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Rescues, restructuring and state aid

12 December 2013

Alex Kynoch highlights the key issues from a European Commission consultation on guidelines for state aid and rescues of non-financial undertakings.

As part of its state aid modernisation drive, the European Commission is consulting on new draft guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulty (financial undertakings such as banks are subject to separate rules).

Current guidelines

The current guidelines distinguish between temporary support to an undertaking in difficulty such as loans or loan guarantees (rescue aid) and aid intended to restore the long-term viability of an undertaking on the basis of a restructuring plan (restructuring aid) and were originally published in 2004.

Proposed new guidelines

The Commissions proposed guidelines include four main changes:

Temporary restructuring support

The proposed guidelines include a new temporary restructuring measure available only to SMEs, designed to "simplify the granting of state aid for restructuring SMEs while reducing distortions of competition".

The maximum duration of such aid is shorter (the Commission proposes either 12 or 18 months) than for the standard restructuring support and can only be in the form of loans or loan guarantees. The recipient would also only be required to provide a simplified version of the restructuring plan usually required in respect of restructuring support.

This new approach appears to be intended to bridge the gap between rescue aid (which has a maximum duration of six months) and the more complex restructuring aid where the recipient is an SME. This may be on the basis that the size of SMEs means any market distortion is likely to be less severe than where a larger undertaking is involved.

Better filters ensuring aid is in the public interest

Any aid under the new guidelines must pursue an "objective of common interest" but simply preventing an undertaking from exiting the market will not be, in and of itself, an objective of common interest. The aid must aim to "prevent social hardship or address market failures by restoring the long-term viability of the undertaking."

Examples of how this will be demonstrated are set out in the guidelines and include high unemployment in the affected regions, disruption to an important service where it would be difficult for a competitor to simply step in or even where the exit of the undertaking would lead to an irremediable loss of important technical knowledge or expertise.

Burden sharing with the undertakings investors

The concept of burden sharing requires the undertakings investors to share the burden of the aid with the rescuing body. This concept has been developed through the rescue of financial institutions and the Commission believes it could successfully be applied to other non-financial undertakings.

Two potential options are set out. The first requires reasonable contributions from an undertakings shareholders and creditors which are (i) based on the losses they would likely suffer in the event of insolvency and (ii) at least match the level of aid provided. The second requires that shareholders bear past losses and then subordinating creditors also contribute if anything further is required. Again the contributions must usually match the level of aid provided.

Definition of undertakings in difficulty

In order to benefit from rescuing or restructuring aid undertakings must be in difficulty and the new guidelines seek to develop this requirement by making the definition more objective and precise. Specific objective criteria apply and more subjective criteria can only be used exceptionally. The application of these more objective criteria should make it easier for public bodies to determine whether an undertaking is eligible for this class of aid, but also carries the risk of limiting the availability of the aid if the criteria are drafted too tightly.

The consultation is open until 31 December 2013 and comments are invited from any stakeholders, but particularly public bodies who may provide aid to undertakings in difficulty. The draft guidelines are available on the European Commission website here.

This article was first published by www.localgovernmentlawyer.co.uk

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