EFTA SURVEILLANCE AUTHORITY DECISION No 123/94/COL of 19 October 1994 on the fourth amendment of the Procedural and Substantive Rules in the Field of State Aid

THE EFTA SURVEILLANCE AUTHORITY

has amended the Procedural and Substantive Rules in the Field of State Aid (1), adopted on 19 January 1994 (2), as last amended on 31 August 1994 (3), as follows:

Chapter 16 of the State Aid Guidelines shall be replaced by the following:

'16. AID FOR RESCUING AND RESTRUCTURING FIRMS IN DIFFICULTY (4)

16.1. Introduction

1. The need for comprehensive and firm control of State aid is acknowledged in the Agreement on the European Economic Area (EEA Agreement). The distortive effect of aid is magnified as other government-induced distortions are eliminated and markets become more open and integrated. Hence, it is more important than ever to maintain tight control of State aid.

2. In the medium term the Single Market and the European Economic Area are expected to yield significant benefits in terms of increased economic growth. A major part of the increase in economic growth that should ultimately result from the Single Market and the EEA Agreement will be due to the extensive structural change that will be induced in the States parties to the EEA Agreement. While structural change is easier in an expanding economy, even in a recession it is undesirable that States should frustrate or unduly retard the process of structural adjustment through subsidies to firms which in the new market situation ought to disappear or restructure. Such aid would shift the burden of structural change on to other, more efficient firms and encourage a subsidy race.

3. On the other hand, there are circumstances in which State aid for rescuing firms in difficulty and helping them to restructure may be justified. It may be warranted, for instance, by social or regional policy considerations, by the desirability of maintaining a competitive market structure when the disappearance of firms could lead to a monopoly or tight oligopoly situation, or by the special needs and wider economic benefits of the small and medium-sized enterprise (SME) sector.

4. The Commission's policy on aid for rescuing and restructuring firms in difficulty as set out in 1979 in the Eight Report on Competition Policy (5) and reflected in these guidelines as initially adopted by the EFTA Surveillance Authority on 19 January 1994, has been endorsed many times by the Court of Justice of the European Communities (6).

5. However, for the reasons given in paragraph 16.1 (1) the functioning of the EEA Agreement requires the policy to be reviewed and updated. Furthermore, it must be clarified in the light of developments in the policies towards government capital injections (7), financial transfers to public enterprise (8), and aid for SMEs (9).

16.2. Definitions and scope of the rules to be applied with regard to rescue and restructuring aid

16.2.1. Definition of rescue and restructuring aid

1. It is right to treat aid for rescues of companies and for restructuring together, because in both cases the government is faced with a firm in difficulties unable to recover through its own resources or by raising the funds it needs from shareholders or borrowing, and because the rescue and the restructuring are often two parts, albeit clearly distinguishable parts, of a single operation. The financial weakness of firms that are rescued by governments or receive help for restructuring is generally due to poor past performance and dim future prospects. The typical symptoms are deteriorating profitability or increasing size of losses, diminishing turnover, growing inventories, excess capacity, declining cash flow, increasing debt, rising interest charges and low net asset value. In acute cases the company may already have become insolvent or gone into liquidation.

2. It is not possible to establish a universal and precise set of financial parameters to identify when aid to a company amounts to a rescue or is for restructuring. Nevertheless, the two situations show basic differences.

3. A rescue temporarily maintains the position of a firm that is facing a substantial deterioration in its financial position reflected in an acute liquidity crisis or technical insolvency, while an analysis of the circumstances giving rise to the company's difficulties can be performed and an appropriate plan to remedy the situation devised. In other words, rescue aid provides a brief respite, generally for not more than six months, from a firm's financial problems while a long-term solution can be worked out.

4. Restructuring, on the other hand, is part of a feasible, coherent and far-reaching plan to restore a firm's long-term viability. Restructuring usually involves one or more of the following elements: the reorganization and rationalization of the firm's activities on to a more efficient basis typically involving the withdrawal from activities that are no longer viable or are already loss-making, the restructuring of those existing activities that can be made competitive again and, possibly, the development of or diversification to new viable activities. Financial restructuring (capital injections, debt reduction) usually has to accompany the physical restructuring. Restructuring plans take account of, inter alia, the circumstances giving rise to the firm's difficulties, market supply and demand for the relevant products as well as their expected development and the specific strengths and weaknesses of the firm. They allow an orderly transition of the firm to a new structure that gives it viable long-term prospects and will enable it to operate on the strength of its own resources without requiring further State assistance.

16.2.2. Sectoral scope

1. The EFTA Surveillance Authority follows the general approach to rescue and restructuring aid that is set out in this chapter in all sectors (10). However, in sectors currently subject to specific rules on State aid the provisions of this chapter will apply only to the extent that they are consistent with the specific sectoral rules. At present there are specific aid rules in steel, textiles and clothing, synthetic fibres, the motor vehicle industry and the transport sector.

16.2.3. Applicability of Article 61 (1) of the EEA Agreement

1. For the reasons stated in paragraph 16.1 (1), State aid for rescuing or restructuring firms in difficulty will, by its very nature, tend to distort competition and affect trade between the Contracting Parties. Therefore, as a rule, it falls within Article 61 (1) of the EEA Agreement and requires exemption.

2. The only general exception is aid that is too small in amount to have a significant effect on inter-state trade. This de minimis figure has been set at ECU 50 000 for each of two broad categories of expenditure (investment and other expenditure) from all sources and under any scheme over three years (11). The de minimis facility is not available in sectors subject to specific rules (12).

3. Aid for restructuring can take many forms, including capital injections, debt write-offs, loans, interest subsidies, relief from taxes or social security contributions, and loan guarantees. For rescues, however, it should be limited to loans at market interest rates or loan guarantees (see paragraph 16.3.1 (1). The source of the aid can be any level of government, central, regional or local, and any "public undertaking", as defined in Article 2 of the act referred to in point 1 of Annex XV to the EEA Agreement (13). Thus, for example, rescue or restructuring aid may come from State holding companies or public investment corporations (14).

4. The method used by the EFTA Surveillance Authority to determine when government injections of new capital into companies that are already State-owned or become wholly or partly State-owned as a result of the operation involving aid is set out in Chapter 20 of these Guidelines. The criterion is based on the market economy investor principle, which means that in circumstances where a rational private investor operating in a market economy would have made the finance available the provision or guarantee of funding to a company does not involve aid.

5. Where funding is provided or guaranteed by the State to an enterprise that is in financial difficulties, however, there is a presumption that the financial transfers involve State aid. Therefore, such financial transactions must be notified to the EFTA Surveillance Authority in advance, in accordance with Article 1 (3) of Protocol 3 to the Surveillance and Court Agreement. The presumption of aid is compelling where the industry, as a whole, is in difficulties or suffering from structural overcapacity.

6. The assessment of rescue or restructuring aid is not affected by changes in the ownership of the business aided. Thus, it will not be possible to evade control by transferring the business to another legal entity or owner.

16.2.4. Basis of exemption

1. Article 61 (2) and (3) of the EEA Agreement provide for the possibility of exemption of aid falling within Article 61 (1). The only basis for exempting aid for rescuing or restructuring firms in difficulty - apart from cases of national disasters and exceptional occurrences which are exempted by Article 61 (2) (b) and are not covered here - is Article 61 (3) (c). Pursuant to this provision, the EFTA Surveillance Authority can authorize "aid to facilitate the development of certain economic activities where such aid does not adversely affect trading conditions to an extent contrary to the common interest."

2. The EFTA Surveillance Authority considers that aid for rescues and restructuring may contribute to the development of economic activities without adversely affecting trade between the Contracting Parties if the conditions set out in Section 16.3 are met, and will therefore authorize such aid under those conditions. Where the firms to be rescued or restructured are located in assisted areas, the EFTA Surveillance Authority will take regional considerations pursuant subparagraphs (a) and (c) of Article 61 (3) into account as described in Section 16.3.2.3.

16.3. General conditions for the authorization of rescue and restructuring aid

16.3.1. Rescue aid

1. In order to be approved by the EFTA Surveillance Authority rescue aid, as defined above, must continue to satisfy the following basic conditions (15):

- it must consist of liquidity help in the form of loan guarantees or loans bearing normal commercial interest rates,

- it must be restricted to the amount needed to keep a firm in business (for example, covering wage and salary costs and routine supplies),

- it must be paid only for the time needed (generally not exceeding six months) (16) to draw up the necessary and feasible recovery plan,

- it must be warranted on the grounds of serious social difficulties and have no undue adverse effects on the industrial situation in other EFTA States or EC Member States.

2. A further condition is that, in principle, the rescue should be a one-off operation. A series of rescues that effectively merely maintain the status quo, postpone the inevitable and in the meantime transfer the attendant industrial and social problems to other, more efficient producers and to other EFTA States or EC Member States, is clearly unacceptable. Rescue aid should therefore normally be an one-off holding operation mounted over a limited period during which the company's future can be assessed.

3. Rescue aid need not be granted in a single payment. Indeed, it may be desirable to spread payment of the aid over several or more instalments subject to separate assessment in order to take account of external conditions which may be rapidly fluctuating or in order to stimulate the ailing company into taking the necessary corrective action.

4. In applying the above conditions to SMEs the EFTA Surveillance Authority will take account of the special features of businesses in this size category.

5. The approval of rescue aid is without any presumption regarding the subsequent approval of aid under a restructuring plan, which will fall to be assessed on its own merits.

16.3.2. Restructuring aid

16.3.2.1. Basic approach

1. Aid for restructuring raises particular competition concerns as it can shift an unfair share of the burden of structural adjustment and the attendant social and industrial problems on to other producers who are managing without aid and to other EFTA States or EC Member States. The general principle should therefore be to allow restructuring aid only in circumstances in which it can be demonstrated that the approval of restructuring aid is compatible with the functioning of the EEA Agreement. This will only be possible when strict criteria are fulfilled and full account is taken of the possible distortive effects of the aid.

16.3.2.2. General conditions

1. Subject to the special provisions for assisted areas and SMEs set out below, for the EFTA Surveillance Authority to approve aid a restructuring plan will need to satisfy all the following general conditions:

(a) Restoration of viability

The sine qua non of all restructuring plans is that they must restore the long-term viability and health of the firm within a reasonable time scale and on the basis of realistic assumptions as to its future operating conditions. Consequently, structuring aid must be linked to a viable restructuring/recovery programme submitted in all relevant detail to the EFTA Surveillance Authority. The plan must restore the firm to competitiveness within a reasonable period. The improvement in viability must result mainly from internal measures contained in the restructuring plan and may only be based on external factors such as price and demand increases over which the company has no great influence, if the market assumptions made are generally acknowledged. Successful restructuring should involve the abandonment of structurally loss-making activities.

To fulfil the viability criterion, the restructuring plan must be considered capable of putting the company into a position of covering all its costs including depreciation and financial charges and generating a minimum return on capital such that, after completing its restructuring, the firm will not require further injections of State aid and will be able to compete in the market place on its own merits. Like rescue aid, aid for restructuring should therefore normally only need to be granted once.

(b) Avoidance of undue distortions of competition through the aid

A further condition of aid for restructuring is that measures are taken to offset as far as possible adverse effects on competitors. Otherwise aid would be 'contrary to the common interest' and ineligible for exemption pursuant to Article 61 (3) (c).

Where on an objective assessment of the demand and supply situation there is a structural excess of production capacity in a relevant market in the territory covered by the EEA Agreement served by the recipient, the restructuring plan must make a contribution, proportionate to the amount of aid received, to the restructuring of the industry serving the relevant market by irreversibly reducing or closing capacity. A reduction or closure is irreversible when the relevant assets are scrapped, rendered permanently incapable of producing at the previous rate, or permanently converted to another use. The sale of capacity to competitors is not sufficient in this case, except if the plant is sold for use in a part of the world from which the continued operation of the facilities is unlikely to have significant effects on the competitive situation in the territory covered by the EEA Agreement.

A relaxation of the principle of requiring a proportionate capacity reduction may be allowed if such a reduction is likely to cause a manifest deterioration in the structure of the market, for example by creating a monopoly or a tight oligopoly situation.

Where, on the other hand, there is no structural excess of production capacity in a relevant market in the territory covered by the EEA Agreement served by the recipient, the EFTA Surveillance Authority will normally not require a reduction of capacity in return for the aid. However, it must be satisfied that the aid will be used only for the purpose of restoring the firm's viability and that it will not enable the recipient during the implementation of the restructuring plan to expand production capacity, except in so far as essential for restoring viability without thereby unduly distorting competition. To ensure that the aid does not distort competition to an extent contrary to the common interest, the EFTA Surveillance Authority may impose any conditions and obligations as may be necessary.

(c) Aid in proportion to the restructuring costs and benefits

The amount and intensity of the aid must be limited to the strict minimum needed to enable restructuring to be undertaken and must be related to the anticipated benefits. Therefore, aid beneficiaires will normally be expected to make a significant contribution to the restructuring plan from their own resources or from external commercial financing. To limit the distortive effect, the form in which the aid is granted must be such as to avoid providing the company with surplus cash which could be used for aggressive, market-distorting activities not linked to the restructuring process. Nor should any of the aid go to finance new investment not required for the restructuring. Aid for financial restructuring should not unduly reduce the firm's financial charges.

If aid is used to write off debt resulting from past losses, any tax credits attaching to the losses must be extinguished, not retained to offset against future profits or sold or transferred to third parties, as in that case the firm would be receiving the aid twice.

(d) Full implementation of restructuring plan and observance of conditions

The company must fully implement the restructuring plan that was submitted to and accepted by the EFTA Surveillance Authority and must discharge any other obligations laid down by the EFTA Surveillance Authority decision. Otherwise, unless the original decision is amended following a new notification from the EFTA State concerned, the EFTA Surveillance Authority will take steps to ensure the full implementation of the restructuring plan. These steps may include requirement to recover aid which has been found incompatible with the functioning of the EEA Agreement.

(e) Monitoring and annual report

The implementation, progress and success of the restructuring plan will be monitored by requiring the submission of detailed annual reports to the EFTA Surveillance Authority. The annual report will have to contain all relevant information to enable the EFTA Surveillance Authority to monitor the implementation of the agreed restructuring programme, the receipt of aid by the company and its financial position and the observance of any conditions or obligations laid down in the EFTA Surveillance Authority decision approving the aid. Where there is a particular need for timely confirmation of certain key information, such as closures, capacity reductions, etc., the EFTA Surveillance Authority may request more frequent reports.

16.3.2.3. Conditions for restructuring aid in assisted areas

1. The EFTA Surveillance Authority will take the needs of regional development into account when assessing restructuring aid in assisted areas. The fact that an ailing firm is located in an assisted area does not, however, justify a wholly permissive approach to aid for restructuring. In the medium to long term it does not help a region to prop up artificially companies which for structural or other reasons are ultimately doomed to failure.

2. Furthermore, given that national resources available to promote regional development are limited it is in the region's own best interest to apply these scarce resources to develop as soon as possible alternative activities that are viable and durable. Finally, distortions of competition must be minimized even in the case of aid to firms in assisted areas.

3. Thus, the criteria listed in Section 16.3.2.2 are equally applicable to assisted areas, even when the needs of regional development are considered. In particular, the result of the restructuring operation must be an economically viable business that will contribute to the real development of the region without requiring continual aid. Recurrent injections of aid will thus not be viewed any more leniently than in non-assisted areas. Likewise, restructuring plans must be followed through and monitored. To avoid undue distortions of competition the aid must also be in proportion to restructuring costs and benefits. Somewhat more flexibility can be shown in assisted areas, however, with regard to the requirement for a reduction in capacity in the case of markets in structural overcapacity. If regional development needs justify it, the EFTA Surveillance Authority will require a smaller capacity reduction for this purpose in assisted areas than in non-assisted areas and will differentiate between areas eligible for regional aid pursuant to Article 61 (3) (a) of the EEA Agreement and those eligible pursuant to Article 61 (3) (c) to take account of the greater severity of the regional problems in the former areas.

4. Any aid for new investment not required for the restructuring must be within the limits for regional aid authorized by the EFTA Surveillance Authority.

16.3.2.4. Aid for restructuring small and medium-sized enterprises

1. Provided certain acceptable intensities of aid are not exceeded, aid to firms in the small to medium-sized category tends to affect trading conditions less than that to large firms and any harm to competition is more likely to be offset by economic benefits (17). This also applies to aid to help restructuring. Consequently, the EFTA Surveillance Authority is justified in taking a less restrictive attitude towards such aid when it is granted to SMEs.

2. In the rules on aid to small and medium sized enterprises (SMEs) in Chapter 10 of these Guidelines, a uniform definition of SME is established for state aid control purposes.

3. In relation to SMEs, the EFTA Surveillance Authority will not require aid for restructuring to meet the same strict conditions as aid for restructuring large firms, particularly as regards capacity reductions and reporting obligations.

16.3.2.5. Aid to cover the social costs of restructuring

1. Restructuring plans normally entail reductions in or abandonment of the affected activities. A scaling back of the firm's activities is often necessary for the purposes of rationalization and efficiency, quite apart from any capacity reductions that may be required as a condition for granting aid if the industry is suffering from structural overcapacity. Whatever the reason for them, such measures will generally lead to reductions in the company's workforce.

2. The EFTA States' and the EC Member States' labour legislation may comprise general social security schemes under which the redundancy benefits and early retirement pensions are paid direct to redundant employees. Such schemes are not to be regarded as State aid falling within Article 61 (1) in so far as the State deals direct with employees and the company is not involved.

3. Besides direct redundancy benefit and early retirement provision for employees general social support schemes are widespread under which the government covers the cost of benefits that the company provides to redundant workers and which go beyond its statutory or contractual obligations. Where such schemes are available generally without sectoral limitations to any worker meeting predefined and automatic eligibility conditions, they are not considered to involve aid pursuant to Article 61 (1) for firms undertaking restructuring. On the other hand, if the schemes are used to support restructuring in particular industries, they may well involve aid because of the selective way in which they are used.

4. The obligations a company itself has under employment legislation or collective agreements with trade unions to provide redundancy benefits and/or early retirement pensions are part of the normal costs of a business which a firm has to meet from its own resources. This being so, any contribution by the State to these costs must be counted as aid. This is true regardless of whether the payments are made direct to the firm or are administered through a government agency to the employees.

5. The EFTA Surveillance Authority has a positive approach to such aid, for it brings economic benefits above and beyond the interests of the firm concerned, facilitating structural change and reducing hardship, and often only evens out differences in the obligations placed on companies by national legislation.

6. As well as to meet the cost of redundancy payments and early retirement, aid is commonly provided in connection with a particular restructuring case for training, counselling and practical help with finding alternative employment, assistance with relocation, and professional training and assistance for employees wishing to start new businesses. The EFTA Surveillance Authority consistently takes a favourable view of such aid.

7. Aid for social measures exclusively for the benefit of employees who are displaced by restructuring is disregarded for the purposes of determining the size of the capacity reduction under 16.3.2.2. (b).

16.4. Schemes for rescuing or restructuring SMEs

1. For SMEs within the definition given in Section 10.2 the EFTA Surveillance Authority will be prepared to authorize schemes of assistance for rescue or restructuring purposes. It will do so within the usual period of two months from the receipt of complete information, unless the scheme qualifies for the accelerated clearance procedure, in which case the EFTA Surveillance Authority is allowed 20 working days (18). Such schemes must clearly identify the firms eligible, the circumstances under which rescue or restructuring aid may be granted and the maximum amount of aid available. A condition of approval will be that an annual report is provided on the scheme's operation containing the information specified in Chapter 30 and in Annexes III and IV to these Guidelines. The reports must also include an individual list of all beneficiary firms giving: company name, sectoral code - in accordance with the NACE (19) 2-digit sectoral classification codes - number of employees, annual turnover, amount of aid granted each year, confirmation of whether rescue or restructuring aid was received in the previous two years and, if so, the total amount previously granted.

2. Awards of aid for rescuing or restructuring SMEs outside an approved scheme will require to be notified individually to the EFTA Surveillance Authority, as in the case of such aid for large firms. Aid awards or aid schemes for rescuing or restructuring firms which meet the conditions of the de minimis facility (see Section 16.2.3) need not be notified.

16.5. Duration and review of the rules

The EFTA Surveillance Authority will follow these rules in its assessment of aid for rescuing or restructuring firms in difficulty for three years from the date of their adoption. Before the end of that period, it will review the operation of the rules.

Done at Brussels, 19 October 1994.

For the EFTA Surveillance Authority

Knut ALMESTAD

The President

(1) Hereinafter referred to as the State Aid Guidelines.

(2) OJ No L 231, 3. 9. 1994, p. 1.

(3) OJ No L 263, 13. 10. 1994, p. 22.

(4) This chapter corresponds to the Community guidelines on State aid for rescuing and restructuring firms in difficulty, adopted on 27 July 1994 (not yet published in the Official Journal at the time of adoption of this text).

(5) Paragraphs 227 and 228 and paragraph 177 (see point 33 of Annex XV to the EEA Agreement).

(6) See, in particular, European Court of Justice of 14 February 1990, Case C-301/87, France v. Commission [1990], ECR I, p. 307 (Boussac); European Court of Justice of 21 March 1990, Case C-142/87, Belgium v. Commission [1990], ECR I, p. 959 (Tube meuse); European Court of Justice of 21 March 1991, Case C-303/88, Italy v. Commission [1991], ECR I, p. 1433 (ENI-Lanerossi) [1991], ECR I, p. 1603; European Court of Justice of 21 March 1991, Case C-305/89, Italy v. Commission (Alfa Romeo). See also European Court of Justice of 14 November 1984, Case 323/82, Intermills v. Commission [1984], ECR, p. 3809; European Court of Justice of 13 March 1985, Cases 296 and 318/82, Netherlands and Leeuwarder Papierwarenfabriek v. Commission [1985], ECR, p. 809; European Court of Justice of 10 July 1986, Case 234/84, Belgium v. Commission [1986], ECR p. 2263 (Meura).

(7) See Chapter 19 of these Guidelines.

(8) See Chapter 20 of these Guidelines.

(9) See Chapter 10 of these Guidelines.

(10) See part III of these Guidelines.

(11) See Chapter 12 of these Guidelines, on the application and implementation of the de minimis rule.

(12) See paragraph 16.2.2 (1).

(13) Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings.

(14) See European Court of Justice of 22 March 1977, Case 78/76, Steinike und Weinlig v. Germany [1977], ECR, p. 595; Crédit Lyonnais/Usinor-Sacilor, Commission Press Release IP(91) 1045.

(15) These conditions were laid down in Chapter 16 of these Guidelines, as initially adopted by the EFTA Surveillance Authority on 19 January 1994 and correspond to the Commission's Eight Report on Competition Policy, point 228 on control of aid for rescue and restructuring.

(16) If the EFTA Surveillance Authority is still investigating the restructuring plan when the period for which rescue aid has been authorized runs out, it will consider favourably an extension of the rescue aid until the investigation is completed (see 23rd Competition Report, point 527).

(17) See Chapter 10, rules on aid to small medium-sized enterprises.

(18) See Chapter 11 of these Guidelines.

(19) General Nomenclature of Economic Activity in the European Community, published by the Statistical Office of the European Communities.'