Recent news and developments: State guarantees

United Kingdom
Article 92 of the EC Treaty prohibits member states from granting state aid, including state guarantees, which would distort competition. If a member state wishes to give a guarantee which could be interpreted as distorting competition it must go through the pre-clearance procedure in Article 93.

What if banks receive state guarantees which have not been pre-cleared?

The scope is deceptively wide-ranging because a state guarantee may arise automatically, for example, where a provision of national law makes a state responsible for the obligations of an enterprise within its ownership or control.

Areas of concern in a recent paper published by the Financial Law Panel include the following:

  • Member states are prohibited from providing state aid until the aid has been approved by the Commission. Implementation without pre-clearance will call into question its enforceability before national courts.

  • The failure to pre-clear a guarantee is actionable in national courts by any aggrieved third parties. The paper calls for the Commission to issue guidance to the courts.

  • The Commission has the power to 'abolish' state aid which is incompatible with the common market. Commission policy is unclear, but perhaps it could order a member state guarantor not to honour its guarantee.

  • The Commission has power to require illegal aid to be repaid to the member state. Although unlikely in this context, this could involve repayments of monies already paid under the terms of a guarantee or even a repayment equivalent to the market cost of the guarantee itself.

Banks may wish to consider the incorporation of appropriate contractual indemnities. The Panel also suggests that banks should try to ensure member states have complied with the Commission approval process, or seek informal guidance from the Commission.