Companies ruled responsible for ensuring State aid they receive is legal

United Kingdom

As the UK readies itself for a post-Brexit domestic State aid regime, a ruling last month of the Court of Justice highlights the horns of a dilemma that many companies find themselves in when seeking public money to support their projects.  The ruling confirms that they are not permitted to rely on the assurances of national authorities granting the aid, and must satisfy themselves it is lawful.  This is despite the duty to comply with State aid rules resting with the authorities granting it.

Importantly, the ruling also has wider implications in other sectors, such as the energy sector, where recent cases such as the Tempus judgment have highlighted the invidious position companies benefiting from State aid find themselves in if the aid is subsequently found to have been granted unlawfully (in that case, even though the aid had been formally approved by the European Commission).

Bakeries

The ruling was handed down in a case involving an Estonian bakery company, Eesti Pagar, and the funding it received in 2009 from public investment firm, Enterprise Estonia: Case C-349/17, Eesti Pagar AS v Ettevõtluse Arendamise Sihtasutus (judgment dated 5 March 2019).

The facts of the case are relatively straightforward.  Eesti Pagar had entered into a contract in August 2008 to acquire a new bread production line.  The price of the new production line was €2,770,000 and a 5% upfront payment was required when it entered into the contract.  Two months later, in October 2008, Eesti Pagar applied to Enterprise Estonia (EAS) for public funding of €526,300 as a contribution towards the cost.  This was granted in March 2009.

Subsequently, in January 2013, EAS informed Eesti Pagar that the contract for the purchase of the new bread production line had been concluded in breach of the “incentive effect” condition under the EU State aid rules, and specifically the General Block Exemption Regulation under which the aid had been granted by EAS as regional investment aid (see Commission Regulation 800/2008, now replaced by Commission Regulation 651/2014 (GBER)).  EAS had then taken proceedings against Eesti Pagar to recover the aid sum, plus compound interest from the date it had been granted to the date of the recovery proceedings.

Eesti Pagar took its own proceedings against EAS for annulment of the recovery decision.  As part of those proceedings, the Court of Appeal in Tallinn referred a series of questions to the Court of Justice of the EU (CJEU).  The central focus of those questions was, firstly, whether the fact Eesti Pagar had entered into contracts to buy the new equipment before formally applying for the support meant that the “incentive effect” condition had not been satisfied and that the aid was therefore not granted within the conditions of the GBER. Secondly, whether EAS was obliged to recover the aid and whether Eesti Pagar could argue that there was a “legitimate expectation” that the aid was granted lawfully and would not be recovered given EAS had not raised any issue when granting it.

Incentive effect

Under Article 8(2) of GBER (now Article 6(2) of the current GBER) aid will be considered to have an incentive effect if the intended beneficiary has submitted an application for the aid “before work on the project or activity has started”.  On this point, the Grand Chamber of the CJEU ruled that the condition is not satisfied where the beneficiary enters into an unconditional and legally binding commitment before the submission of the aid application to the relevant authority.

Recovery and legitimate expectation

Eesti Pagar argued that EAS had actually recommended it make the application for aid, despite knowing that the contract had already been entered into.  In its judgement, the CJEU ruled that “EU law must be interpreted as meaning that a national authority cannot, where it grants aid while misapplying Regulation No 800/2008, cause the beneficiary of that aid to hold a legitimate expectation that the aid is lawful” (see point 3 of the dispositive conclusion of the CJEU).  Accordingly, regardless of whether EAS had recommended Eesti Pagar to make the application knowing that work on the project had begun, the responsibility of ensuring the aid was being granted lawfully, and the risk of it being subsequently recovered, lay with Eesti Pagar as the beneficiary.

Comment

Interestingly, it was confirmed by the Advocate General in this case that there is no precedent in case-law for finding that there is an obligation on national authorities to recover unlawful State aid on their own initiative (i.e. rather than waiting to be ordered by the European Commission or a national court to do so) (see para. 106 of AG Wathelet’s Opinion dated 25 September 2018).

The main takeaway from this case is that companies who benefit from State aid are responsible for satisfying themselves that the aid being granted to them is being granted lawfully.  This was emphasised by the European Commission, which made representations in the case, making the point that in order to avoid such risks, beneficiaries need, as a minimum, to take their own advice and should consider refusing State aid if they lack certainty as to its legality.