(1)

In December 2008, Hypo Alpe Adria Group (‘HGAA’ or ‘the bank’) received EUR 900 million in Tier-1 Partizipationskapital (2) from the Republic of Austria on the basis of the Austrian emergency bank support scheme (‘the bank support scheme’) (3).

(2)

On 29 April 2009 Austria provided the Commission with a viability plan for HGAA.

(3)

In its decision of 12 May 2009 in case N 254/2009 (‘the 2009 opening decision’) (4) the Commission instigated the formal investigation procedure pursuant to Article 16 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (5), raising doubts about the compatibility with the internal market of the restructuring aid which Germany had granted to HGAA’s majority stakeholder, BayernLB, in December 2008. In the same decision, the Commission questioned whether HGAA was fundamentally sound.

(4)

HGAA was nationalised on 23 December 2009. In that context several aid measures were temporarily authorised by the Commission in its decision of 23 December 2009 in Cases C 16/2009 and N 698/2009 (6) (‘the December 2009 rescue decision’) on the basis of Article 107(3)(b) of the Treaty on the Functioning of the European Union (‘the Treaty’) until the submission of a credible restructuring plan for HGAA to the Commission. In the same decision the Commission extended the formal investigation procedure in relation to additional aid measures granted by Austria in favour of HGAA.

(5)

On 22 June 2010, the Commission further extended the formal investigation procedure in particular due to the failure of the revised restructuring plan for HGAA, which had been submitted on 16 April 2010, to demonstrate the restoration of viability, proper burden-sharing and a sufficient degree of mitigation of competition distortions. The Commission also prolonged the authorisation of the aid it had temporarily found compatible with the internal market in the December 2009 rescue decision, until it had concluded its examination of the restructuring plan for HGAA (‘the 2010 extension decision’) (7).

(6)

On 29 December 2010, Austria notified an additional measure in favour of HGAA in the form of an asset guarantee amounting to EUR 200 million. That aid measure was authorised by Commission Decision of 19 July 2011 in cases SA.32172 (2011/NN) and SA.32554 (2009/C) (8) (‘the July 2011 rescue decision’).

(7)

On 7 February 2011, the Commission informed Austria and Germany that Case N 698/2009 (9) concerning HGAA would be split procedurally from Case C 16/2009 concerning BayernLB. Subsequently, the procedure relating to HGAA was registered under Case SA.32554 (2009/C). This Decision only concerns Case SA.32554 (2009/C).

(8)

On 21 April 2011, Austria submitted a new restructuring plan for HGAA.

(9)

On 3 December 2012, Austria notified an additional aid measure in favour of HGAA in the form of a capital injection via ordinary shares by the Republic of Austria and a State guarantee on subordinated debt instruments to be issued by HGAA. The notification contained a catalogue of commitments for HGAA. Those measures were temporarily authorised by Commission Decision of 5 December 2012 in case SA.32554 (2009/C) (10) (‘the December 2012 rescue decision’). The authorisation took place in light of certain commitments provided by Austria. However, Austria only partially respected those commitments.

(10)

On 5 October 2012 Austria brought an action for the annulment of Commission Decision of 25 July 2012 in case SA.28487 (C 16/2009 ex N 254/2009) (11) (subsequently withdrawn and replaced by Commission Decision of 5 February 2013 (12) concerning BayernLB (‘the BayernLB decision’).

(11)

For a detailed description of the procedure, reference is made to the 2009 opening decision, the December 2009 rescue decision, the 2010 extension decision, the July 2011 rescue decision and the December 2012 rescue decision.

(12)

The various restructuring plans for HGAA and their amendments were discussed between the Austrian authorities and the Commission services in a series of meetings, phone conferences and other information exchanges between July 2010 and August 2013.

(13)

On 29 June 2013 Austria notified a restructuring plan providing for the liquidation of HGAA which was subsequently completed by submission of 27 August 2013.

(14)

HGAA is an internationally active finance group with headquarters in Klagenfurt, Carinthia, from where its banking and leasing activities including the wind-down part are controlled and steered via Hypo Alpe Adria Bank-International (‘HBInt’). HBInt carries out central group functions including group controlling, group accounting, overall risk management, legal matters and compliance, liquidity management, security issuance and refinancing of HGAA’s subsidiaries.

(15)

At the end of 2012, HGAA had an overall balance sheet total of EUR 33,8 billion and risk weighted assets (‘RWA’) of about EUR 21 billion.

(16)

HGAA is 100 % owned by the Republic of Austria (13).

(17)

As of 31 December 2008 HGAA was present via banking and/or leasing subsidiaries in twelve countries, namely in Austria, Slovenia, Italy, Germany, Hungary, Bulgaria, Croatia, Serbia, Bosnia and Herzegovina, Montenegro, Ukraine and in the former Yugoslav Republic of Macedonia (‘FYROM’).

(18)

Currently, HGAA is active in Austria with HBA. It is also active in Slovenia (with HBS and the leasing company HLS), Croatia (with HBC and the integrated leasing company HAALC), Bosnia and Herzegovina (with the two banking entities HBFBiH and — in the Republika Srpska — HBRS including the leasing company HLRS), Serbia (with HBSE) and Montenegro (with HBM) (collectively ‘the South-Eastern European (‘SEE’) countries’).

(19)

A wind-down process has been launched for many of the bank’s industrial stakes and financial subsidiaries. The Italian HBI stopped new business by 1 July 2013. Other subsidiaries in wind-down are the Croatian leasing company (HLC) and a Croatian wind-down unit derived from transferred banking assets (H-ABDUCO), the Austrian leasing company (HLA), the German leasing company (HLG), in Montenegro the leasing company (HLM) and a wind-down unit derived from transferred banking assets (HDM), leasing in Hungary (HLHU), leasing in Bulgaria (HLBG), leasing in FYROM (HLMK), leasing in Ukraine (HLUA), in Bosnia and Herzegovina the leasing company HETA BiH as well as a wind-down unit derived from transferred banking assets (BORA), HLSE and HRSE leasing in Serbia, and in Slovenia TCK and TCV which are two entities derived from transferred banking and leasing activities and HLI leasing in Italy (14). The Alpe Adria Privatbank in Lichtenstein has already been liquidated.

(20)

The following recitals provide an overview of the entities which are still active.

(21)

The Austrian subsidiary HBA is present in the segment retail, corporate and institutional. It offers all classical services of a universal bank. HBA which has a regional focus on Carinthia with branches in Vienna and Salzburg has a national market share of below […] (*1) % when measured in assets and of […] % in deposits.

(22)

In Slovenia the group is present with the bank HBS (market share of about […] % in assets and […] % in deposits). As for the leasing company, HLS, it focuses on mobile and selected immobile leasing activities.

(23)

The Croatian HBC is a universal bank (market share of around […] % in assets, […] % in deposits). HAALC is active in leasing and has a market share of around […] % in new financing volume.

(24)

Two different banks are active in Bosnia and Herzegovina, HBRS in Republika Srpska (market share around […] % in assets and […] % in deposits) and HBFBiH in the Federation of Bosnia and Herzegovina (having a market share of […] % in assets). The leasing company HLRS, owned by HBRS, has a market share of around […] % on new finance volume.

(25)

HBM in Montenegro has a market share of […] % in assets. The leasing business generated out of the bank has a market share of […] %.

(26)

The Serbian HBSE focuses on the private and business segments (market share about […] % in assets and […] % in deposits).

(27)

In 2008 HGAA received support by its shareholders at the time, BayernLB and the Republic of Austria.

(28)

When HGAA was nationalised it received the following aid measures:

(29)

Following an additional need for write-downs, Austria granted HGAA an asset guarantee amounting to EUR 200 million from 31 December 2010 until 30 June 2013.

(30)

Following a decision by the Austrian supervisory authority, HGAA had to comply with an increased capital ratio of 12,04 % by 31 December 2012. To that end, HGAA received from the Austrian authorities

(31)

For a detailed description of the bank and the aid measures authorised so far, reference is made to recitals 17 to 19 of the opening decision, recitals 13 to 15 and 27 to 40 of the December 2009 rescue decision, recitals 15 to 19 of the July 2011 rescue decision and recitals 10 to 12 of the December 2012 recue decision.

(32)

The restructuring plan projects for the period 2013-17 additional capital needs for the wind-down unit amounting to approximately EUR 2,6 billion in the base case, EUR 4,7 billion in the pessimistic case and EUR 5,4 billion in the stress case. Under the assumption that the capital is provided in a liquid form the required additional liquidity needs of HGAA until 2017 would amount to EUR 2,5 billion in a base case and are estimated to reach EUR 3,3 billion in a stressed pessimistic case. (Should the measures not be granted in a liquid form liquidity measures in a higher amount might be necessary).

(33)

Austria has sought, on a precautionary basis, the Commission’s authorisation of State aid measures which may be necessary to satisfy any additional capital or liquidity needs so as to satisfy all regulatory requirements or cover losses. Any capital granted will be limited to the amount necessary to fulfil the regulatory minimum capital requirements which have to be confirmed by the competent supervisory authority.

(34)

Before its nationalisation HGAA had the following owners: BayernLB (67,08 %), Land Carinthia via Kärntner Landesholding (12,42 %), Grazer Wechselseitige Versicherung AG (‘GRAWE’) (20,48 %) and Mitarbeiterstiftung Hypo Alpe Adria (0,02 %).

(35)

All owners ceded their shareholders’ rights by selling their shares to Austria for a symbolic price of one euro.

(36)

BayernLB renounced all its shareholder’s rights including an existing EUR 300 million Ergänzungskapital (Tier-2) in HGAA and relieved HGAA from the obligation to repay EUR 525 million of existing credit lines it had previously been granted (15).

(37)

In order to ensure liquidity for HGAA, BayernLB re-issued a liquidity line that had terminated in December 2009, amounting to EUR […]. Furthermore, it was agreed that the existing intra-group funding of EUR […] from BayernLB to HGAA would remain with HGAA until 31 December 2013. For 2014, BayernLB would leave funding amounting to EUR […] within HGAA, and for 2015 EUR […]. Those amounts are guaranteed by Austria in case HGAA is split up or another economically comparable measure is taken which does not ensure the viability of HGAA (16).

(38)

In 2008 BayernLB had already injected capital amounting to EUR 700 million into HGAA, which has since been fully depleted as it was fully used to cover losses.

(39)

GRAWE subscribed to EUR 30 million of non-convertible Tier-1 capital (Partizipationskapital) with a dividend of 6 % p.a. starting in 2013 in case of profits. Based on a decision by the Republic of Austria on 30 May 2011, the nominal amount of that capital has been reduced to EUR 9 million following a loss allocation (Kapitalschnitt).

(40)

GRAWE also contributed EUR 100 million in terms of liquidity until 31 December 2013. The liquidity was fully collateralised (EUR 50 million by Austrian covered bonds, the remaining EUR 50 million by other assets eligible for issuing covered bonds).

(41)

Carinthia contributed to the rescue operation in December 2009 via

(42)

The following table provides an overview of the original amounts of Partizipationskapital in HGAA (all in HBInt) and its current amount. It should be recalled that Partizipationskapital has no voting rights. All shares with voting rights are held by the Republic of Austria.

Table 1

Overview Partizipationskapital

(43)

HGAA repurchased several hybrid and other capital instruments significantly below par or cancelled them altogether and thus increased its capital base: In April 2012 HGAA made a transaction which resulted in a Tier-1 increase of EUR 153 million. In August 2012 HGAA cancelled some hybrid instruments thus generating a further EUR 23,5 million in capital. In December 2012, HGAA offered a buy-back of other capital instruments resulting in an extraordinary profit of EUR […].

(44)

In addition, the holders of own fund instruments (Partizipationskapital and other hybrid capital instruments) did not receive any profit-dependent dividends or coupons due to the losses of HGAA. For 2009 and 2010, HGAA could therefore retain more than EUR […].

(45)

HGAA’s problems were mainly caused by an aggressive growth strategy based on cheap State-guaranteed funding.

(46)

HGAA bet massively on a rapid growth and catch-up in the markets in the SEE countries. In particular in the period 2000 to 2007 HGAA entered a large number of new markets. As a result, the balance sheet size of HGAA increased to EUR 43,3 billion on 31 December 2008, up from EUR 9,8 billion on 31 December 2002.

Table 2

Expansion of HGAA, per country and business line

(47)

The expansion strategy was made possible by favourable financing costs of HGAA due to State guarantees by Land Carinthia (Ausfallshaftung) which increased from EUR 4,9 billion by 31 December 2002 to EUR 20,7 billion by 31 December 2009. The access to cheap financing caused HGAA to neglect the generation of local deposits.

(48)

The rapid balance sheet expansion in SEE markets, coupled with cheap State-guaranteed funding, generated short-term profits. From 2002 to 2006, HGAA made profits in every year except in 2004. However, the business model masked underlying risks of asset quality deterioration and refinancing, thus causing the bank to neglect the adequate overhaul and development of the procedures for internal control and risk management, which would have been required to cope with its changed needs following the expansion. With business volume considerations driving the bank’s strategy, leading it to taking high risks in particular in projects in the real estate and tourism segments, economic and business risks were systemically misjudged. The lack of adequate control mechanisms also rendered the bank vulnerable to fraud, causing several criminal investigations. Over time its portfolio became, partly due to a lack of proper collateralisation, plagued with a significant portion of non-performing loans. In many cases underlying collateral proved difficult or impossible to sell, necessitating large write downs.

(49)

In addition, by granting a significant part of its retail and small and medium-sized enterprises (‘SME’) loans in SEE countries in Euros or Swiss Francs, the bank exposed itself to additional repayment risks. With the subsequent appreciation in particular of the Swiss Franc against the local currencies, those risks have partly materialized.

(50)

Although within the regulatory limits at the time, in view of its risk profile resulting from its target client base and asset portfolio, the bank was operating with insufficient capital. That factor became a problem almost as soon as fortunes reversed. A calculation contained in the submitted liquidation plan shows that without the aid measures the bank would have had as from 2013 a negative capital ratio, both for the Tier-1 ratio […] and the overall own funds ratio […]. That calculation is fictional in so far as there would have been the need for a drastic downsizing or a liquidation of the bank even before. According to Austria liquidation would have had systemic financial stability effects in Austria, in particular due to the liability guarantees assumed by Land Carinthia, which might have been triggered in such scenario, but also in those SEE countries where HGAA has a significant market share.

(51)

The bank realized too late that its business model was dysfunctional and reacted too slowly, partly due to the complex group structure and the difficulty of managing such a large and heterogeneous group.

(52)

Even in early […], the asset quality relating to new business continued to be problematic and the margins inadequate, when taking appropriate risk and capital costs into account.

(53)

Previously submitted restructuring plans did not demonstrate HGAA’s stand-alone viability.

(54)

In addition, in the submissions by Austria on which this Decision is based (17) the base case scenarios of the restructuring plan show the group result being negative throughout the period 2013-17, whilst setting out an additional capital need of EUR […]. Even the ‘management case’, which does not contain adequate measures to limit potential distortions of competition, shows a return to a modest profitability (of […]) only in the year 2017, with losses before that. Moreover, potential costs for the prolongations of guarantees beyond 2013 are not included in that prognosis.

(55)

In the December 2012 rescue decision the Commission authorised the measures notified by Austria in light of certain commitments made by the Member State which were intended to ensure that competition distortions would be limited as much as possible. The commitments aimed at limiting the bank’s business activities, e.g. in terms of return levels, risk categories of customers and maturities thus contributing to limiting risky behaviour and therefore the possibility to expand business to the detriment of competitors.

(56)

In January 2013 Austria informed the Commission that for economic reasons it had not been feasible for the bank to comply with all of those commitments for some of its subsidiaries. It referred in particular to the restriction as regards foreign currency loans, the restriction to limit public finance and corporate credit engagements to clients with a credit rating of […] which Austria claimed could not be implemented in the SEE countries and, for HBA, the restriction to limit public finance engagements to […].

(57)

On 29 June 2013 Austria submitted a liquidation plan under which HGAA will be liquidated in an orderly manner with the necessary time available to sell potentially viable assets while the remaining parts will be wound down over time.

(58)

Under the liquidation plan, the balance sheet size of HGAA will decrease by 85 % from EUR 43,3 billion at the end of 2008 to EUR 6,56 billion in 2017. In the same period its RWA will decrease by 85 % to EUR 4,75 billion from EUR 32,8 billion at the end of 2008.

(59)

To implement that liquidation, the liquidation plan presents a strategy for the bank’s three remaining pillars, i.e. (i) the Austrian bank (HBA), (ii) the SEE network and (iii) the wind-down part.

(60)

The liquidation process will be steered from the central group level, where meanwhile a number of improvements have taken place as regards – inter alia – risk management, reporting, collateral valuation and procedures relating to ratings (18).

(61)

Overall, the liquidation plan puts the focus on completing the sale of HBA, which has already been instigated, and increasing the attractiveness of the SEE network with the aim of enabling a sale of all SEE entities by 30 June 2015 at the latest. To that end, Austria has given a number of commitments for any new business with the aim of ensuring an adequate balance of risk and profitability as long as the SEE entities have not been sold.

(62)

In particular, HGAA will in principle only disburse new retail mortgages with a loan to value-ratio of […]% or higher, the internal funding cost matrix will be commensurate with the funding situation of the relevant branch or subsidiary and […] will, apart from certain exceptions, only be provided to clients if that client has a […].

(63)

On 31 May 2013 a contract for the sale of all HBA shares was signed with Anadi Financial Holdings Pte. Ltd, with the closure of that sale being currently expected to take place before 31 December 2013 (19).

(64)

Until the closure of the sale, HBA will continue to focus on its position as a regional bank in Carinthia with branches in Vienna and Salzburg. The size of the bank has already been reduced significantly and a problematic portfolio amounting to EUR 1,99 billion was hived off before 31 December 2011. The balance sheet of HBA as of 31 December 2012 amounted to EUR 4,15 billion (while the balance sheet by 31 December 2008 amounted to EUR 7,05 billion).

(65)

The business activity of the SEE network has already been significantly reduced by focusing on core markets and core competences in Slovenia, Croatia, Bosnia and Herzegovina, Serbia and Montenegro. In addition, the operational entities in those countries were relieved by a portfolio of EUR 2,4 billion and a further portfolio hive-off in the amount of EUR […] is planned in 2013, pending approval by local supervisory authorities. The balance sheet size of the total SEE network amounts to EUR 10,11 billion as of 31 December 2012 and will decrease further to less than EUR […] after the envisaged additional portfolio transfer has been completed, amounting to about […] % of the balance sheet size when compared to 31 December 2008 (EUR 14,8 billion).

(66)

Furthermore, there has been a change in the business strategy of those entities’ operation in the SEE countries, aiming at improving their saleability, with a focus on small-scale business and on retail and SME. Their funding strategy is also changing, with local SEE entities focusing on becoming more locally funded instead of relying too strongly on the funding provided by the group. New business is already now fully locally funded.

(67)

In Slovenia the focus of the banking activities is on […] and […] clients […] with the aim of […]. […] will be reduced significantly with a planned exit from […] while the bank remains active in […].

(68)

In Croatia the bank aims to […] with the objective of […]. For […], the aim is to focus more on […]. The focus of the […] is on […].

(69)

In Bosnia and Herzegovina the focus will be increasingly on […] coupled with a stringent […], better […] and a […]. […] will be reduced with […] remaining the focus.

(70)

In Serbia the focus is on […] with the aim of […]. As regards […], the focus is on […] as well as […]. The bank aims at […], even for performing portfolios […].

(71)

In Montenegro the […] focus on a […], whereas focusses on […].

(72)

The change in the focus and business strategy of the SEE banks aims at increasing the chances that the entities can be sold over time. The liquidation plan provides that the SEE network will be sold as a whole or in parts by 30 June 2015. Any sale will be done through open and transparent sale procedures where buyers will have the choice to acquire all or part of the network.

(73)

Any part of the SEE network not sold by 30 June 2015 will immediately cease to undertake new business and be transferred to the wind-down unit (20).

(74)

The aim of the wind-down unit is to reduce all wind-down entities and portfolios as quickly as possible.

(75)

The activities in Italy are already in wind-down. The aim is to steer an orderly wind-down process while avoiding an abrupt withdrawal of deposits (21).

(76)

In addition, the wind-down part encompasses all other portfolios which have been identified to be wound down (including entities which have stopped new business including the subsidiaries in Macedonia, Ukraine, Bulgaria, Germany and Hungary), as well as stakes in industrial and touristic companies.

(77)

In summary, the wind-down part includes in particular:

(78)

Until 2017, the estimated cumulative capital needs (mainly due to write-downs of the book value of the entities to be sold, due to further losses on different portfolios and due to needed refinancing) amount to about EUR 2,6 billion in a base case and up to EUR 5,4 billion under an adverse stress pessimistic case. The liquidation plan also assumes additional liquidity needs depending on whether the capital would be provided in cash or via a guarantee. Under the assumption that the capital is provided in a liquid form the required additional liquidity needs of HGAA until 2017 would amount to EUR 2,5 billion in a base case and are estimated to reach EUR 3,3 billion in a stressed pessimistic case (23).

(79)

However, as according to Austria different options are still being examined for the wind-down part, those estimates may still change. For instance, Austria has announced that it is exploring the option of installing an asset management company (‘AMC’), which would enable HGAA to transfer wind-down assets to that entity, operating without a banking licence. Such a transfer would affect the point in time at which the capital needs would arise.

(80)

Austria has undertaken to ensure that the liquidation plan submitted on 29 June 2013, as last modified by Austria’s communication of 27 August 2013, is implemented in full, including the commitments set out in the Annex, and in accordance with the timetable laid down in that Annex.

(81)

The Commission recalls that it opened the formal investigation procedure pursuant to Article 108(2) of the Treaty regarding the compatibility of the restructuring aid for HGAA with the internal market because it had, on the basis of the earlier submitted restructuring plans, serious doubts whether HGAA would be able to restore its long-term viability. The Commission had also expressed doubts whether adequate burden-sharing was ensured and the distortions of competition were sufficiently limited.

(82)

The Commission has repeatedly questioned the ability of HGAA to restore its viability (24), with serious doubts explicitly raised regarding the business model (25). The Commission has also raised doubts as to whether HGAA would be able to remunerate its capital sufficiently, which is a precondition for a bank to be considered viable (26). In its December 2009 rescue decision the Commission has already requested the Member State to consider the option of an orderly winding down of the bank (27).

(83)

In assessing viability, the Commission raised in particular doubts relating to the funding strategy (28), asset quality (29) and internal control structures (30). In recital 37 of its December 2012 rescue decision the Commission raised doubts about the quality of HGAA’s new business.

(84)

As regards burden-sharing, the 2009 opening decision (31) and the December 2009 rescue decision (32) mention a possible lack of burden-sharing from BayernLB and HGAA’s previous owners (GRAWE and Land Carinthia). The 2009 opening decision mentions in recital 102 a lack of burden-sharing from HGAA’s hybrid capital owners.

(85)

Recital 41 of the 2010 extension decision questions whether the injected capital into HGAA by Austria under the conditions of the Austrian scheme is sufficiently remunerated as the bank had been considered as fundamentally sound by Austria and thus benefitted from cheaper remuneration rates than would have been the case had it been considered as a distressed bank.

(86)

On competition distortions, the Commission, based on the previous plans submitted by Austria, questioned whether the extent of the balance size reductions would be sufficient (33) and repeatedly called for measures which would address competition distortions (34). Against the background of an ever increasing aid amount the Commission has repeatedly called for additional measures for addressing competition distortions (35).

(87)

No comments from interested parties were received.

(88)

Austria’s comments deal mainly with the Commission’s treatment of State aid to BayernLB. The Commission concluded in its Decision of 25 July 2012 in case SA. 28487 (C16/2009) (36) regarding restructuring aid to BayernLB that the guarantee by the Republic of Austria on the liquidity amounting to EUR 2,638 billion which BayernLB, in the context of the 2009 rescue operation, has agreed to leave in HGAA, constituted State aid to the benefit of BayernLB and has subsequently authorised the aid measure as being compatible with the internal market. On 5 October 2012 Austria brought an action for annulment (37) against that decision, arguing in particular that the Commission had failed to demonstrate why the measure should be considered compatible with the internal market and insisting that the measure does not constitute aid to the benefit of BayernLB.

(89)

Austria undertakes to ensure that the commitments laid down in the Annex are complied with in full.

(90)

According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market

(91)

The qualification of a measure as State aid requires the following conditions to be met: (i) the measure must be financed through State resources; (ii) it must grant an advantage liable to favour certain undertakings or the production of certain goods; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States. Those conditions being cumulative, they must all be present before a measure is characterized as State aid.

(92)

Recitals 51 to 56 of the decision approving the bank support scheme confirm that any measure granted under that scheme constitutes State aid. The Commission furthermore recalls that it has already established in recitals 48 to 53 of the 2009 rescue decision, recital 25 of the July 2011 rescue decision and recital 16 of the December 2012 rescue decision that the conditions set out in Article 107(1) of the Treaty are met for the aid measures listed under a) and b) and that those measures therefore constitute aid. The Commission maintains its view as it will explain below.

(93)

All measures granted under the bank support scheme, namely the EUR 900 million recapitalisation and the guarantees of EUR 1,35 billion received in 2008, constitute aid as set out in recitals 51 to 56 of the decision approving that scheme.

(94)

Outside the bank support scheme Austria has authorized a EUR 450 million recapitalisation, an asset guarantee of EUR 100 million (which has meanwhile been terminated), an asset guarantee of EUR 200 million, a capital increase of EUR 500 million in the form of shares and a guarantee on subordinated Tier-2 capital instruments with a nominal value of EUR 1 billion.

(95)

Both the capital injection and the guarantees are granted from State resources within the meaning of Article 107(1) of the Treaty. They are granted to a single undertaking and are therefore selective. They are granted under conditions which would not be available to HGAA on the markets, which is not disputed by Austria. Given that HGAA is an undertaking active in the financial sector, which is open to intense international competition, any advantage from State resources to HGAA has the potential to affect intra-Union trade and to distort competition. Those findings were already set out in recital 16 of the December 2012 rescue decision and are confirmed in the present Decision.

(96)

BayernLB was itself recapitalised by the Free State of Bavaria in 2008 and used part of the funds to recapitalise its subsidiary HGAA. According to recital 124 of the BayernLB decision the full amount of the recapitalisation granted by the Free State of Bavaria constitutes aid to BayernLB. As the amount of aid in one measure cannot be double-counted, the Commission concludes that the recapitalisation of HGAA by BayernLB does not constitute State aid to the benefit of HGAA. Moreover, it seems that at the time of the recapitalisation of HGAA BayernLB was acting in order to safeguard its investment in its subsidiary, in line with market economy considerations, and that its decision to recapitalise HGAA cannot be imputed to a Member State.

(97)

Austria seeks authorisation of aid measures to satisfy potentially arising capital and liquidity needs which in a stress scenario might amount up to EUR 5,4 billion for capital and up to EUR 3,3 billion for liquidity. Those potential future aid measures for the wind-down of HGAA will be granted from State resources within the meaning of Article 107(1) of the Treaty. They are granted to a single undertaking and are therefore selective. As they are granted under conditions which would not be available to HGAA on the markets they constitute an advantage. Given that HGAA is an undertaking active in the financial sector, which is open to intense international competition, any advantage from State resources to HGAA has the potential to affect intra-Union trade and to distort competition.

(98)

The total amount of aid granted to HGAA by Austria through the reinforcement of capital is EUR 3,15 billion (including the EUR 300 million of asset guarantees having the same effect as a capital injection). That amount represents around 9,6 % of HGAA’s RWA in 2008. In addition, HGAA has received a total amount of EUR 1,35 billion in guarantees. Furthermore, Austria has requested the authorisation of potential aid measures which might become necessary to cover future capital needs within the wind-down of HGAA which in a stress case might go up to EUR 5,4 billion, leading to a total aid amount in terms of capital and asset guarantees of EUR 8,55 billion which equal 26 % of RWA. In addition, Austria requested the authorisation of liquidity measures amounting to EUR 3,3 billion.

(99)

Article 107(3)(b) of the Treaty sets out that State aid may be considered to be compatible with the internal market where it is granted ‘to remedy a serious disturbance in the economy of a Member State’.

(100)

On the basis of Article 107(3)(b) of the Treaty State aid can be found compatible with the internal market if it serves to ‘remedy a serious disturbance in the economy of a Member State’. Despite a slow economic recovery that has taken hold since the beginning of 2010, the Commission still considers that the requirements for State aid to be approved pursuant to Article 107(3)(b) of the Treaty continue to be fulfilled in view of the persisting stress in financial markets. In July 2013 the Commission confirmed that view by adopting the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (38).

(101)

The Austrian Central Bank has already on an earlier occasion confirmed that HGAA was a bank with systemic importance for the financial market in Austria and in South-Eastern Europe and reiterated that view by letter of 3 December 2012. Without the aid measures the supervisory authorities might have closed HGAA due to the latter’s breach of capital requirements.

(102)

The closure under such conditions of a bank considered by a Member State to be of systemic importance, such as HGAA, could directly affect the financial markets and thus the entire economy of a Member State. In the light of the current fragile situation of the financial markets, the Commission therefore continues to base its assessment of State aid measures in the banking sector on Article 107(3)(b) of the Treaty.

(103)

All measures identified as State aid have been provided in the context of the restructuring and liquidation of HGAA. The Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (39) (‘Restructuring Communication’) sets out the rules applicable to the granting of restructuring and liquidation aid to financial institutions in the current crisis. According to the Restructuring Communication, in order to be compatible with the internal market under Article 107(3)(b) of the Treaty, the restructuring of a financial institution in the context of the current financial crisis has to (i) lead to the restoration of the viability of the bank, (ii) include sufficient own contribution by the beneficiary (burden-sharing) and ensure that the aid is limited to the minimum necessary and (iii) contain sufficient measures limiting the distortion of competition.

(104)

As the Commission has indicated in the Restructuring Communication, the Member State needs to provide a comprehensive restructuring plan which shows how the long-term viability of the entity will be restored without State aid within a reasonable period of time and within a maximum of five years. According to point 13 of the Restructuring Communication long-term viability is achieved when a bank is able to compete in the marketplace for capital on its own merits in compliance with the relevant regulatory requirements. For a bank to do so, it must be able to cover all its costs and provide an appropriate return on equity, taking into account the risk profile of the bank. Point 14 of the Restructuring Communication stipulates that long-term viability requires that any State aid received is either redeemed over time or is remunerated according to normal market conditions, thereby ensuring that any form of additional State aid is terminated.

(105)

Previously submitted restructuring plans for HGAA did not allow for the conclusion that a return to viability of the whole group is feasible.

(106)

The Commission furthermore notes that the cheap funding stemming from the guarantees offered by Carinthia will come to an end over time and that the rapid catch-up process of the SEE economies has stopped.

(107)

As a result, the bank is unable to adequately remunerate its capital or to repay the State capital and thus achieve a return to viability by the end of the restructuring period. Thus, it does not seem possible to restore viability for HGAA on a stand-alone basis. The Commission therefore concludes that its doubts as regards the restoration of viability have not been allayed.

(108)

As set out in point 9 of the Restructuring Communication any restructuring plan should include a comparison with alternative options, including a break-up or absorption by another bank. In case a bank cannot be restored to viability, the restructuring plan should indicate how it can be wound up in an orderly fashion. Point 21 stipulates that an orderly winding-up or the auctioning off of a failed bank should always be considered where a bank cannot credibly return to long-term viability.

(109)

The Austrian authorities have submitted a liquidation plan which provides for such an orderly wind-down strategy. The submitted plan sets out the sale of the operational entities, the Austrian HBA (for which a sales contract is already signed) and the SEE network, via an open procedure by end June 2015 at the latest. All the remaining parts are put into a controlled and orderly wind-down process. In that context Austria commits that as from 1 July 2013 the Italian entity HBI will not undertake new business. Should a sale of the operational SEE units not be feasible by 30 June 2015, they will also stop new business and be wound down. As a result, by 30 June 2015 at the latest HGAA will cease to be an active undertaking in the financial sector.

(110)

The sale of the operational entities will be done through unconditional, transparent and open procedures, which will allow all interested market participants to make an offer for the entities. Such competitive procedures ensure that the best bid constitutes the market price, thus excluding aid to the buyer (40). Where the Commission finds that there is aid to a buyer, the Commission will assess the compatibility of that aid separately.

(111)

As regards the issue of whether the entities to be sold might constitute an economic continuity of HGAA and the aid measures might therefore constitute aid to those entities, the Commission first notes that it is not yet clear whether the SEE network will be sold as a whole to a single buyer or whether various buyers will acquire parts of the current network.

(112)

For a finding of economic continuity, inter alia, the following factors may be taken into consideration: the subject-matter of the transfer, the price of the transfer, the identity of the shareholders or the owners of the undertaking which takes over and of the initial undertaking or the economic logic of the operation (41).

(113)

The Commission observes firstly that the aid granted was not assigned to tackle the problems of the individual operational entities in Austria or SEE countries but of HGAA as a group. None of the subsidiaries in the SEE countries or HBA represents the core of HGAA’s business and the entities to be sold only represent a part of HGAA’s assets. Furthermore, the business model of the entities to be sold is different from the business model of HGAA, which was an international banking group reliant on cheap financing largely based on State guarantees from Carinthia and focussing on rapid expansion benefitting from the catch-up potential of emerging markets. In the future, the funding of the subsidiaries in the SEE countries will no longer be dependent on State guarantees but will be based on local (and thus more expensive) funding, which will require a more prudent approach as regards margins and risk management. Whilst HGAA focussed rather on large-scale business and key clients, the entities to be sold will focus on SME business. In practice the entities to be sold will be oriented towards a different client base.

(114)

The Commission furthermore notes that the sale of the operational entities is designed to maximise the value of HGAA’s assets before its liquidation in the interest of its creditors.

(115)

On the basis of the subject-matter, of the fact that the shareholders of HGAA and the entities to be sold will not be identical, and of the economic logic of the sales operation, the Commission considers that once the operational entities are sold and HGAA has ceased to exist there will be no continuation of the economic activity of HGAA.

(116)

The liquidation plan sets out that some assets will be taken out of the operational entities to be sold. That removal will both improve the entities’ funding ability and improve the average asset quality of the remaining balance sheet, thus contributing to the marketability of the respective entities.

(117)

Point 21 of the Restructuring Communication points out that the creation of an autonomous ‘good bank’ from a combination of the ‘good’ assets and liabilities of an existing bank may also be an acceptable path to viability, provided any such new entity is not in a position to unduly distort competition. In that regard, the creation of a SEE holding or the regrouping of certain assets away from HBInt to the SEE holding with the aim of creating a viable and marketable SEE banking unit would be an acceptable solution (42).

(118)

The problem of asset quality, stemming from both the legacy portfolio and more recent risky engagements, could not be solved on a going concern basis because of increasing risk costs and impairments. Therefore the Commission considers that the liquidation plan presented by Austria to increasingly transfer problematic assets into the wind-down unit as the appropriate strategy.

(119)

As regards the funding envisaged in the liquidation plan, the entities to be sold will increasingly concentrate on local funding and seek to reduce their dependency on wholesale funding provided by HGAA. The Commission welcomes that change in funding strategy. It notes that there will be an on-going funding commitment of HGAA to the entities to be sold.

(120)

Furthermore, the liquidation plan provides for a significant reduction in the leasing activities of HGAA, which have been a major source of HGAA’s problems in the past as leasing activities have a relatively low profitability compared to their risks and funding requirements. That reduction will also positively contribute to the marketability of the operational entities.

(121)

The Commission concludes that the viability of HGAA cannot be restored and that the orderly wind-down strategy for HGAA as put forward by Austria is an appropriate means to deal with HGAA given that it is not possible to restore the viability of the bank as such.

(122)

The Restructuring Communication indicates that an appropriate contribution by the beneficiary is necessary in order to limit the aid to a minimum and to address distortions of competition and moral hazard. To that end, it provides that (i) both the restructuring costs and the amount of aid should be limited and (ii) a significant own contribution is necessary.

(123)

The Restructuring Communication further provides that, in order to keep the aid limited to the minimum, the bank should first use its own resources to finance the restructuring. The costs associated with the restructuring should not only be borne by the State but also by those who invested in the bank. That objective is achieved in particular by absorbing losses with available capital.

(124)

First, all previous shareholders of HGAA have sold their shares to the Republic of Austria for a symbolic price of one euro which reduced the risk that the aid measures benefit the former shareholders. The former owners have also provided HGAA with capital or liquidity, which have been used to cover losses and to improve the liquidity situation.

(125)

The majority shareholder of HGAA at the time of that sale was BayernLB. In total, BayernLB has contributed about EUR 1,5 billion in capital whilst renouncing further ownership rights, not even any prospect of further remuneration. BayernLB also contributed about EUR 4,3 billion in liquidity to HGAA. Furthermore, BayernLB faced a significant write-down loss when selling its HGAA shares which contributes to addressing moral hazard in line with point 22 of the Restructuring Communication.

(126)

The Commission therefore considers that the amount of burden-sharing from the former owner BayernLB is significant and adequate.

(127)

That conclusion will not be affected by the final outcome of the on-going lawsuit on the repayment of the outstanding loans to BayernLB. If BayernLB were to lose the lawsuit, the amount of burden-sharing would be even higher. If BayernLB were to win the lawsuit, the amount of burden-sharing as assessed in this Decision would not change.

(128)

The contribution of GRAWE consists of both capital and liquidity measures. The originally capital injection of GRAWE into HGAA amounting to EUR 30 million has in the meantime been reduced to about EUR 9 million through a decision by the Republic of Austria as the bank’s sole shareholder to allocate the capital for loss absorption (Kapitalschnitt). GRAWE also provided liquidity to HGAA.

(129)

Based on the above considerations, the Commission concludes that the burden-sharing of GRAWE is sufficient.

(130)

As regards the Land Carinthia, the Commission observes that the Land Carinthia has contributed to burden-sharing by injecting capital which has been significantly reduced in the meantime through the Kapitalschnitt.

(131)

Based on the above considerations, the Commission concludes that the burden-sharing of Land Carinthia is sufficient.

(132)

The fact that the remuneration on the Partizipationskapital for GRAWE and Land Carinthia is higher than the remuneration for the capital injected by BayernLB is justified because BayernLB provided a different kind of capital instrument. In contrast to GRAWE and Land Carinthia, they provided no Partizipationskapital, but simply renounced all rights deriving from capital instruments and some liquidity. Thus BayernLB provided a higher degree of burden-sharing which seems appropriate as BayernLB had been the dominant owner of HGAA before the acquisition of the bank by Austria.

(133)

Another open issue is whether the injected Partizipationskapital capital into HGAA by Austria under the conditions of the bank support scheme is sufficiently remunerated. It has to be recalled that under the bank support scheme there were two different interest rates to be paid depending on whether the aided bank had been a distressed or a fundamentally sound bank. HGAA was considered as fundamentally sound by Austria and thus paid lower remuneration rates than if it would have done had it been considered a distressed bank.

(134)

On that issue, the Commission observes that all the remaining Partizipationskapital remains with HBInt, and thus with the wind-down part of HGAA. Given that the wind-down part is no longer active on the market and that the viability of HGAA cannot be restored (so that HGAA will be liquidated), the Commission finds that the low remuneration can be accepted in the present case.

(135)

The Mitarbeiterstiftung Alpe Adria was the smallest owner of HGAA with a 0,02 % stake. Its stake was also sold for one euro when the Republic of Austria acquired HGAA in December 2009. Given the complete loss of any shareholders’ rights without any consideration, the Commission considers the degree of burden-sharing is sufficient, in particular given its relative small size compared with the other owners.

(136)

As regards the hybrid capital holders, HGAA has taken a number of steps to ensure their burden-sharing by buying back those instruments significantly below par or cancelling them altogether which has generated a significant capital effect.

(137)

Furthermore, the Commission notes that many of the hybrid capital instruments as well as the Partizipationskapital instruments only yield dividends or coupon payments in case of profits. Given the lack of profitability of the bank in recent years, the holders of those instruments have not received such payments. In addition, there will be restrictions on dividend and coupon pay-outs in the future. As a result, the Commission considers that there is sufficient burden-sharing from the holders of those instruments.

(138)

For those reasons, the Commission concludes that the liquidation plan of HGAA provides for an appropriate burden-sharing.

(139)

Finally, section 4 of the Restructuring Communication requires that the restructuring plan contains measures limiting distortions of competition. Such measures should be tailor-made to address the distortions on the markets where the beneficiary operates after restructuring. In the present case it needs to be ensured that the entities which will remain active on the market before they will be finally sold do not use the State resources received in a manner which is detrimental to competitors and do not act in a distortive manner.

(140)

To that end, Austria commits to the business restrictions set out in section 4 of the Annex which will ensure that until the sale competition distortions resulting from the existence and the activities of the operational entities are kept as much as possible to the minimum.

(141)

The nature and form of competition measures depend on two criteria: first, the amount of the aid and the conditions and circumstances under which it was granted and, second, the characteristics of the markets on which the beneficiary will operate.

(142)

The Commission recalls that HGAA has received State aid amounting to EUR 3,15 billion in capital and asset guarantees and EUR 1,35 billion in liquidity guarantees and, for purposes of the wind-down process, might receive additional State aid up to EUR 5,4 billion in capital and EUR 3,3 billion in liquidity in the future.

(143)

The total aid amount in capital and asset guarantees would amount to EUR 8,55 billion which is equivalent to approximately 26 % of HGAA’s RWA of EUR 32,8 billion as of 31 December 2008. The amount of aid granted is therefore significant very large, requiring appropriate measures.

(144)

Point 35 of the Restructuring Communication stipulates that structural measures such as divestitures should favour the entry of competitors while allowing for the exit process to take place within an appropriate time frame that preserves financial stability.

(145)

The Commission observes that the liquidation plan provides for an orderly wind-down where by 30 June 2015 at the latest HGAA will cease to exist as an active economic actor on the markets and will just wind down the activities which have not been sold by that time.

(146)

As regards the continued activity of the SEE entities until their sale, Austria has submitted a number of commitments as regards the new business to be pursued by those entities, avoiding any possible distortion of competition in the period until the sale.

(147)

In that respect, the Commission in particular positively takes note of the restrictions on new business to which Austria and HGAA committed: After taking into account risk costs and funding costs a minimum return of […] % p.a. should be realised on new business. That minimum return on new business will ensure that operational entities do not enter into anti-competitive pricing practices while at the same time contribute to their long-term profitability. In the same spirit, the bank commits to limitations on the maturities of new business so that maturity transformation only contributes in a limited way to profitability. […] (43) […]. As regards […], Austria provided an additional commitment to limit the […] business to customers rated […] or better and not to exceed a total volume of EUR […]. That commitment mitigates the risks associated with currency devaluation and restricts the volume in which the bank can be active in that market segment. In summary, those restrictions both serve to ensure long-term viability and limit the competitive capacity of the respective entities.

(148)

The Commission further views positively the commitments regarding an improved risk management, in particular as regards the annual re-rating of all exposures exceeding EUR […] and the commitment that in retail and public finance the bank will only do business with customers rated […] (44). Those commitments ensure that the business conduct will be prudent and the affected entities will abstain from a risky business strategy. Business will be conducted so that profitability needs are balanced with the necessary risk control considerations. At the same time, the commitments also preclude an aggressive market expansion strategy.

(149)

The Commission notes positively the two-fold purpose of the commitments set out in recitals 147 and 148. Firstly, they contribute to increasing the saleability of the business as no overly risky business is conducted, and secondly, they diminish competition distortions by restricting aggressive behaviour and thus limiting new business.

(150)

Under the liquidation plan all operational parts of HGAA will be either wound down or sold. Austria has provided a firm commitment as regards the sale of HBA and the SEE network (in parts or as a whole) in that the sale has to be done by 30 June 2014 respectively 30 June 2015 at the latest. After that date, all new business has to stop and HGAA will exit the market, either because all activities are in a wind-down process or because they have been sold to a third party in a transparent way. As such, the sales/wind-down process of HGAA contributes significantly to limiting the competition distortions of competition resulting from the aid, because HGAA as such will disappear from the markets.

(151)

The Commission considers that the still fragile situation on the financial markets in particular in the SEE countries justifies the prolonged deadline of 30 June 2015 for the sale of the entities in those countries. It notes that the Austrian activities have already been sold and that if the sale is not completed by 30 June 2014 those activities will also be wound down.

(152)

Overall, the Commission notes that by 2017 the remaining balance sheet size and the RWA of HGAA will decline by about 85 % (provided the sale succeeds as planned).

(153)

In addition to those far-reaching measures, the Commission notes a ban on advertising State support and a ban on aggressive commercial practices to which Austria committed. It also welcomes an acquisition ban, which ensures that the State aid will not be used to take over competitors, but to serve its intended purpose, namely to finance the liquidation process.

(154)

The Commission deplores Austria’s partial compliance with the commitments it entered into within the framework of the 2012 December rescue decision. The Commission considers, however, that the breach of some of those commitments which lasted for a restricted period of time is counterbalanced by the complete break-up and liquidation of the bank.

(155)

Taking into account the commitments and in light of the appropriateness of the own contribution and burden-sharing as set out in recitals 122 to 138, the Commission considers that there are sufficient safeguards to limit potential distortions of competition despite the high amount of aid granted to HGAA.

(156)

In view of the commitments made by Austria it is concluded that the wind-down strategy is in line with the Restructuring Communication, the liquidation aid is limited to the minimum necessary and competition distortions are sufficiently addressed. The liquidation aid is thus compatible with the internal market pursuant to Article 107(3)(b) of the Treaty,

(1)

By letter of 15 October 2004 registered on 25 October 2004, the Commission received a complaint concerning alleged unlawful state aid granted to Frucona Košice, a. s.. The complainant sent additional information on 3 February 2005. A meeting with the complainant took place on 24 May 2005.

(2)

On the basis of the information provided by the complainant, by letter of 6 December 2004 the Commission asked Slovakia to provide information on the disputed measure. Slovakia responded by letter of 4 January 2005, registered on 17 January 2005, informing the Commission about the potentially unlawful aid granted to Frucona Košice a. s. in the context of an arrangement with creditors and asking the Commission to approve the aid as rescue aid to a company in financial difficulties. Slovakia submitted additional information by letter of 24 January 2005, registered on 28 January 2005. The Commission asked for additional information by letter of 9 February 2005, to which it received answers by letter of 4 March 2005, registered on 10 March 2005. A meeting with the Slovak authorities took place on 12 May 2005.

(3)

By letter of 5 July 2005, the Commission informed Slovakia that it had decided to initiate the procedure laid down in Article 108(2) TFEU in respect of the aid.

(4)

The Commission decision to initiate the procedure was published in the Official Journal of the European Union (3). The Commission invited interested parties to submit their comments on the measure.

(5)

The Slovak authorities submitted their observations by letter of 10 October 2005, registered on 17 October 2005. The Commission received comments from one interested party (the beneficiary) by letter of 24 October 2005, registered on 25 October 2005. It forwarded them to Slovakia, which was given the opportunity to react; Slovakia’s comments were received by letter dated 16 December 2005, registered on 20 December. A meeting at which the beneficiary was given the opportunity to explain its submission took place on 28 March 2006. Slovakia submitted additional information by letter of 5 May 2006, registered on 8 May 2006.

(6)

The Commission adopted a decision ordering recovery of the aid on 7 June 2006 (4). Since that date, in the course of its contacts with the Slovak authorities concerning execution of that decision, the Commission was notified of the outcome of the national judicial proceedings relating to the amount of debt to be entered into the arrangement with the creditors. That information should be taken into account in this decision.

(7)

On 12 January 2007 Frucona Košice a.s. appealed against the decision to the General Court of the European Union, contesting, inter alia, the classification of the debt write-off as state aid by claiming that it was in line with the market economy creditor principle. By judgment of 7 December 2010 (Case T-11/07) the General Court dismissed the arguments of the applicant and confirmed the Commission decision on the grounds that bankruptcy would have been more advantageous for the State than the arrangement with the creditors.

(8)

Frucona Košice a.s. appealed against the judgment of the General Court to the Court of Justice, claiming in particular that the General Court had failed to assess correctly the Commission’s application of the private creditor test and had inadmissibly sought to substitute its own reasoning for that of the Commission as regards the private creditor test (Case C-73/11 P).

(9)

On 24 January 2013 the Court of Justice set the judgment of the General Court aside. The Court of Justice concluded that the Commission had committed a manifest error of assessment by failing to take into account the duration of bankruptcy proceedings in its assessment of the private creditor test or, if it had taken that factor into account, by failing to set out sufficient grounds for its decision. The case was referred back to the General Court for judgment on the company’s pleas concerning the tax execution procedure which it had not yet ruled on.

(10)

In view of the judgment of the Court of Justice, the Commission therefore considers it appropriate to revoke the original decision of 7 June 2006 and replace it with this decision in order to remedy the shortcomings identified by the Court of Justice.

(11)

The beneficiary of the financial support is Frucona Košice a. s., a company which was active in the production of spirit and spirit-based beverages, non-alcoholic beverages, canned fruit and vegetables, and vinegar. After losing its licence the beneficiary stopped producing spirit and spirit-based beverages. Nevertheless, it continued to be active on the wholesale market for spirit and spirit-based beverages. The company is situated in a region eligible for regional aid under Article 107(3)(a) TFEU.

(12)

At the time of the relevant events, the beneficiary employed about 200 people. In its comments on the decision to open the formal investigation, the company provided the Commission with data on turnover (including excise duties and VAT), shown in the following table.

Table 1

Turnover in different segments of production, including excise duties and VAT [SKK]

(13)

These data differ considerably from the data obtained by the Commission from the Slovak authorities and stated in the decision to open the formal investigation (5). In their reaction to the comments of the beneficiary after the opening of the formal investigation, the Slovak authorities did not dispute the accuracy of the above figures. According to the Slovak authorities, the beneficiary qualifies as a medium-sized enterprise.

(14)

The disputed measure is a write-off of a tax debt by the Košice IV Tax Office under an arrangement with creditors. This process is governed by Bankruptcy and Arrangement Act No 328/91 (the ‘Bankruptcy Act’).

(15)

An arrangement with creditors is a court-supervised process, which, like bankruptcy, is designed to settle the financial situation of indebted companies (6). Under bankruptcy proceedings, the company ceases to exist and either its assets are sold to a new owner or the company is liquidated. In contrast, under arrangement proceedings, the indebted company continues to trade with no change of ownership.

(16)

Arrangement proceedings are initiated by the indebted company. The purpose is to reach an agreement with its creditors whereby the indebted company pays off part of its debt and the remainder is written off. The agreement has to be approved by the supervising court.

(17)

Creditors whose receivables are secured, for example by means of a mortgage, act as separate creditors. For the arrangement proposal to be accepted, all the separate creditors have to vote in its favour, whereas for other creditors a qualified majority suffices. In other words, separate creditors vote separately and have a right to veto the proposal.

(18)

Separate creditors have a privileged position also in bankruptcy proceedings. The claims of the separate creditors may be satisfied at any time during the bankruptcy proceedings and any proceeds from sale of secured assets under the bankruptcy proceedings are meant to be used exclusively to satisfy the claims of the separate creditors. If the claims of the separate creditors cannot be covered from this sale, the remaining parts are put into the second group with the claims of the remaining creditors. In the second group, the creditors are satisfied on a pro rata basis.

(19)

Under the Bankruptcy Act, the company applying for an arrangement with creditors has to submit to the supervising court a list of measures for its reorganisation and for continued financing of its activity after the arrangement.

(20)

Under Act 511/92 on Administration of Taxes and Fees and Changes to the System of Local Financial Authorities (the ‘Tax Administration Act’), a company may ask the tax authorities to defer payment of taxes. Interest is charged on the deferred amount and the deferred debt has to be secured.

(21)

The Tax Administration Act also governs tax execution, the aim of which is to recover the tax receivables of the State through sale of real estate, movable assets or of the firm as a whole.

(22)

Between November 2002 and November 2003 the beneficiary availed itself of the possibility offered by the Tax Administration Act to have its obligation to pay excise duty on spirit deferred (7). The deferred debt totalled SKK 477 015 759 (EUR 12,6 million). Before agreeing to defer these payments, as prescribed by law the Tax Office secured each of its receivables against the beneficiary’s assets. The Slovak authorities submit that the value of these securities based on the beneficiary’s accounts was SKK 397 476 726 (EUR 10,5 million). The beneficiary, however, claims that the value of these securities, as estimated by experts at the end of 2003, was SKK 193 940 000 (EUR 5 million). This is, according to the beneficiary, the value of the secured assets (movable property, real estate and receivables) expressed in what are known as ‘expert prices’.

(23)

As of 1 January 2004, the amended Tax Administration Act limited the possibility of requesting a tax deferral to only once a year. The beneficiary availed itself of this for the December 2003 excise tax payable in January 2004. However, it was not able to pay or have deferred the January 2004 excise duty payable on 25 February 2004. As a result, the beneficiary became an indebted company within the meaning of the Bankruptcy Act. As a result, the beneficiary lost its licence for production and processing of spirit.

(24)

On 8 March 2004 the beneficiary applied to the competent regional court for arrangement. After establishing that all the necessary legal requirements were met, the regional court decided to initiate arrangement by a decision of 29 April 2004. The creditors voted in favour of the arrangement proposed by the beneficiary at a meeting on 9 July 2004. The arrangement was confirmed on 14 July 2004 by a decision of the supervising regional court.

(25)

In August 2004 the Tax Office appealed against this confirmatory decision of the court. By a decision of 25 October 2004 the Supreme Court decided that the appeal was not admissible and declared the decision of the regional court approving the creditors’ agreement to be valid and enforceable as of 23 July 2004. The public prosecutor subsequently appealed against the decision of the regional court under the extraordinary further appeal procedure.

(26)

The creditors, including the Tax Office, agreed with the beneficiary on the following arrangement: 35 % of the debt would be repaid by the beneficiary within one month from the validity of the creditors’ agreement and the remaining 65 % of the debt would be foregone by the creditors. All the creditors were therefore treated equally. The specific amounts for each creditor are shown in the following table.

Table 2

The beneficiary’s debt situation before and after the arrangement [SKK]

(27)

The claims of the Tax Office entered in the arrangement proceedings totalled SKK 640 793 831 (EUR 16,86 million) and comprised mainly unpaid excise taxes for the period May 2003 – March 2004, VAT for the period January-April 2004, plus penalties and interest. The claims foregone by the Tax Office totalled SKK 416 515 990 (EUR 11 million). The arrangement provided the Tax Office with SKK 244 277 841 (EUR 5,86 million).

(28)

The Tax Office acted in the arrangement proceedings as a separate creditor and as such voted separately. Thus, in order for the arrangement to take place, the Tax Office had to vote in favour of it. The privileged position of the Tax Office was due to the fact that some of its receivables were secured in relation to the deferral of the beneficiary’s tax debt in 2002-2003 (see paragraph 17). All the other creditors voted in favour of the proposed arrangement. Their receivables were ordinary trade receivables not secured in any manner.

(29)

In its proposal for arrangement, in accordance with the requirements of the Bankruptcy Act the beneficiary described reorganisation measures concerning the production, distribution and workforce (including redundancies).

(30)

On the organisational and workforce fronts, the beneficiary planned the following measures: creation of a universal production group for all the production activities, reorganisation of its transport facilities by exclusion of vehicles with the lowest residual value and reorganisation of commercial activities. These measures were to be accompanied by laying off 50 employees from March to May 2004. Over the same period, a further 50 employees were to work on 60 % remuneration.

(31)

In the production and technical area, the beneficiary stated that, since the company had lost the licence for production of spirit, the production facilities concerned would be rented out as of April 2004. The beneficiary planned to reduce or cease production of some unprofitable non-alcoholic beverages and stated that any introduction of a new product in this category would be preceded by an analysis of profitability of such a production.

(32)

The beneficiary also mentions the following measures: the cost restructuring that should result from lower production costs following the abandonment of the production of spirit and from the abolition of part of the company’s own transport and the sale of old equipment for scrap.

(33)

The beneficiary also planned to sell an administrative building, a shop and a recreation building and mentioned the possibility of selling or renting out the vinegar production facility. In their comments on the decision to open the formal investigation procedure the Slovak authorities confirmed that the sale of the administrative building, the shop and the recreation building had not taken place.

(34)

The beneficiary planned an intensive sale of its stocks of ready products (8).

(35)

According to this proposal, the beneficiary was to finance the arrangement through own resources (sale of stock) of SKK 110 million and through external financing in the form of a loan from a commercial bank of SKK 100 million. From the information submitted by the beneficiary in response to the opening of the formal investigation, the outstanding debt was eventually covered by the revenue from the issue of new shares (SKK 21 million; EUR 0,56 million), revenue from the sale of stock (SKK 110 million; EUR 2,9 million) and a supplier loan from Old Herold s.r.o. (SKK 100 million; EUR 2,6 million). The maturity of the invoices of Old Herold s.r.o. was 40 days, which, according to the beneficiary, was a long period considering the precarious financial situation of the beneficiary. This longer maturity enabled the beneficiary to accumulate the necessary cash.

(36)

After the opening of the formal investigation the Slovak authorities informed the Commission that, under the creditors’ agreement, SKK 224 277 841 had been paid to the Tax Office on 17 December 2004. The Slovak authorities confirmed that they had suspended the write-off of the debt agreed in the arrangement proceedings pending resolution of the procedure before the European Commission.

(37)

In the context of their contacts concerning the execution of the Commission decision ordering recovery of the aid, the Slovak authorities informed the Commission of the outcome of the extraordinary appeal procedure referred to in paragraph 25: by decision of 27 April 2006, the Supreme Court of the Slovak Republic partially overturned the decision of the competent regional court of 14 July 2004 confirming the creditors’ agreement on the grounds that road tax arrears of SKK 424 490 had wrongly been included in the arrangement. The Supreme Court dismissed the appeal as to the remainder. By decision of 18 August 2006, the competent regional court implemented the decision of the Supreme Court of 27 April 2006, stating that the corrected amount due to the Tax Office was SKK 640 369 341,4 (35 % of which is SKK 224 129 269,1).

(38)

In its decision to initiate the formal investigation the Commission raised doubts that the disputed write-off was free of state aid. The Commission concluded that the behaviour of the Tax Office in the arrangement proceedings did not meet the market economy creditor test. Specifically, the Commission found that the Tax Office was in a situation legally different from the other creditors, as it possessed secured claims and could initiate tax execution. The Commission doubted that the arrangement proceedings led to the best possible outcome for the State, when compared with bankruptcy proceedings or tax execution.

(39)

The Commission then raised doubts on the compatibility of the disputed aid with the internal market. It first raised doubts that the aid could be found compatible as rescue aid, as the Slovak authorities had claimed. Rescue aid can only be liquidity support in the form of loan guarantees or loans. The disputed measure, however, is a debt write-off, which corresponds to a non-repayable grant. In addition, the measure was not granted with the prospect that, no later than six months after the rescue measure had been authorised, the beneficiary would present a restructuring plan or a liquidation plan or reimburse the aid in full.

(40)

The Commission then considered the compatibility of the disputed measure as restructuring aid and raised doubts as to whether two of the main conditions were fulfilled: the existence of a restructuring plan ensuring the return to long-term viability within a reasonable time-frame and the limitation of the aid to the minimum necessary.

(41)

In addition to the information on the facts set out in Part II, the beneficiary submitted the following comments.

(42)

The beneficiary argues that the reason for its financial difficulties at the beginning of 2004 was the change in the Tax Administration Act, which restricted the possibility of requesting deferral of taxes to only once a year. This was an important change for the beneficiary, which had been, in its own words, relying on this mechanism in previous years.

(43)

On the merits of the case, the beneficiary first submitted that the Commission did not have jurisdiction to review the contested measure because the measure had been put into effect before the date of accession and was not applicable after accession. The measure is said to have been put into effect before accession because the arrangement procedure was initiated on 8 March 2004 and, as the beneficiary submits, approved by the court on 29 April 2004, i.e. before Slovakia joined the European Union. Furthermore, the tax authorities are said to have signalled their agreement to the proposed arrangement in the framework of negotiations preceding the initiation of the arrangement procedure. A meeting with the Tax Directorate of the Slovak Republic had taken place in December 2003 and on 3 February 2004 the local Tax Office sent the beneficiary a letter in which it, allegedly, confirmed the possibility of going ahead with an arrangement.

(44)

The beneficiary then submitted that, even if the Commission continued to maintain that it was competent to act, the contested measure did not constitute state aid because the market economy creditor principle was met.

(45)

First, the beneficiary claims that comparing arrangement with tax execution is misleading because the initiation of the former excludes or suspends the latter. Tax execution was not, therefore, an option for the Tax Office. In addition, according to the beneficiary, had it not voluntarily initiated the arrangement, after some weeks or months it would have had a legal obligation under the law governing insolvency to launch the procedure for bankruptcy or an arrangement.

(46)

Second, the beneficiary submits that the decision of the State to avoid bankruptcy but instead to seek a solution through an arrangement met the market economy creditor test. As evidence the beneficiary submits certificates from two auditors and one bankruptcy receiver stating that the Tax Office would receive more – and receive it more quickly – from the arrangement than from bankruptcy proceedings. The beneficiary also submits further material and statistics suggesting that bankruptcy proceedings in Slovakia last on average 3-7 years and bring only a very limited return from the sale of the assets (9).

(47)

The beneficiary bases its analysis mainly on a report of 7 July 2004 by the auditing company EKORDA, which the Tax Office allegedly had at its disposal before the creditors’ vote on 9 July 2004. No evidence, however, was submitted showing that this was indeed the case.

(48)

According to the EKORDA report, the revenue from the sale of assets in the case of bankruptcy would be at best SKK 204 million (EUR 5,3 million), which, after deduction of various fees of SKK 45 million, would be only SKK 159 million (EUR 4,2 million). The beneficiary itself corrected the amount of the fees to be deducted (SKK 36 million) and arrived at the figure of SKK 168 million (EUR 4,4 million). Even though the Tax Office as the only separate creditor and by far the largest creditor would receive most of this revenue, it would still be less than what it received after the arrangement.

(49)

To arrive at this result EKORDA used as a basis the book value as at 31 March 2004 of fixed assets, stock, cash and short-term receivables after adjustments, taking account of their unrecoverability and low value. EKORDA adjusted the nominal value of the beneficiary’s assets by a ‘liquidation factor’ for each component of the assets in the event of sale in bankruptcy (45 % for fixed assets, 20 % for stock and short-term receivables and 100 % for cash).

(50)

EKORDA mentions the future tax revenue from the operation of the beneficiary (10), as well as the development of employment in the region and of the food-processing industry in Slovakia as very important factors pleading in favour of the continuation of the beneficiary.

(51)

The beneficiary also mentions two other reports. The auditor Ms Marta Kochová concluded that the maximum revenue from the sale of the assets, which, however, were not evaluated, would be SKK 100 million (EUR 2,6 million), which, after deduction of fees of SKK 22 million, would be only SKK 78 million (EUR 2 million). The bankruptcy receiver Ms Holovačová is said to state that, in her opinion, in general arrangement is more advantageous for creditors than bankruptcy. One consideration is that the creditor has an interest in the debtor staying in business (future revenue from trade or from taxes).

(52)

Third, the beneficiary submits that long-term considerations should be taken into account, such as future tax revenue. It is asserted that the case-law excluding socio-political considerations from the market economy creditor test does not apply when the calculation of future tax revenue is considered by a public authority (11). According to the beneficiary, the situation of the public authority here is analogous to the situation of a market economy creditor, who is a supplier interested in the survival of a client. The beneficiary then refers to the case-law on the market economy investor principle.

(53)

The beneficiary concludes that the market economy creditor test was met and the disputed measure does not constitute state aid.

(54)

Should the Commission nevertheless conclude otherwise, the beneficiary argues that the disputed measure is compatible as restructuring aid. The beneficiary submits that the Tax Office had verified the capacity of the business plan of the beneficiary to restore long-term viability before agreeing with the arrangement. The absence of a formal restructuring plan is, according to the beneficiary, irrelevant in the case of an ex post assessment by the Commission, because the Commission is now able to see whether the beneficiary did in fact become viable. However, the beneficiary considers that, in the case of an ex ante assessment, a detailed restructuring plan is necessary. It then briefly describes the restructuring measures undertaken: increase of own capital, lay-offs, and sale of stock. The beneficiary considers that the halting of the production of spirit and spirit-based beverages and the renting out of the production assets to the company Old Herold s. r. o. was indeed a restructuring measure. Even though originally the halting of production was the result of the loss of the licence, the beneficiary did not ask for a new licence after the arrangement.

(55)

According to the beneficiary, the requirement that its contribution to the restructuring be significant was also met.

(56)

Finally, the beneficiary submits that the fact that it is active in an assisted region and is one of the largest regional employers should be taken into account when applying the guidelines applicable to restructuring aid.

(57)

In their reply to the opening of the formal investigation, the Slovak authorities made some comments on the facts already referred to in Part II.

(58)

The Slovak authorities confirmed that at the time of the vote on the arrangement the Tax Office did not take the state aid aspect into account. The Tax Office did not consider the arrangement as a form of state aid and therefore the beneficiary was not requested to provide a restructuring plan, which differs from the business plan submitted to the court in accordance with the insolvency legislation.

(59)

In their reaction to the comments submitted by the beneficiary, the Slovak authorities submitted the following comments of its own.

(60)

The Slovak authorities would not apply the beneficiary's comments on the average length of bankruptcy proceedings and the average return from the sale of assets in bankruptcy proceedings to this case. According to them, considering the low number of creditors and the existence of assets with a positive liquidation value, which exceeded the amount paid to the State after the arrangement, bankruptcy proceedings would have been completed in a shorter period than the average and the yield of the Tax Office would have been higher than in case of the arrangement. The local Tax Office undertook an inspection at the company on 21 June 2004 and found that, as at 17 June 2004, the beneficiary had cash of SKK 161,3 million, receivables of SKK 62,8 million, stocks of spirit and spirit-based beverages with a value of SKK 84 million and fixed assets with a book value of SKK 200 million.

(61)

The Slovak authorities consider that tax execution was a real alternative for the Tax Office. They confirm that the Tax Office could have initiated this procedure prior to the arrangement, as it also could have done if the court had refused to confirm the arrangement (because the Tax Office as a separate creditor would not have voted for it).

(62)

The Slovak authorities do not agree with the beneficiary’s assertion that its financial difficulties were due to the change in the Tax Administration Act. According to the Slovak authorities, the financial difficulties of the beneficiary were due to its financial strategy of using indirect taxes for the running of its own business, whereas what the beneficiary was supposed to do was simply collect the taxes from its clients and transfer them to the state budget.

(63)

The Slovak authorities do not agree that the meeting with the Tax Directorate in December 2003 is evidence of the Tax Office's preliminary agreement with the arrangement. They submitted a letter of 6 July 2004 from the Tax Directorate to the Tax Office, indicating that the Tax Office should not agree to the arrangement proposed by the beneficiary, because it was unfavourable for the State. This letter then referred to another, more general, letter of 15 January 2004 from the Minister of Finance to the Tax Directorate, asking it to ensure that no agreement would be given to proposals for arrangements with creditors that would involve write-offs of tax receivables by tax offices. Moreover the Slovak authorities interpret the letter of 3 February 2004 referred to by the beneficiary (see paragraph 43) as explicitly disagreeing with the arrangement at the level of 35 %.

(64)

The Slovak authorities submit that the beneficiary had not paid excise taxes on time from January 2001 to March 2004 and had regularly had its tax obligations deferred.

(65)

According to the Slovak authorities, considerable differences in the estimates of the two auditors’ reports (see paragraphs 48 and 51) raise doubts as to the credibility of both reports. The authorities have, in particular, doubts on the liquidation factor assigned to current assets by EKORDA. This factor should be higher than 20 %.

(66)

Finally, according to the Slovak authorities, the beneficiary had not drawn up a viable restructuring plan and the arrangement measures proposed could not be considered restructuring measures.

(67)

As some of the relevant events took place before Slovakia joined the European Union on 1 May 2004, the Commission first has to determine whether it is competent to act with regard to the disputed measure.

(68)

Measures that were put into effect before accession and are not applicable after accession cannot be examined by the Commission either under the interim mechanism procedure, governed by Annex IV, point 3 of the Accession Treaty, or under the procedures laid down in Article 108 TFEU. Neither the Accession Treaty nor the Treaty on the Functioning of the European Union requires or empowers the Commission to review these measures.

(69)

However, measures put into effect after accession clearly fall within the competence of the Commission. In order to assess the moment when a certain measure was put into effect, the relevant criterion is the legally binding act by which the competent national authority undertakes to grant aid (12).

(70)

The beneficiary claimed that the disputed measure was put into effect before accession and is not applicable thereafter (see paragraph 43).

(71)

The Commission cannot accept the arguments put forward by the beneficiary. The proposal to initiate the arrangement proceedings is not an act of the granting authority, but an act of the beneficiary. The decision of the court to commence the arrangement proceedings is likewise not an act of the granting authority. This decision only permitted the beneficiary and its creditors to proceed with negotiations on the arrangement but clearly did not constitute the granting event. There is no evidence that the Tax Directorate would have expressed its agreement with the disputed measure at the meeting in December 2003. On the contrary, the Slovak authorities denied any such preliminary agreement. The letter of 3 February 2004 is explicit in refusing to accept the proposal to settle at the level of 35 %.

(72)

The decision of the competent authority to write off part of its claims was taken on 9 July 2004, when the Tax Office agreed with the arrangement proposed by the beneficiary.

(73)

Accordingly, the question of whether the measure is applicable after accession no longer arises.

(74)

The Commission therefore concludes that it is competent to assess the disputed measure pursuant to Article 108 TFEU.

(75)

Article 107(1) TFEU declares any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods and affects trade between Member States incompatible with the internal market.

(76)

Writing off a debt towards a public authority, such as a Tax Office, is a form of using state resources. Since it benefits an individual undertaking, the measure is selective.

(77)

Until the events that triggered the insolvency procedure, the beneficiary was operating in the market of the production of spirit and spirit-based beverages, non-alcoholic beverages and canned fruit and vegetables. In 2003 the beneficiary was the third producer of spirit and spirit-based beverages in Slovakia. After the loss of the licence for the production of spirit and spirit-based beverages in March 2004, the beneficiary was active in the wholesale of spirit and spirit-based beverages, produced by another company, Old Herold s. r. o., using the beneficiary’s production assets that Old Herold s. r. o. rents. In all segments in which the beneficiary was active prior to the arrangement and in which it is active at present there is trade between Member States.

(78)

In the decision to open the formal investigation procedure, the Commission raised doubts as to whether the measure distorted or threatened to distort competition by conferring on the beneficiary an advantage that it would normally not be able to obtain on the market. In other words, the Commission had doubts as to whether the State behaved in relation to the beneficiary as a market economy creditor.

(79)

It was established that the creditors’ agreement contained the same conditions of debt arrangement for both the private creditors and the Tax Office (public creditor). 35 % of the debt was to be paid to the creditors by a prescribed date, which is what the beneficiary did in fact do. The remaining 65 % was to be written off.

(80)

However, the position of the Tax Office as a creditor in this case was unusually strong and cannot be equated to that of a typical creditor in bankruptcy proceedings. The legal and economic situation of the Tax Office before the creditors’ agreement was more advantageous than that of the private creditors. Not only was the Tax Office, with more than 99 % of all claims registered in the bankruptcy proceedings, clearly the dominant and decisive creditor, it was also, and more importantly, a separate creditor. Its claims could therefore be satisfied at any time during the bankruptcy proceedings from the proceeds from the sale of the secured assets: as described in paragraph 18 above, those proceeds would be used exclusively to satisfy the claims of the separate creditor. It therefore needs to be examined in detail whether the Tax Office used all the means available to it to obtain the highest possible repayment of its receivables, as a market economy creditor would do.

(81)

The conditions which a measure must meet in order to be treated as aid for the purposes of Article 107 TFEU are not met if the recipient undertaking could, in circumstances which correspond to normal market conditions, have obtained the same advantage as that which has been made available to it through state resources (13). That assessment is made by applying, in principle, the private market creditor test. When a public creditor grants payment facilities in respect of a debt payable to it by an undertaking, such payment facilities constitute state aid for the purposes of Article 107(1) TFEU where, taking account of the significance of the economic advantage thereby granted, the recipient undertaking would manifestly not have obtained comparable facilities from a private creditor in a situation as close as possible to that of the public creditor and seeking to recover sums due to it by a debtor in financial difficulty (14).

(82)

The applicability of the private market operator test ultimately depends on the Member State concerned having conferred, otherwise than in its capacity as public authority, an economic advantage on an undertaking. It follows that, if a Member State relies on that test during the administrative procedure, it must, where there is doubt, establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented is ascribable to the State acting as a private market operator. That evidence must show clearly that the Member State concerned took the decision to act as it did before or at the same time as conferring the economic advantage. In that regard, it may be necessary to produce evidence showing that the decision was based on economic evaluations comparable to those which would have been carried out in the circumstances by a rational private market operator in a situation as close as possible to that of the Member State. However, it is not enough to rely on economic evaluations made after the advantage was conferred, or on a retrospective finding that the course of action chosen by the Member State concerned was actually beneficial, or on subsequent justifications of the course of action actually chosen (15).

(83)

In brief, the Slovak Republic submits that, in its view, the measure constitutes state aid. It acknowledged that, at the time of the arrangement, the question of state aid was simply not considered and requested that the disputed measure be treated as rescue aid. It therefore appears that the requirements of the case-law referred to above have not been complied with in this case and the disputed measure constitutes state aid within the meaning of Article 107(1) TFEU.

(84)

It is the beneficiary who argued that the measure is free of aid and submits the documents described above, in particular reports from two auditors.

(85)

On the basis of the information submitted both by the beneficiary and the Slovak authorities, the Commission determined the following facts on the financial situation of the beneficiary in the year in question, in as far as relevant for the application of the market economy creditor test. The figures as at 31 March 2004 provided by the beneficiary and the figures as at 17 June 2004 provided by the Slovak authorities cannot be verified by the Commission against the beneficiary’s accounts. The Commission, however, has no reason to doubt these figures.

Table 3

Financial situation of the beneficiary 2003–2004 [million SKK]

(86)

The Commission will first examine the evidence submitted by the beneficiary in support of the statement that bankruptcy proceedings would have left the Tax Office worse off than arrangement proceedings (section 2.1). The Commission will then examine the position in relation to tax execution (section 2.2). Finally the Commission will examine other evidence submitted by the Slovak authorities and the beneficiary (section 2.3).

(87)

As described in paragraph 37, the amount of debt to be included in the arrangement was reduced as a result of the extraordinary appeal procedure. However, it should be noted that this judgment came several years after the decision to enter into the arrangement. For the purposes of the market economy creditor test, the information available at the time when a hypothetical creditor would have assessed which course of action was most appropriate remains the standard against which to measure the behaviour of the public creditor. The analysis below therefore uses the figures in the agreement as entered into on 23 July 2004.

(88)

In order to assess whether an advantage was actually conferred on the beneficiary, the Commission must carry out an overall assessment, taking into account all relevant evidence in the case enabling it to determine whether the beneficiary company would manifestly not have obtained comparable facilities from a private creditor (24). In other words, it must examine whether the Tax Office was better off accepting the conditions proposed under the arrangement or whether it would have been more advantageous to initiate bankruptcy proceedings.

(89)

The Commission considers that the EKORDA report is not a credible basis for comparing the arrangement proposed with hypothetical bankruptcy proceedings. The Slovak authorities agree with the Commission in this respect.

(90)

At the outset, the Commission notes that, when issuing its report on 7 July 2004 (just two days before the creditors’ meeting), for its calculations EKORDA used the status of the beneficiary’s assets as at 31 March 2004. It is clear from Table 3 that the level of various assets changed considerably after 31 March 2004. In particular a considerable portion of the stock was sold, which led to an increase in cash. These changes are of great importance when applying liquidation factors ranging from 20 % for stock and short-term receivables to 100 % for cash. Indeed, even if the liquidation factors estimated by EKORDA had been correct (which the Commission contests for the reasons set out below) and using the methodology used by EKORDA, the following table shows how the outcome of EKORDA’s calculation would have been different if based on figures from 28 April 2004 and 17 June 2004, i.e. still before the creditors’ meeting on 9 July 2004.

Table 4

Comparison of the likely yield from the sale of the beneficiary’s assets in bankruptcy proceedings [million SKK]

(91)

It should be noted that the business plan submitted by the beneficiary to the court the sale of stock for SKK 110 million was planned for the period March–May 2004. EKORDA must therefore have been aware that the assets of the beneficiary would be subject to considerable changes after 31 March 2004, but did not take this into account.

(92)

Had the book value of the beneficiary’s assets from 28 April 2004 been taken into account, it would have led to the conclusion that the likely yield from the sale of the beneficiary’s assets in a bankruptcy procedure would have been higher than estimated in the report (SKK 238 million, or EUR 6,3 million, instead of SKK 204 million, or EUR 5,3 million). An analysis using the figures from June 2004 would have allowed a clear conclusion to be drawn that the likely yield from the sale of the beneficiary’s assets in bankruptcy proceedings (SKK 275 million; EUR 7,2 million) would have been higher than what was proposed under the arrangement, and that the Tax Office should use its veto right and reject the proposal with the effect of terminating the arrangement. Again, the Commission would point out that the above results were obtained using the assumptions and the methodology of EKORDA.

(93)

The Commission, however, cannot accept the methodology used by EKORDA and does not find the assumptions of the beneficiary credible. This conclusion is reinforced by the doubts of the Slovak authorities as described in paragraphs 60 and 65.

(94)

To start with, EKORDA does not explain in its report how it determined the three liquidation factors. The purpose of liquidation factors is to calculate the remaining value of assets sold in the liquidation proceedings, taking into account the nature of the sale e.g. assets sold separately, under time constraints, etc. Therefore, it is assumed that the value of the assets obtained through a liquidation sale is usually lower than the book value, depending on the type of the assets. The percentage share of the value of the assets obtained through the liquidation compared to the book value is the liquidation factor.

(95)

Furthermore, the liquidation factor of 45 % for non-current assets seems to be too low. According to the beneficiary itself, the value of its assets pledged in favour of the Tax Office was SKK 194 million (28). This value is, according to the beneficiary, expressed in prices estimated by independent experts at the turn of the year 2003/2004. In the Commission’s view, this kind of ‘expert price’ should normally reflect the general value of the asset, a proxy expressing for what price the asset can be sold at a given moment. It should be recalled that the expert value of these assets was established in order to ascertain their value as security for the Slovak authorities against the deferred tax debt of the beneficiary, as required by the Tax Administration Act. EKORDA does not provide any clarification as to why the sale of the non-current assets in bankruptcy proceedings would yield only 45 % of their book value of SKK 205 million, whereas the beneficiary itself placed a much higher value on these assets.

(96)

In response to the beneficiary’s argument that it would be hard to find a buyer because most of the pledged machinery was confined only to the production of spirit and spirit-based beverages, non-alcoholic beverages or canned products, the Commission has the following two comments. First, the ‘expert price’ of the pledged real estate was SKK 105 million, which is on its own higher than the total yield forecast by EKORDA (SKK 92 million). Second, the actual developments in the company show that some of these production assets quickly found a new user Old Herold s.r.o. Indeed, once the beneficiary lost the licence to produce spirit and spirit-based beverages its production assets were rented to Old Herold. It seems therefore that there was an imminent interest from a competitor for these production assets.

(97)

As for stock, the Slovak authorities themselves consider that the liquidation factor should be higher than 20 %.

(98)

The beneficiary was able to generate SKK 110 million from the sale of its stock in 2004 (see paragraph 35), i.e. more than 50 % of the book value of the stock on which EKORDA based its assessment. This is a strong indication that the liquidation factor of 20 % was too low. The changes in the balance sheet in 2004 with regard to stock supports this conclusion. In addition, in its business plan the beneficiary itself estimated the yield from the sale of stock over the period March–May 2004 to be SKK 110 million (see paragraph 35). EKORDA ignored this estimate. Finally, from the nature of the beneficiary’s activities it can be assumed that the stock comprised final or semi-finished products which could have been sold directly to distributors or consumers, further supporting the use of a higher liquidation factor.

(99)

The Commission considers that the liquidation factor for the stock should be 52 %. This figure is based on the beneficiary’s estimate of the yield it would receive from the sale of stock for the purpose of financing the agreement (i.e. SKK 110 million). Taking into account the book value at that time (SKK 209 million) the only possible liquidation factor for stock was therefore at least 52 % (52 % of 209 million being 110 million).

(100)

Concerning the short-term receivables, EKORDA used double adjusting. First, it adjusted their book value by a factor of 59 % (the book value being SKK 166 million and the value that EKORDA used in its calculations SKK 98 million) and then in addition used the low liquidation factor of 20 %. This methodology is questionable. It can be acceptable to adjust the book value of receivables to reflect their actual value at a given time. EKORDA, however, does not provide any explanation as to why the yield in bankruptcy/liquidation would be only one fifth (SKK 20 million) of what the beneficiary itself believed to be able to obtain from its debtors (SKK 98 million).

(101)

The book value of short-term receivables based on March 2004 figures (SKK 166 million) was adjusted to SKK 98 million by EKORDA in order to correct for uncollectible or low-quality receivables. In addition, however, EKORDA applied a liquidation factor of only 20 % to the adjusted book value. If EKORDA’s 59 % factor for adjusting the book value of the short-term receivables is applied to the book value based on the June 2004 figures (SKK 63 million), the result is SKK 37 million. However, according to the information provided by the Slovak authorities, there were receivables of SKK 63 million that were enforceable. It is therefore doubtful whether any adjusting of their book value is actually necessary.

(102)

In any event, there is no obvious reason why the liquidation value should be even lower than the adjusted figure. The Commission therefore considers that the expected yield from the short-term receivables is certainly not lower than the adjusted figure of SKK 37 million.

(103)

Given the above, the Commission adjusted EKORDA’s estimates and made a new assessment using the figures from June 2004. This assessment clearly shows that the likely yield from the sale of the beneficiary’s assets in bankruptcy proceedings would have been much higher than the yield forecast in EKORDA’s report. The figures are summarised in the table below.

Table 5

Comparison of the likely yield from the sale of the beneficiary’s assets in bankruptcy proceedings

EKORDA figures compared with the Commission’s corrected figures (in SKK million)

(104)

The costs of bankruptcy proceedings, according to the beneficiary’s comments on the opening decision, should constitute 18 % of the estimated value of the proceeds from the sale of the beneficiary’s assets in those proceedings. This is according to the beneficiary an appropriate rate in the light of the World Bank Report of 2004 (33). Therefore, by applying this percentage to the corrected value of the likely yield from the sale of the beneficiary’s assets, as established by the Commission, the costs of the bankruptcy proceedings would come to SKK 78,3 million. When this amount is deducted from the corrected yield from the sale of the beneficiary’s assets, the result is higher than the sum received by the Tax Office under the arrangement (435 million – 78,3 million = 356,7 million; the sum agreed under arrangement was SKK 224,3 million).

(105)

As indicated in Table 5, the likely yield from sale of the beneficiary’s assets was SKK 435 million. Taking into account that the Tax Office would have received close to 100 % of the proceeds of the sale (34), and even allowing for bankruptcy costs of up to 18 % of these proceeds as claimed by the beneficiary, the Tax Office would still have received SKK 132,4 million more than under the arrangement.

(106)

Moreover, even applying the very low liquidation factors provided by EKORDA to the value of the beneficiary’s assets as at June 2004, the likely yield from the sale of these assets (after deducting the costs of the bankruptcy proceedings – 18 %) would be SKK 225,5 million, which is still higher than the sum agreed to by the Tax Office under the arrangement (35).

(107)

Finally, it should be noted that the Slovak authorities have not supported the beneficiary’s claim that the Tax Office had the EKORDA report at its disposal prior to the creditors’ meeting on 9 July 2004 and thus could have used it as a basis for its decision. However, the Tax Office did have the results of its own June 2004 inspection, which showed that Frucona had significant assets as indicated in Table 3. On the basis of these data, the Tax Directorate by letter of 6 July 2004 to the local Tax Office, indicated that the local Tax Office should not agree to the arrangement proposed by the beneficiary, because it was unfavourable for the State.

(108)

The other experts’ reports provided by the beneficiary failed to meet the standard required to demonstrate that the market creditor test was met. In particular, none of the reports states on what basis the, sometimes exceptionally low, liquidation factors were established. Furthermore, it can be observed that as regards the report of Ms Kochová, whose conclusions were significantly different from the conclusions of EKORDA, that it is not clear for what purpose this report was made and on what period and assumptions it was based. The report by the receiver Ms Holovačová only states that, in general, arrangement proceedings are more advantageous for creditors than bankruptcy proceedings. Therefore, none of the information in either of these two reports can be used either to support or to refute the beneficiary’s assertion that the market economy creditor test was met.

(109)

In addition, as regards the arguments regarding the duration of bankruptcy proceedings, the circumstances of this case need to be taken into account when considering what impact the possible length of bankruptcy proceedings might have on the decision-making process of a hypothetical private creditor.

(110)

The fact that the State was in a privileged position in comparison to the other creditors, due to the fact that its debt was secured against the beneficiary’s non-current assets, is a further important aspect in this case. In HAMSA, the Court confirmed that the status as a secured creditor is a relevant factor to be taken into account in applying the private creditor test (36). In accordance with Section 31(1)(e) of the Bankruptcy Act, the claims of a separate creditor may be satisfied at any time during the bankruptcy proceedings from the sale of the assets which provide the security. Therefore, as regards the assets pledged to the Tax Office, the length of the bankruptcy proceedings overall was, in the Commission’s view, irrelevant, since these claims could have been satisfied independently of the progress of those proceedings.

(111)

In particular, even taking the value placed on the secured assets by the beneficiary, the Tax Office could have obtained early satisfaction through the sale of the securities of at least SKK 194 million, or 86 % of the sum proposed in the creditors’ agreement. Only if there had been some prospect of it not receiving the full amount agreed under the arrangement would the Tax Office have had to consider whether it was worth waiting for the end of the bankruptcy proceedings. What is more, upon final distribution to the creditors, the Tax Office would then have received around 99 % of the yield from the sale of the remaining assets (SKK 185 million in the worst case scenario, that is applying EKORDA’s liquidation factors; see Table 4). It should have been clear to the Tax Office that the resulting debt recovery would have been well in excess of the sum on offer under the arrangement and that only a small part of that total would have entailed a wait as compared to under the arrangement.

(112)

Therefore, it can be concluded that the information concerning the duration of bankruptcy proceedings in Slovakia would not have influenced the decision of a hypothetical private creditor in any significant way.

(113)

Furthermore, in any event, at the time of the arrangement the beneficiary had: (i) a very low number of creditors and (ii) assets with a liquidation value higher than the amount agreed by the State under the arrangement (as shown in Table 5, the likely yield from the sale of the unsecured assets alone was SKK 241 million).

(114)

The number of creditors involved in the arrangement was low, there being only five of them. Of these five creditors, four were private and their share of the total debt was only 0,6 % (SKK 3 797 608 out of SKK 644 166 949) as shown in Table 2. The State therefore represented by far the largest creditor with 99,4 % of the total claims. Such circumstances would significantly reduce the risk of any disagreements between creditors and consequent litigation and would, therefore, tend to shorten the length of the bankruptcy proceedings.

(115)

With regard to the argument presented by the beneficiary, based on a report by the World Bank called ‘Doing business in 2004’ claiming that bankruptcy proceedings in Slovakia last on average 4,8 years, it should be noted that the report refers to a general ‘closing a business indicator’, which measures the overall time to go through bankruptcy proceedings as well as court powers in bankruptcy proceedings. This duration is not strictly the same as the average length of bankruptcy proceedings. The Slovak authorities themselves expressed the view that given the circumstances of this case, the duration of the bankruptcy proceedings would be shorter than the average (see paragraph 60). This assessment by the Slovak authorities is particularly relevant given the fact that the proceedings in question would be conducted in accordance with Slovak bankruptcy law and practice. Moreover, the Slovak government was itself the creditor of the beneficiary.

(116)

In addition, the length of the bankruptcy proceedings in the reports provided by the beneficiary varies significantly from two years to more than six years (37). Therefore the assessments of the duration of bankruptcy proceedings in Slovakia that the beneficiary submitted to the Commission were generalisations and did not take account of the specifics of the case at hand. Some of those assessments were of an approximate nature and, to a certain extent, were inconsistent with each another.

(117)

As regards the specific example of a Slovak company in the same sector as the beneficiary whose bankruptcy proceedings lasted for more than five years, it should be noted that the beneficiary failed to demonstrate how that example relates to this case and in particular whether that company was in the same or a very similar legal and material situation as the beneficiary (38). Given the fact that the beneficiary had one large creditor with privileged status the State and a number of assets with a significant appraisal value, the bankruptcy proceedings in the case of the beneficiary could have been concluded in a relatively swift manner and would thus present a preferred course of action for the largest creditor the State.

(118)

Lastly, even assuming that the bankruptcy proceedings would have lasted four to five years, as claimed by the beneficiary, the difference between the likely amounts to be recovered and the amounts agreed under the arrangement was so big, that the length of those proceedings would not have played a significant role in the decision of a private creditor as to whether to accept the arrangement. Considering a discount rate of 5,14 % (39), the present value of the future cash flow of SKK 356,7 million even after five years is SKK 277,6 million, i.e. well above the amount agreed under the arrangement. Under such conditions, the bankruptcy proceedings would have had to take more than 9 years in order for the present value to be lower than the amount agreed under the arrangement. Such a long liquidation procedure would not have been considered likely in this case by any private market operator. In addition, the present value of the total amounts to be recovered would be further increased if it is taken into account that a significant part of the debt would likely have been repaid earlier through the sale of the secured assets (see paragraph 111111)).

(119)

On the basis of the evidence available, it can be concluded that a private creditor would not have entered into the arrangement on the terms agreed by the Tax Office in this case; given that the Tax Office could be satisfied as a separate creditor at any time during the bankruptcy proceedings and, in addition, obtain over 99 % of the yield distributed to the remaining creditors (due to the size of its claims when compared to the other creditors), it can be concluded that almost the entire yield obtained in the bankruptcy proceedings would go to the Tax Office and, as demonstrated above, would be higher than the amount agreed in the arrangement between the creditors.

(120)

The Tax Office, unlike the private creditors, was entitled on its own initiative to proceed with tax execution through the sale of real estate, machinery or the firm as a whole. No evidence, within the meaning of the case-law referred to above in paragraph 82, was provided to indicate that the Tax Office had considered this course of action and concluded that it would be less advantageous than agreeing to the arrangement.

(121)

In any event, the Commission finds irrelevant the beneficiary’s argument that the arrangement proceedings shelter the company from tax execution. As confirmed by the Slovak authorities, tax execution was an option for the Tax Office, either prior to the launch of the arrangement proceedings or after the Tax Office’s veto on the proposed arrangement. This option therefore needs to be considered when applying the market economy creditor test. The beneficiary does not compare the proposed arrangement with the potential outcome of tax execution.

(122)

The Commission bases its analysis on data provided by both the beneficiary and the Slovak authorities. In this context it is noted that the Slovak authorities confirmed that the pledge in favour of the Tax Office was SKK 397 million as mentioned in the decision to open the formal investigation procedure. This value is said to be obtained from the beneficiary’s accounts. The beneficiary, for its part, submits that the value of the pledged assets expressed in ‘expert prices’ is SKK 194 million (see paragraph 22). While the Commission does not need to determine which figure is correct, the following conclusions can nevertheless be made.

(123)

First, the pledge was a counterpart against the deferred tax debt of the beneficiary, as required by the Tax Administration Act. If the value of the beneficiary’s assets was in reality only half of the pledge, as suggested by the expert opinion submitted by the beneficiary, it means that the securities required by the State for those deferrals were insufficient. In these circumstances, the tax deferrals permitted by the Tax Office between November 2002 and November 2003 totalling SKK 477 million therefore in all probability failed to meet the market economy creditor test. For the purpose of this case it is not necessary for the Commission to determine whether those measures were free of state aid. However, if the earlier deferrals already constituted state aid, the market economy creditor principle can no longer be referred to when the deferred amounts are later (partly) written off.

(124)

Second, even if the lower figures submitted by the beneficiary are used in the calculation of the proceeds from tax execution, the market economy creditor, had he had the possibility, would have favoured this procedure over arrangement.

(125)

In the case of tax execution a tax office can directly sell the debtor’s assets (receivables and other current assets, movable assets, real estate). At the time when the Tax Office voted in favour of the arrangement, the beneficiary had stock worth SKK 43 million, enforceable receivables of at least SKK 37 million and SKK 161 million in cash (see Table 5). It is noted that the value of those current assets alone (SKK 241 million; EUR 6,3 million) (40) would exceed the yield proposed in the arrangement (SKK 224,3 million; EUR 5,93 million). In addition, the beneficiary had other assets, the value of which was at least SKK 194 million.

(126)

Furthermore, tax execution would not involve administrative fees as in the case of bankruptcy proceedings. It is a procedure that is initiated and controlled by the tax office, so it can also be assumed that it would be conducted in a speedy manner.

(127)

The Commission therefore concluded that tax execution against the beneficiary’s assets would have led to a higher return than the arrangement.

(128)

The Commission takes note of the letter submitted by the Slovak authorities from the director of the Tax Directorate to his subordinate, the director of the tax office in question (see paragraph 63). The letter clearly shows that the Tax Directorate (which had prior direct contacts with the beneficiary) opposed the proposed arrangement and gave a clear indication that the local Tax Office should not vote in favour of the arrangement. The reason mentioned in the letter was that the proposed arrangement was ‘not advantageous’ for the State.

(129)

It was also demonstrated by the Slovak authorities that there was a clear policy instruction given by the Ministry of Finance at the beginning of 2004 to the tax authorities to the effect that they should not accept arrangements proposing write-offs of tax authorities’ receivables (41). This policy choice was communicated in connection with the amendment of the Tax Administration Act as of 1 January 2004, in an effort to strengthen discipline in tax collection.

(130)

In addition, it should be noted that the Tax Office itself appealed against this arrangement as early as 2 August 2004, i.e. not even one month after the arrangement was agreed upon.

(131)

The beneficiary submitted that the Tax Office had signalled its agreement to the arrangement even prior to the beneficiary launching the procedure. The Commission considers that the evidence submitted by the beneficiary indicates quite the opposite. In his letter of 3 February 2004 to the beneficiary, the director of the Tax Office writes that, although in principle he is not against the use of the arrangement procedure, he does not agree with the beneficiary’s proposal for arrangement with 35 % repayment of the debt.

(132)

On the basis of this evidence, the Commission cannot but conclude that the Slovak authorities were opposed to the arrangement proposed by the beneficiary, and were opposed to it already prior to the launching of the arrangement proceedings on 8 March 2004, before the creditors’ vote on 9 July 2004 and also after the court approved the arrangement.

(133)

The beneficiary submitted that long-term effects, such as the continuity of the tax revenue for the State, should be taken into account (see paragraph 52).

(134)

First, it needs to be stressed that the market economy creditor test differs from the market economy investor test. Whereas a market economy investor is in a position to decide whether to enter into a relationship with the company in question and will be driven by the long-term, strategic prospect of obtaining an appropriate return from his investment (42), a ‘market economy creditor’, who already is in a commercial or public law relationship with the insolvent company, will aim at obtaining the repayment of sums already due to him (43) on conditions that are as advantageous as possible in terms of the degree of repayment and the timeframe. The motivations of the hypothetical market economy creditor and the market economy investor will therefore be different. Accordingly, the case-law has defined separate tests for the two situations.

(135)

Second, as to the analogy to the creditor–supplier, it is important to note that the nature of his receivables and those of the State is fundamentally different. Because the relations of the supplier to the insolvent firm have an exclusively contractual basis, he may actually suffer from the loss of a business partner. If the insolvent company is liquidated or sold off, the supplier would need to find a new client or contract with the new owner. The risk is higher when his dependency on the insolvent firm is considerable. Such a creditor will indeed consider the future. In contrast, the relations of the State with the insolvent firm are based on public law and are therefore not dependent on the will of the parties. Any new owner taking over the assets of the liquidated firm would automatically be obliged to pay taxes. Moreover, the State is never dependent on a single taxpayer. Finally and most importantly, the State is not profit-driven when levying taxes and does not act in a commercial way and with commercial considerations when doing so. The above analogy is therefore not well-founded.

(136)

The Commission concludes that the situation of the State in this case is not comparable to the situation of a hypothetical market economy investor or to the situation of a hypothetical dependent market economy creditor. In any event, the loss of future taxes cannot be taken into account when applying the market economy creditor principle (44).

(137)

Lastly, it is noted from the overview of taxes submitted by the beneficiary that most of the taxes paid by the beneficiary since 1995 were indirect taxes (excise duties and VAT). As these taxes are paid by final consumers, the liquidation of the beneficiary would have no impact on their collection, as consumers would continue to purchase the taxed products (in this case mainly spirit and spirit-based beverages) from other producers. The beneficiary’s argument regarding considerable future tax loss is therefore not credible.

(138)

The Commission concludes that none of the other evidence submitted by the beneficiary demonstrates that the behaviour of the hypothetical private creditor would have been influenced. Therefore nothing in this section alters the Commission’s assessment of that behaviour in sections 2.1 or 2.2.

(139)

On the basis of the above evidence, the Commission concludes that in this case the market economy creditor test was not met and the State conferred on the beneficiary an advantage that it would not have been able to obtain from the market.

(140)

The Commission therefore concludes that the debt write-off agreed to by the local Tax Office under the arrangement constitutes state aid within the meaning of Article 107(1) TFEU.

(141)

The primary objective of the measure is to assist a company in difficulty. In such cases, the exemption under Article 107(3)(c) TFEU, which allows state aid to be authorised to facilitate the development of certain economic activities where it does not adversely affect trading conditions to an extent contrary to the common interest, can be applied, if the relevant conditions are complied with.

(142)

In view of the production portfolio of the beneficiary, the Commission assessed whether special rules applicable to the agriculture sector apply in this case. Basing itself on the information on the beneficiary’s turnover submitted by the Slovak authorities, the Commission concluded in its decision to open the formal investigation that most of beneficiary’s products were not products falling under Annex I to the TFEU and therefore the general state aid rules apply.

(143)

In its comments on the decision to open the formal investigation the beneficiary disputed the data on the turnover provided by the Slovak authorities beforehand (see Table 1), but did not dispute the decision of the Commission to base its assessment on the general state aid rules. Without wishing to determine whether the figures provided by the beneficiary were accurate (45), the Commission verified whether its above conclusion would stand up against the new data. The Commission concluded that the majority of the beneficiary’s turnover is generated by products not falling under Annex I to the TFEU. The general, and not the sector-specific, state aid rules therefore apply.

(144)

Rescue and restructuring aid to ailing companies is currently governed by the Community Guidelines on state aid for rescuing and restructuring firms in difficulty (46) (the ‘New Guidelines’), which replaced the previous text adopted in 1999 (47) (the ‘1999 Guidelines’).

(145)

The transitional provisions of the New Guidelines stipulate that the New Guidelines will apply to the assessment of any rescue or restructuring aid granted without the authorisation of the Commission (unlawful aid) if some of or all the aid is granted after 1 October 2004, the day of publication of the New Guidelines in the Official Journal of the European Union (point 104, first subparagraph). However, for aid unlawfully granted before 1 October 2004, the examination will be conducted on the basis of the guidelines applicable at the time when the aid was granted (point 104, second subparagraph).

(146)

The approval by the Tax Office of the arrangement was issued on 9 July 2004 and took effect on 23 July 2004. Accordingly, the aid was unlawfully granted before 1 October 2004. The 1999 Guidelines, which were applicable at the time when the aid was granted, therefore apply.

(147)

The beneficiary is a medium-sized company within the meaning of Commission Regulation (EC) No 70/2001 on the application of Articles 87 and 88 of the EC Treaty to state aid to small and medium-sized enterprises (48).

(148)

According to point 5(c) of the 1999 Guidelines, a company is regarded as being in difficulty where it fulfils the criteria under domestic law for being the subject of collective insolvency proceedings.

(149)

The beneficiary was the subject of the arrangement proceedings, which, under the definition in the Bankruptcy Act, is only accessible to insolvent companies. It is therefore eligible for rescue and restructuring aid.

(150)

The disputed measure was initially described by the Slovak authorities as rescue aid. In accordance with the 1999 Guidelines, the Commission raised doubts as to the compatibility of the aid as rescue aid on the grounds described in part III.

(151)

Neither the Slovak authorities nor the beneficiary commented on these doubts. No new facts have been presented to the Commission in this respect.

(152)

Since the above doubts have not been allayed, the Commission concludes that the aid is not compatible as rescue aid within the meaning of the 1999 Guidelines.

(153)

The Commission raised doubts as to whether the aid was compatible as restructuring aid within the meaning of the 1999 Guidelines on the grounds described in part III.

(154)

The Commission notes that the Slovak authorities, who bear the burden of proving that the state aid is compatible with the internal market, have not submitted any new facts in support of this conclusion. The Commission took due note of the comments submitted by the beneficiary.

(155)

According to the 1999 Guidelines, the granting of restructuring aid must be linked to and conditional on implementation of a feasible and coherent restructuring plan to restore the firm’s long-term viability. The Member State commits itself to this plan, which must be endorsed by the Commission. Failure by the company to implement the plan is regarded as misuse of aid.

(156)

In substance, the restructuring plan must be such as to enable the beneficiary to restore its long-term viability within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions. The plan should describe the circumstances that led to the beneficiary’s difficulties and identify appropriate measures to address these difficulties. Restructuring operations cannot be limited to financial aid designed to make good debts and past losses without tackling the reasons for the difficulties.

(157)

For companies situated in assisted areas and small and medium-sized companies, the 1999 Guidelines stipulate that the conditions for authorising aid may be less stringent as regards the implementation of compensatory measures and the content of monitoring reports. Nonetheless, these factors do not exempt such companies from the requirement to draw up a restructuring plan nor the Member States from the obligation to make the granting of restructuring aid conditional upon implementation of a restructuring plan.

(158)

After the opening of the formal investigation, the Slovak authorities confirmed that the business plan that the beneficiary was obliged to draw up as a condition for the launching of the arrangement procedure was only considered by the competent court, i.e. not the granting authority, and that neither the court nor the Tax Office monitored the implementation of the plan.

(159)

Contrary to this confirmation, the beneficiary stated that the Tax Office had studied the ability of the business plan to restore long-term viability prior to its approval of the arrangement, but did not submit any evidence of this.

(160)

The beneficiary further argued that the absence of a formal restructuring plan is irrelevant in a situation of an ex post assessment of the aid by the Commission, when the Commission can assess whether the beneficiary did actually become viable. According to the beneficiary, the formal restructuring plan can only be required in the case of an ex ante assessment, to which only the 1999 Guidelines can apply.

(161)

This line of argument is not correct. The 1999 Guidelines apply to the compatibility assessment of both notified and unlawful aid. Whenever the assessment takes place, the condition that the restructuring aid be subject to the establishment of a viable restructuring plan is valid. The Commission has to conduct its assessment on the basis of the information available at the time when the aid was granted.

(162)

It may be concluded that the Tax Office as the granting authority did not have any opportunity to evaluate a restructuring plan and to make the write-off of its receivables conditional on duly monitored implementation of such a plan. Therefore, the first, formal, condition, which is fully applicable also to ex post assessment, was not met.

(163)

As to the substance of the business plan, the Slovak authorities did not submit any information allaying the Commission’s doubt that the plan represented a genuine restructuring plan as required by the 1999 Guidelines.

(164)

The Commission cannot but maintain the conclusion it reached in the decision to open the formal investigation. The business plan submitted is merely a plan dealing with the beneficiary’s acute problem of mounting debt to the State. The plan does not analyse in any way the circumstances that led to the beneficiary’s difficulties nor the financial situation of the company at that time and its financial prospects. Since this analysis was missing, the beneficiary did not propose specific steps addressing the individual reasons that led to the difficulties. The only measure described in detail is the proposed financial restructuring through the arrangement with creditors.

(165)

The plan does not mention at all the increase of the beneficiary’s own capital, mentioned by the beneficiary as one of the restructuring measures. Nothing in the file demonstrates that the capital increase by Hydree Slovakia should be considered as a measure ensuring that, in the long-term, the beneficiary would not repeat its strategy of financing its production through debt on VAT and excise duties, which is what eventually led to its difficulties. The Slovak authorities themselves confirmed that the capital increase did not in any way decrease the risk of repetition of the financial problems. These doubts are all the stronger, given that the capital increase totalled SKK 21 million while the restructured debt was SKK 644 million.

(166)

The capital increase in itself is not proof of market confidence in the beneficiary’s return to long-term viability. The Commission notes that the beneficiary did not manage to obtain any loan from a private bank, despite its active efforts.

(167)

Furthermore, letting the production assets to the beneficiary’s competitor Old Herold s. r. o. was clearly necessitated by the fact that the beneficiary had lost its licence to produce spirit and spirit-based products and not by the fact that this production would have been loss-making and therefore in need of restructuring. It is true that the beneficiary itself could have requested a new licence after the arrangement was finalised and did not do so. The Commission, however, observes that the beneficiary continues to sell the products produced by Old Herold using the beneficiary’s assets and brand name and even plans to increase these sales, as is stated in the annual report for the period 29 April 2004 - 30 December 2004. The letting of these production assets therefore cannot be considered as a restructuring measure because, on the basis of all the evidence available, there was no need for restructuring of this part of production.

(168)

As to the remaining measures proposed in the business plan, the Commission’s doubts have not been allayed. These measures are simply activities in the normal course of business rather than rationalisation measures (sale of old equipment or vehicles). The two proposed structural measures (abandonment of the production of non-profitable non-alcoholic products and the sale of some real estate) were described very vaguely without any indication of the precise products or a timetable. The Slovak authorities confirmed that the real estate intended for sale (an administrative building, a shop and a recreation building) had not been sold as at 10 October 2005, i.e. that this planned measure had not been implemented as announced.

(169)

The combination of the absence of a formal restructuring plan and the absence of genuine analysis of the difficulties, of the measures necessary to address these difficulties and of the market conditions and prospects leads the Commission to the conclusion that the business plan submitted by the beneficiary is not a genuine restructuring plan as required by the 1999 Guidelines (49). The Commission’s doubts that the beneficiary would restore long-term viability have therefore not been allayed.

(170)

Although the Commission’s conclusion that in the absence of a genuine restructuring plan its doubts on the long-term viability persist is in itself sufficient to conclude that the aid is not compatible with the internal market, the Commission will also analyse the other central criterion of the 1999 Guidelines, i.e. that the aid must be limited to the strict minimum necessary.

(171)

In accordance with point 40 of the 1999 Guidelines, the amount and intensity of the aid must be limited to the strict minimum needed to enable restructuring to be undertaken in light of the existing financial resources of the beneficiary. The beneficiary is expected to make a significant contribution to the restructuring from its own resources.

(172)

The costs of restructuring came to the total amount of debt restructured through the arrangement. The beneficiary paid 35 % of this amount.

(173)

The Slovak authorities did not provide any further explanation in response to the doubts expressed by the Commission in this respect. The beneficiary explained how it financed payment of the debt remaining after the arrangement (see paragraphs 30-35). According to the beneficiary, its own contribution totalled to SKK 231 million (EUR 6,1 million).

(174)

First, the resources available to the beneficiary exceeded the amount of debt remaining after the arrangement. This suggests that the aid was not limited to the minimum necessary.

(175)

More importantly, however, the Commission considers that the credit provided by Old Herold does not qualify as an own contribution by the beneficiary within the meaning of the 1999 Guidelines. Payables constitute an ongoing source of financing of the operation of the firm. They are short-term loans, which, however, have to be paid back. It is only if suppliers commit to allow payment maturity longer than normal practice that additional resources are available to the company for the restructuring and that this delay constitutes a sign that the market believes in the feasibility of the return to viability.

(176)

The beneficiary did not in any way demonstrate that the deferral of payment by Old Herold went considerably beyond what is normal commercial practice between the beneficiary and its suppliers. The maturity of 40 days seems to be standard practice, especially considering the fact that it was given to the beneficiary after the arrangement. The beneficiary was thereby no longer in financial difficulties. The very purpose of the arrangement was to help the beneficiary out of its financial problems.

(177)

The Commission therefore concludes that this prolonged maturity cannot be considered as a contribution to restructuring from external resources.

(178)

Without this deferral, the own contribution of the beneficiary within the meaning of the 1999 Guidelines is SKK 131 million (EUR 3,4 million) and thus corresponds to 20 % of the restructuring costs.

(179)

The 1999 Guidelines did not contain any thresholds indicating when the own contribution of the beneficiary is considered to be significant.

(180)

Considering the practice of the Commission in applying the 1999 Guidelines and the change in Commission policy in this respect towards the introduction of thresholds under the 2004 Guidelines (50), the Commission considers that the contribution of 20 % is rather low. Such a contribution might be accepted under the 1999 Guidelines only if all the other conditions for approving the aid were fulfilled. The Commission would then have to take into account such criteria as whether the company is active in an assisted area, to what extent the sources of financing reflect market confidence, beyond the beneficiary itself and its shareholders, in the long-term viability of the company or other specifics of the case.

(181)

In light of the above, the Commission cannot accept in this case that the contribution of the beneficiary is significant. The Commission concludes that its doubts as to whether the own contribution of the beneficiary was significant and whether the aid is limited to the minimum necessary have not been allayed.

(182)

The Commission concludes that the aid is not compatible with the internal market as rescue or restructuring aid. In addition, no other derogation laid down in the TFEU is applicable to this case.

(183)

The Commission finds that the Slovak Republic unlawfully granted the write-off of tax debt in favour of Frucona Košice a.s. in breach of Article 108(3) TFEU. This aid is not compatible with the internal market under any derogation laid down in the TFEU.

(184)

Even though the implementation of the write-off by the Tax Office has been suspended pending resolution of this procedure, the Commission finds that the advantage for the beneficiary was created the moment that the Tax Office decided to forego part of its claims and thus put the aid at the disposal of the beneficiary. This moment was the entry into force of the creditors’ agreement on 23 July 2004. The advantage over the beneficiary’s competitors lay in the fact that the Tax Office has not enforced its tax claims.

(185)

To restore the status ex ante, the state aid has to be recovered. Given that the advantage was conferred at the moment of the entry into force of the creditors’ agreement on 23 July 2004, the amount of aid to be recovered is the full amount of the write-off as set out in that agreement.

(186)

However, it was decided by the Supreme Court of the Slovak Republic that road tax arrears amounting to SKK 424 490 had been wrongly included in the arrangement. As a result, the headline debt in the agreement was reduced by that amount and the amount of debt owing to the Tax Office and entered into the agreement as corrected was SKK 640 369 341.

(187)

The road tax arrears, which had in the meantime been treated as having been written off, were paid in full on 2 August 2006. This payment should be taken into account when calculating the amount of aid and the interest on it still to be recovered,