C-363/16 – Commission v Greece (United Textiles S.A.)

Advocate-General Eleanor Sharpston QC has published her Opinion in the long-running United Textiles S.A. State Aid recovery case (Case C-363/16 European Commission v Hellenic Republic), finding for the Commission in relation to Greece’s failure to recover illegal State Aid granted in the 00s.

To recap, United Textiles was one of Greece’s largest textile companies producing a range of clothing, fibre and fabrics with the majority of its sales being to other Member States of the European Union.  It had been in financial difficulty since 2004, and between 2007 and 2009, the Greek authorities granted state guarantees to United Textiles’s non-performing commercial bank loan portfolio, and re-scheduled overdue social insurance obligations.  Despite this, manufacturing production by United Textiles S.A. virtually ceased in early 2009, and the company’s shares were suspended from the Athens Stock Exchange in February 2010.

In February 2012, the Commission adopted a recovery decision (C 27/10 ex NN 6/09) finding that state guarantees and help with social insurance obligations had given United Textiles an “undue advantage without restoring its long-term viability”, in addition to potentially conferring an undue advantage upon United Textiles SA’s commercial lenders whose loans were effectively underwritten by Greece’s state guarantees.

The multiple infusions of State Aid, in both 2007 and 2009, the Commission found had breached the 2004 EU guidelines on rescue and restructuring aid (see IP/04/856), where a company in financial difficulty is allowed to be “rescued” by the State only once in 10 years. This is the so-called “one time, last time” principle.  The total amount of the unlawful aid was estimated at €30.57 million and, pursuant to the Commission’s decision,  Greece was obliged to recover the State Aid plus compound interest within four months.

Months later, United Textiles entered insolvency procedures and, in July 2012, United Textiles was declared insolvent.  Between this period and May 2015 the Commission and Greece exchanged a number of letters concerning the execution of the recovery decision and the course of the insolvency proceedings.  In December 2015, United Textiles’ insolvency administrator informed the Commission by e-mail that efforts were being made to re-launch the business without having recovered the State Aid, and asked the Commission to what extent it supported this project.

On 30 June 2016, the Commission brought an action in the European Court of Justice (the “ECJ”) stating that Greece had failed to recover the unlawful aid and should therefore complete the insolvency proceedings after learning that Greece had suspended insolvency proceedings for a period of six months to allow time for United Textiles to be resurrected.

In oral argument,  the Commission submitted that that recovery of illegal State Aid must must be immediate (that is, within four months of the Commission’s recovery decision) and effective (to remove the distortive effect of the State Aid upon competition). The suspension of the public auctions for the sale of United Textiles’ assets in December 2015 stopped the process of liquidating United Textiles, which is supposed to be irreversible, and impeded the recovery of the unlawful State aid.

In contrast, Greece argued that United Textiles had ceased its activities and the competitive advantage it had received had therefore disappeared. Neither the case-law nor the Commission’s practice, it argued, require that the insolvency proceedings must “inevitably result” in the winding-up and the dissolution of the undertaking concerned. The suspension of the public auctions lasted only for six months, after which the liquidation proceedings continued normally. Furthermore, the project to re-launch United Textiles’ activities included provision for the immediate recovery of the State aid in question.

A-G Sharpston, whilst finding that Greece had indeed infringed its legal obligations to (a) implement the Commission’s recovery decision and to keep the Commission informed of progress it was taking to implement the decision (the later obligation being intrinsically linked to the former), disagreed sharply with the Commission’s contention that recovery of State Aid via insolvency proceedings must, “inevitably”, lead to the winding up of the beneficiary to expunge the effect of illegal State Aid upon competition.

Pointing to settled case law of the ECJ, A-G Sharpston highlighted that whilst insolvency proceedings may well be used to lead to the “definitive cessation of [an undertaking’s] activities” where it has received unlawful aid, the obligation to pursue insolvency “only bites” [original emphasis] “where the State authorities are unable to recover the full amount of the aid”, referencing Commission v Spain, C‑610/10, paragraph 104 and the case-law cited.

She added;

“Second, the proposition that the State aid rules, within a system that aims at economic growth and full employment, should mechanically require undertakings that could otherwise be viable to cease operating, with the consequent loss of jobs, is inherently repugnant.” [para. 87]

She therefore found that, in principle, a Member State may envisage relaunching the activities of a beneficiary that had received unlawful Aid in the circumstances such as those of United Textiles S.A., subject to the following pre-conditions as a minimum:

  1. The ‘re-launch’ of the beneficiary must permit the full recovery of the amount of the unlawful aid;
  2. The exit from insolvency must be in accordance with the applicable national law of a Member State;
  3. The Commission must be fully informed in advance, agree to the plan and set a binding schedule for its implementation which must be respected by the Member State; and,
  4. That a Member State’s duty of sincere cooperation and duty to ensure effectiveness of EU law must be respected.

Whilst A-G Sharpston’s Opinion, which is likely but not certain to be adopted by the ECJ, is clearly for the Commission in that she found that Greece had failed to implement its legal obligation – within the four month period following the Commission’s recovery notice – to take all measures necessary to recover the unlawful aid and to keep the Commission sufficiently informed of its measures to implement recovery, A-G Sharpston’s Opinion, if upheld, provides a very useful road map for State Aid practitioners in national authorities when wrestling with how to recover unlawful State Aid from beneficiaries in financial difficulty.

More systemically, her Opinion that the overall aim of the recovery of unlawful State aid needs to be considered within the context of Article 3 TFEU, in particular balanced economic growth and a highly competitive social market aiming at full employment as pillars of the sustainable development of the EU, may very well prove to be a highly significant development in State Aid case law in the years to come.