1999/143/EC: Commission Decision of 14 July 1998 on State aid in favour of Fabricantes Vascos de Herramientas SA (Favahe SA) and its successors (notified under document number C(1998) 2362) (Only the Spanish text is authentic) (Text with EEA relevance)
Date: 1998-07-14
Institutions: European Commission
Subjects: Basque Country, Spain, State aid, aid to undertakings, regional aid, tool industry

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Official Journal of the European Communities

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COMMISSION DECISION

of 14 July 1998

on State aid in favour of Fabricantes Vascos de Herramientas SA (Favahe SA) and
its successors

(notified under document number C(1998) 2362)

(Only the Spanish text is authentic)

(Text with EEA relevance)

(1999/143/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of
Article 93(2) thereof,

Having given the parties concerned the opportunity to
submit their comments, in accordance with Article 93,

Whereas:

I

By letter dated 19 November 1996 (SG(96) D/9851), the
Commission informed the Spanish Government of its
decision to initiate Article 93(2) proceedings against aid in
favour of the group Fabricantes Vascos de Herramientas
SA (Favahe), a Basque manufacturer of hand tools.

Favahe’s headquarters and production plants were located
in the Basque Country (Vitoria and Ir(cid:156)n), which is an area
eligible for regional aid within the meaning of Article
92(3)(c).

The group was created in 1982 with a view to rational-
ising the supply of various hand tool producers in the
Basque Country and adapting it to demand. However, the
expected positive results did not materialise. The group
undertook various restructuring measures up to 1991, but
failed to improve the financial situation. In 1990 the
enterprise made losses of ESP 457 million and in 1991
the losses rose to ESP 686 million.

In 1992 a new strategic plan was drafted, envisaging posi-
tive results for the group by 1994. The plan included,
among other measures, the optimisation of the supply of
the various companies in the group, coordination of the
companies’ administrative structures, the reorganisation
and rationalisation of production activities (with each
company concentrating on only one sector of the market),
and a reduction of the workforce, from 1 153 in 1992 to
714 in 1994.

In order to finance the restructuring measures, Favahe
applied for a guarantee from the Basque Autonomous
Government under Decree No 628/91, to cover bank
loans totalling ESP 825 million, which would be used to
implement the restructuring plan.

Decree No 628/91 established an aid scheme under
which restructuring aid could be granted to firms located
in the region. The aid was to be given in the form of
guarantees covering an amount proportionate to the
the
firm’s difficulties. By letter dated 28 April 1992,
Commission informed the Spanish authorities that it had
decided to raise no objections to the aid scheme, but that
the Commission would have to be notified of guarantees
given to firms with more than 250 employees.

The guarantee in favour of Favahe was granted in
December 1992 for a period of seven years with a two-
year grace period. The Spanish Government, however, had
failed to notify the granting of the aid, despite the fact
that the Favahe companies had more than 250 employees.

Since the restructuring plan did not have the expected
results, and the company went on making losses of some
ESP 580 million in 1994, Favahe filed for voluntary bank-
ruptcy on 7 April 1995.

The Commission received several complaints regarding
possible aid in the context of the bankruptcy procedure.
According to the complainants, Favahe’s assets had been
transferred to a newly created company, Herramientas
Eurotools SA, which had several Favahe executives on its
Board of Directors. The new firm, Herramientas Euro-
tools SA, was later acquired by the American multina-
tional Snap-on, which paid ESP 1 200 million to the
Basque Regional Government and to the Guip(cid:156)zcoa and
Alava provincial councils. This company marketed hand
tools under the brand names originally used by Favahe,
‘Irimo' and ‘Palmera'.
namely ‘Acesa',

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The Commission considered that the guarantee given by
the Basque Government constituted aid within the
meaning of Article 92(1) of the Treaty and Article 61(1) of
the EEA Agreement, and that it was unlawful, since in
granting it the Spanish Government did not comply with
the obligation, imposed by the Commission in it author-
isation of 28 April 1992, of notifying the granting of
guarantees to firms with more than 250 employees, in
accordance with Article 93(3) of the Treaty.

At the time, the Commission had been unable to obtain
information from the Spanish Government enabling it to
determine whether, after the conditions of the approved
scheme had not been satisfied, any action was taken in
relation to the aid, and whether the guarantee was mo-
bilised at the time of the firm’s bankruptcy. Neither could
the Commission, on the basis of the information avail-
able, determine the existence of any possible new aid
involved in the bankruptcy of Favahe, the creation of
Herramientas Eurotools and its acquisition by Snap-on.

The Commission therefore felt that it was necessary to
carry out an in-depth analysis, pursuant to Article 93(2) of
the Treaty, of the guarantee given to Favahe, and of any
possible new aid element that might have been present in
subsequent events, in order to determine whether the aid
could be considered compatible with the common
market, on the basis of
the derogations contained in
Article 92(3) of the Treaty and Article 61(3) of the EEA
Agreement.

According to the Italian association Assoutensili (Associa-
zione Nazionale Industrie degli Utensili a Mano e Stru-
menti di Misura), its members, the leading Italian manu-
facturers of the same type of products as Favahe, had had
to face aggressive competition from Favahe, which was
probably due to the aid it had received. The association
also mentioned that there had been no invitation to bid
for the purchase of Favahe and that a ‘selected' purchaser
had been able to benefit from a ‘favour' which distorted
competition.

The French Federation of Mechanical Engineering argued
that the creation of Herramientas Eurotools had been an
‘artificial' operation aimed at transferring Favahe’s assets
to Eurotools while the company’s tax and social debts
were not included in the transfer. Hence Eurotools was
able to compete aggressively in various Member States,
distorting competition and selling at prices lower than
those of the rest of the market.

It also provided information on the prices of various
competitors located in several Member States (e.g. Spain,
in
Italy, Germany, France and the United Kingdom),
comparison with Palmera and Acesa prices, as well as the
quantities (in tonnes) of various types of ‘standard' hand
tool exported and imported in 1995 from and to
Germany, France, Italy, the United Kingdom and Spain.

III

II

The Spanish authorities sent
their comments on the
proceedings by letters dated 24 July 1997, 9 October
1997, 20 October 1997 and 30 October 1997.

The letter to the Spanish Government was published in
the Official Journal of the European Communities (1)
and invited the other Member States and interested
parties to submit their comments on the measures. The
Commission received comments from two of Favahe’s
competitors (one German, one British) as well as from the
Italian and the French hand tool manufacturers’ associ-
ations. Those comments stated that the aid received by
the companies had given them an unfair competitive
advantage which helped them to sell their products at
lower-than-market prices.

The British competitor considered that Favahe had
received aid from the regional authorities which had
enabled it to sell its products cheaply and to consolidate
its supply on the market. According to this competitor,
this had given the acquirer Snap-on, an unfair competi-
tive advantage in comparison with other European and
British hand tool manufacturers.

In those letters they again emphasised the difficult finan-
cial situation that Favahe had had to face in the early
1990s.

The ‘Strategic Plan' was drafted in 1992 with the object of
resolving that situation. That plan, a copy of which was
submitted to the Commission included, among other
measures, an overhaul of all production lines, a strategy
the introduction of a total
for improving marketing,
quality system and continuation of
the search for a
partner to strengthen the group’s strategic position in the
medium and the long term. On the other hand, however,
the plan contained no information on the market situ-
ation within the specific industrial sector in which the
firm was operating, nor on the foreseeable development
of supply and demand on that market on the basis of
scenarios using optimistic, pessimistic and
different
average assumptions.

The German competitor mentioned its offer to acquire
Herramientas Eurotools, which never obtained an answer.

(1) OJ C 71, 7. 3. 1997, p. 2.

Favahe did not manage to finance the restructuring on its
own, and therefore requested a guarantee from the Basque
Government under Decree No 628/91, to cover loans
totalling ESP 825 million to finance the implementation
of the strategic plan.

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The Basque Government studied the plan and concluded
that it fulfilled the requirement of restoring the viability
of the enterprise in the long term, and re-establishing its
solvency within a reasonable period. For that reason, it
decided to grant the guarantees in December 1992.

financial contributions offered by Snap-on amounted to
ESP 1 800 million, bringing its total contribution to some
ESP 3 000 million. This reduced the increase in the liabil-
ities of the bankrupt companies, without which it would
have been impossible for the creditors, which included
the Basque Government itself, to recover anything.

As regards the possibility that the aid granted was consid-
ered unlawful, the Spanish authorities admitted that they
failed to fulfil their obligation to notify the measure, but
stated that this was because the strategic plan required the
measures to be implemented immediately, as a year had
passed since aid had been requested and the plan
presented.

Once the receivers had approved Snap-on’s bid, it was
submitted to the courts which, after ruling that the bank-
ruptcies had been involuntary, formalised the sale of the
shares. In accordance with the applicable legislation, the
companies forming part of the group were later dissolved.

the
The Spanish authorities also acknowledged that
restoration of viability had failed because the market had
weakened more than foreseen in the plan, and the overall
economic developments since 1991 had had negative
effects on Favahe. The group’s sales plummeted and
the
losses increased. Subsequently, on 27 April 1995,
courts declared the group bankrupt.

The Spanish authorities then pointed out that Herra-
mientas Eurotools was created before the bankruptcy
proceedings and in accordance with normal commercial
practice. The companies in the Favahe group contributed
some of their assets but also their liabilities of the time to
Eurotools’ expansion; the company’s capital was increased
to make up for the difference between the two. All this
was reflected in the accounts of the companies in the
Favahe group. The charges on the assets were maintained.
in Eurotools were
After
included in the bankruptcy assets,
just like any other
asset, to meet the company’s debts.

the bankruptcy, holdings

The courts declared the bankruptcy voluntary (under
Spanish law, this happens when the court concludes that
no fraud has occurred).

When Favahe’s bankruptcy became known, the American
company Snap-on expressed its interest
in acquiring
Eurotools shares which were included in the assets of the
bankruptcy as well as any other assets. Snap-on made a
bid to the receivers of the various companies to purchase
all the shares at a combined price of ESP 1 200 million.

Snap-on also offered to finance the financial reconstruc-
tion of Eurotools and the agreement existing with the
companies’ trade union representatives with the purpose
of paying the amounts owing in respect of reduction of
the workforce, amounts which in any case have the nature
of privileged and preferential debts with an independent
right of execution under Spanish law. The additional

As to the existence or otherwise of other definite docu-
mented bids presented by other possible buyers apart
from Snap-on, the Spanish Government maintains that
the shares were sold in accordance with the bankruptcy
procedure, with no intervention by the bankrupt com-
panies. At the time, the Favahe receivers told the courts
that other companies, in addition to Snap-on, had shown
interest. One firm had expressed its initial interest but did
not make a definitive offer. Talks also took place with
other companies, but
they did not end in a definite
proposal. Most of these companies wanted to pay only a
token price for the assets i.e. ESP 1. The receivers chose
the Snap-on offer as the most advantageous.

IV

The Article 93(2) proceedings have clarified Favahe’s
situation and the circumstances
in which the firm
received public financial assistance. As regards the meas-
ures which gave rise to the initiation of Article 93(2)
proceedings, the following conclusions may accordingly
be drawn.

(a) The information provided by the Spanish authorities
shows that the bankruptcy took place in accordance
with the legislation in force and that the sale of the
company’s assets was the solution which enabled
Favahe’s creditors to recover
the greatest amount
possible. The Basque Government included its debt in
the assets of
the bankruptcy and recovered the
maximum possible under the bankruptcy proceedings.
There was no scaling down of debts and a national
court ruled that
the bankruptcy proceedings were
completely lawful and the Basque authorities had
received no special treatment.

(b) The Spanish authorities have given their written assur-
ance that Eurotools received no aid of any kind.

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(c) The ESP 825 million guarantee which was granted in
1992 undoubtedly constitutes aid within the meaning
of Article 92(1) of the Treaty and Article 61(1) of the
EEA Agreement. The aid element deriving from such
to the difference
a guarantee is generally equal
between the interest rate on a loan raised on normal
market terms and the actual interest rate secured by
virtue of the guarantee. The Commission has con-
sistently taken the view that whenever, because of an
undertaking’s severe financial circumstances, no credit
institution would be prepared to lend to it without a
State guarantee, the whole amount of the loan is to be
regarded as aid (see Commission Decision 94/696/EC,
Olympic Airways (2)).

Since the guarantee was a precondition for the banks’
financial involvement in Favahe (they provided the loans
to finance its restructuring), it contains an obvious aid
element which, because of the very high risk of the guar-
involvement.
antee, fully matches the banks’ financial

The aid could distort competition and affect
trade
between Member States. Goods in the hand tool industry
are traded between Spain and other Member States.
According to the information provided by Eurostat (3), in
1996 Spain exported 11 262 tonnes of hand tool products
worth ECU 10,2 million to other Member States and
imported 263 tonnes of hand tools worth ECU 0,9 milion.
In 1997, Spanish exports rose to 17 345 tonnes worth
ECU 14,5 million and imports totalled 277 tonnes worth
ECU 0,8 million. Favahe participated in this market, as
the third parties’ observations demonstrate and as the
Spanish authorities admit. Thus, any aid could improve
Favahe’s position in the common market in comparison
with other competitors, which received no State aid of any
kind.

As regards the possibility that the aid may conform to the
derogations in Article 92(2) of the Treaty,
it msut be
pointed out that these do not apply in this case in view of
its characteristics and the fact that it does not claim to
satisfy the conditions required for these derogations to
apply.

It must also be noted that Favahe is not situated in an
area eligible for regional aid under Article 92(3)(a) of the
Treaty.

Moreover, even though the Favahe headquarters and
production plants were located in a declining area within
the meaning of Article 92(3)(c) of the Treaty, the objective
of the aid was to assist a firm in economic difficulties to
continue its activities on the market rather than to facil-
itate the economic development of a declining area.

Finally, the guarantee does not conform to the derogation
provided for in Article 92(3)(c) of the Treaty in relation to
the Community guidelines on State aid for rescuing and
restructuring firms in difficulty (4).

When Favahe obtained the loan in 1992, it was undoubt-
edly a firm in difficulties within the meaning of the
guidelines (point 2.1), unable to recover through its own
resources.

The objective of the guarantee granted by the Basque
authorities was to help finance the restructuring plan
devised by the group. However, according to point 3.2.2(i)
of the guidelines, the sine qua non for the approval of
such restructuring aid is the existence of a suitable
restructuring plan, presented to the Commission, which
enables the restoration of viability within a reasonable
time-scale and,
in particular, on the basis of realistic
assumptions as to its future operating conditions. Thus,
the restructuring plan must take account of:

The guarantee was awarded unlawfully, as the Spanish
Government did not notify that it was being granted
despite the fact that the regional scheme under which the
guarantees were granted to Favahe in 1992 required indi-
vidual notification for guarantees to companies with more
than 250 employees.

(a) the circumstances giving rise to the firm’s difficulties;

(b) the market situation within the specific industrial

sector in which the firm operates;

The guarantee cannot be considered compatible with the
derogations set out in Article 92(2) and (3) of the Treaty.

(c) the expected development of market supply and
demand, comprising different scenarios based on op-
timistic, pessimistic and average assumptions;

(d) the specific strengths and weaknesses of the firm.

(2) OJ L 273, 25. 10. 1994, p. 22.
(3) Product No 4417; Declarant: Spain.

(4) OJ C 368, 23. 12. 1994, p. 12.

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The Favahe restructuring plan presented to the Commis-
sion in particular made no reference to the market situa-
tion in the hand tool sector, nor to its development on
the basis of different scenarios. If this had been the case,
the plan would have had to take account of the steady
deterioration in the hand tool market. According to the
information available to the Commission (5), this deteri-
oration consisted in a 10 % fall in annual production in
the Community hand tool industry in 1990 and 1994,
compared with a 9,1 % increase in annual production
from 1985 to 1990.

This economic development in the hand tool market was
foreseeable when the restructuring plan was designed in
1992, and thus in the middle of the market’s recession.
With the short period, in the very near future, on which
the plan had to base its assumptions (1992 to 1994), the
prospects for an industrial market can be developed fairly
accurately.

However, neither the restructuring plan itself nor the
Basque authorities,
in examining the possibilities of
restoring Favahe’s viability, took these circumstances in
the industry into account.

The Commission, in its turn, and in applying the rules for
approving restructuring aid, would have done so if it had
had the opportunity of examining the guarantee before it
was granted, and would not have approved the proposed
guarantee without a detailed analysis of how the firm
could survive in a declining market with steadily
declining prospects.

In any case, bearing in mind that the Commission would
not have approved the restructuring plan and the
proposed guarantee in 1992, it could not do so now, in
1998, under the Community guidelines for rescuing and
restructuring firms in difficulty.

The Commission must therefore conclude that the ESP
825 million guarantee granted to Favahe does not comply
with any of the derogations in Article 92(2) and (3) of the
Treaty and that this guarantee is incompatible with the
Community rules on State aid.

V

communication of 24 November 1983 (6); see also judg-
ments of the Court of Justice of the European Commu-
nities in Case 70/72 Commission v. Germany (7) and Case
310/85 Deufil v. Commission (8). Since this applies to the
measures in favour of Favahe SA which are the subject of
the present Decision, the aid must be recovered. Nor does
the fact that Fahave SA went bankrupt and disappeared
from the market make any difference to this assessment.

The recovery of the aid must take place in accordance
with Spanish law, including the rules on interest due for
late payment of amounts owing to the State; interest runs
from the date on which the aid was granted (Letter from
the Commission to the Member States SG(91) D/4577 of
4 March 91; see also Case C-142/87 Belgium v. Commis-
sion (9). In accordance with the case-law of the Court of
Justice, the provisions relevant for the recovery of aid are
to be applied in such a way that the recovery required by
Community law is not rendered practically impossible.
Any procedural or other difficulties in regard to the
implementation of the measure cannot have any influ-
ence on its lawfulness (10),

HAS ADOPTED THIS DECISION:

Article 1

The ESP 825 million guarantee granted by the Basque
Government to Fabricantes Vascos de Herramientas SA
and its successors is unlawful since it was granted by the
Basque Government in breach of the Spanish authorities’
obligation to inform the Commission, in sufficient time
to enable it to submit its comments, of any plans to grant
or alter aid, as set out in Article 93(3) of the Treaty.

In accordance with Article 92(1) of the Treaty, the aid is
incompatible with the common market, since it meets
none of the conditions under which derogations can be
granted contained in Article 92(2) and (3) of the Treaty.

Article 2

Spain shall ensure that the aid referred to in Article 1 is
abolished and recovered in full within two months of the
date of notification of this Decision.

The aid shall be recovered in accordance with the proced-
ures and provisions of Spanish law, and include interest,
from the date on which the aid was granted until the date
it is actually repaid, with the rate applied being the refer-
ence rate used to calculate the net grant equivalent of
regional aid in Spain.

In cases where aid is deemed incompatible with the
common market, the Commission requires the Member
State to reclaim the aid from the recipient (Commission

(5) Panorama of EU Industry 1997, Chapter 12.26.

(6) OJ C 318, 24. 11. 1983, p. 3.
(7)
(8)
(9)
(10) Cited in note 9, paragraphs 58 to 63.

[1973] ECR 813.
[1987] ECR 901.
[1990] ECR I-959.

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These provisions shall be applied in such a way that the
recovery required by Community law is not rendered
practically impossible. Any procedural or other difficulties
in regard to the implementation of the measure shall not
have any influence on its lawfulness.

Article 3

The Spanish Government shall inform the Commission
within two months of notification of this Decision of the
measures it has taken to comply with it.

Article 4

This Decision is addressed to the Kingdom of Spain.

Done at Brussels, 14 July 1998.

For the Commission

Karel VAN MIERT

Member of the Commission