A recent EU Commission decision will have a significant impact on the ability of state owned bodies to raise funding with the benefit of a state guarantee. The decision is particularly important for Irish commercial state-sponsored bodies that have borrowed with the benefit of a state guarantee and for the financial institutions which have lent to those bodies.

Article 87(1) of the EC Treaty provides that any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition is incompatible with the common market insofar as it affects trade between member states.

The notice explains the principles on which the commission intends to base its interpretation of Article 87 and how it applies to state guarantees.

If all the following conditions are fulfilled, an individual state guarantee will not be regarded as constituting state aid:

  • The borrower is not in financial difficulty;

  • The borrower would in principle be able to obtain a loan on market conditions from the financial markets without any intervention by the member state;

  • The guarantee is linked to a specific financial transaction, is for a fixed maximum amount, does not cover more than 80% of the outstanding loan or other financial obligation and is not open-ended; and

  • The market fee is paid for the guarantee.

Similar conditions apply where the guarantees are provided under a state guarantee scheme. In addition, the terms of the scheme must be based on a realistic assessment of the risk, so that the premiums paid by the beneficiary enterprises make it self-financing.

Failure to comply with these conditions does not mean that a guarantee or guarantee scheme is automatically regarded as state aid. If there is any doubt as to whether a planned guarantee or scheme constitutes state aid, the member state should make notification to the commission. Where the member state does not observe the notification obligation, the aid element of the guarantee is treated as unlawful.

If the commission finds that state aid is incompatible with the common market, the beneficiary will be required to refund the aid, even if this means the bankruptcy of the beneficiary.

The notice provides that the question of whether the illegality of the aid affects the legal relations between the member state and third parties such as lenders is a matter to be examined under national law. The commission considers that when national courts are examining the issue in the context of national law, they should take account of the breach of EU law. Accordingly, lenders may have an interest in verifying that the state aid rules have been observed. However, the notice does not prevent a court, while taking account of the breach, from deciding in favour of a lender on the enforceability of the guarantee. The notice does not support any proposition that the guaranteeing member state can rely either on its own failure to notify or the lender's failure to verify whether notification was made in order to reject a claim made under the guarantee.

For further information on this topic please contact Damian Collins or John Darby at McCann FitzGerald by telephone (+353 1 829 0000) or by fax (+353 1 829 0010) or by e-mail ([email protected] or [email protected]).

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