New Commission guidelines in force on state aid and companies in difficulty

New guidelines from the European Commission on state aid for rescuing and restructuring companies in difficulty have come into force from the beginning of the month.

The new publication, replacing the 2004 guidelines, covers:

• The scope of the guidelines;
• Compatibility with the internal market;
• Restructuring aid in assisted areas;
• Aid to SGEI (services of general interest) providers in difficulty;
• Aid schemes for smaller aid amounts and beneficiaries;
• Procedures;
• Reporting and monitoring;
• Appropriate measures as referred to in Article 108(1) TFEU;
• Date of application and duration.

The new guidelines will apply with effect from 1 August 2014 until 31 December 2020. Separate rules apply for banks and other financial institutions.

The Commission last month said: “The new guidelines aim to ensure that public funding is channelled where it is needed most and that investors in failing firms carry their fair share of the costs of restructuring, rather than leaving the burden to taxpayers.”

It added: “State aid granted by Member States to companies in financial distress keeps companies alive that would otherwise have exited the market. Such aid has a high potential to distort competition in the Single Market: It shifts the burden of structural adjustment to others and puts the more efficient and innovative players who receive no such aid at a disadvantage.

“Such aid also risks impairing economic growth, since the exit and replacement of inefficient firms is one of its key drivers, and it could waste taxpayers' money. For all these reasons, it is subject to strict conditions.”

Brussels stressed that some key principles remained unchanged. These were that:

• Aid to companies undergoing financial difficulties may be granted temporarily for a period of six months (‘rescue aid’).
• Beyond this period the aid must either be reimbursed or a restructuring plan must be notified to the Commission for the aid to be approved as ‘restructuring aid’. “The plan must ensure that the long-term viability of a company is restored without further state support, that the distortions of competition induced by the state support are addressed by specific measures and that the company contributes to the costs of restructuring.”
• Restructuring aid may be granted only once over a period of ten years (the 'one time, last time' principle), to prevent companies that are not viable being kept artificially alive through public support.

The Commission identified the following as the main changes in the new guidelines:

• New rules allowing temporary restructuring support for SMEs, designed to simplify the granting of state funding for restructuring while reducing distortions of competition by favouring measures that are less distortive, such as loans and guarantees, over structural aid such as direct grants or capital injections. “Such support can now be granted for at most 18 months – i.e. three times as long as the period for receiving rescue aid – on the basis of a simplified restructuring plan. This will allow Member States to better help SMEs address liquidity problems, something that is particularly important in the current economic context.”
• Better filters to ensure that state aid is used where it is really needed and to avoid waste of taxpayers' money. “Member States will have to demonstrate that the aid is needed to prevent hardship, for example in areas of high unemployment, and that the granting of restructuring aid will make a difference in that respect, for example by reducing the scale of job losses.”
• New rules ensuring that investors pay a fair share of the costs of the firm's restructuring (‘burden sharing’). “Company investors will be primarily responsible for covering incurred losses before any state aid is granted, and the state will receive a fair return on its investment if the restructuring plan succeeds.”

A copy of the guidelines can be viewed here. A memo explaining the rules in more detail can be viewed here.