as France's insolvency law.''" Again, it should be noted that the fact that

the application of insolvency law results in state aid in the sense of Article 87 EC does

not immediately lead to the conclusion that the interests of the open-ended account

of insolvency law are incompatible with the common market. Like obstacles to free

movement, state aids may be justified as compatible with the common market.