Report for the Hearing in Case C-294/90

I — Outline of the facts

1. In March 1988 the Commission initiated the procedure laid down in Article 93(2) of the EEC Treaty in respect of the plan notified by the United Kingdom to provide new capital to Rover Group Holdings pic (hereinafter referred to as ‘Rover’) in the context of the sale of the remaining car and jeep businesses of the group to British Aerospace Public Limited Company (hereinafter referred to as ‘BAe’).

2. After considering the comments submitted by the United Kingdom authorities and examining the aid in the light of Article 92 of the Treaty, the Commission, on 13 July 1988, adopted Decision 89/58/EEC concerning aid provided by the United Kingdom Government to the Rover Group, an undertaking producing motor vehicles (Official Journal 1989 L 25, p. 92, hereinafter referred to as ‘the 1988 decision’). Article 1 of that decision reads as follows :

‘The aid to Rover Group amounting to £800 million as notified to the Commission in the form of a capital contribution aiming at a debt write-off to be awarded in 1988 in the framework of its acquisition by British Aerospace is compatible with the common market pursuant to Article 92(3)(c) up to a maximum amount of £469 million, provided that the United Kingdom Government:

1) does not alter the proposed terms of sale as communicated to the Commission and in particular: with the exception of the amount of debt write-off which must be limited to £469 million;

the acquisition price paid by British Aerospace will be £150 million,

British Aerospace will bear all future restructuring costs,

Rover Group will not use more than £500 million of its current £1600 million trading tax losses and these trading tax losses will remain within Rover Group,

British Aerospace cannot on-sell the core businesses of Rover Group within the next five years without incurring a penalty of up to £650 million,

2) ensures that the aid will be used exclusively for the repayment of financial debts of Rover Group;

3) refrains from granting any further aid in the form of capital contributions and any other form of discretionary aid to the Rover Group with the exception of a regional grant not exceeding £78 million in support of the future investment plan of Rover Group up to 1992. This may only be awarded in so far as the investment plan as communicated to the Commission is fully realized;

4) ensures that British Aerospace completes the Rover Group corporate plan by the end of 1992 in accordance with the details communicated to the Commission;

5) ensures that any underspending or overevaluation on any of the debt items communicated to the Commission is repaid to the United Kingdom Government no later than on the completion of the corporate plan;

6) ensures that Rover Group shall, once it has passed into private ownership, no longer benefit from the parliamentary assurances given in relation to its obligations taken over by the purchaser and, moreover, refrains from guaranteeing new obligations incurred by Rover Group after completion of the sale. Throughout the implementation of the corporate plan the United Kingdom Government shall provide the Commission with a half-yearly report on Rover Group's trading performance, capacity changes, production, pricing policy and intra-Community exports by product as well as a detailed survey of all restructuring measures undertaken in the previous six months.’

3. Following the publication in November 1989 of a report and a secret memorandum by the Comptroller and Auditor General of the United Kingdom National Audit Office, the Commission found that the United Kingdom had granted BAe and Rover a number of financial concessions which were not covered by the 1988 decision: £9.5 million paid to BAe to cover part of the £13.6 million paid out for the acquisition of the 0.2% minority shares held in Rover; £1.5 million paid to Rover to cover the costs of legal and economic advice given in connection with the sale; a financial benefit conferred on BAe and estimated in the National Audit Office report at £33.4 million gross, arising from the fact that payment by BAe of the acquisition price of £150 million was deferred from 12 August 1988 to 30 March 1990.

4. On 17 July 1990, the Commission adopted a decision relating to the incorrect implementation of the 1988 decision.

5. In its decision of July 1990, the Commission stated that the additional financial benefits mentioned above had been discussed with BAe at the beginning of July 1988, and thus prior to the adoption of the 1988 decision. The Commission takes the view that these three additional concessions constitute aid within the meaning of Article 92(1) of the Treaty, since they would not have been made by an investor acting under normal market conditions. The Commission believes that the aid is unlawful in view of the fact that it was granted in breach of Article 1 of the 1988 decision.

6. On the basis of the above considerations, the Commission decided, inter alia:

‘that the additional £44.4 million aid granted in the context of the sale of RG to BAe constitutes illegal aid which was paid in breach of Decision 89/58/EEC and that your authorities [the United Kingdom authorities] are required to recover it from the beneficiaries (i.e. the £9.5 million payment to cover the purchase cost of minority shares and the £33.4 million benefit to BAe which resulted from the deferment of the payment of the sales price) and £1.5 million from RG (which it obtained to cover external advice costs linked to the sale)’.

7. This decision addressed to the United Kingdom was published pursuant to Article 93(2) of the EEC Treaty in the form of a Commission communication to other Member States and interested parties in the 1991 Official Journal (C 21, p. 2). The United Kingdom had sent a copy of that decision to BAe on 19 July 1990.

II — Written procedure and conclusions of the parties

1. The application by BAe and Rover was lodged at the Court Registry on 24 September 1990.

2. BAe and Rover, the applicants, claim that the Court should: (i) annul the Commission Decision made on 27 June 1990 in so far as it requires the United Kingdom to ‘recover’ from BAe and/or Rover the ‘additional £44.4 million aid granted in the context of the sale of RG to BAe’; (ii) order the Commission to pay the costs.

3. The Commission, the defendant, contends that the Court should: (i) reject the application in its entirety; (ii) order the applicants to pay the costs of the action.

4. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

III — Submissions and arguments of the parties

1. BAe and Rover claim that the Commission failed to respect their right to be heard, that the necessary conditions for recovery of State aid were not fulfilled in the present case in relation to BAe, that the amounts in question were erroneously characterized as State aids incompatible with the common market, that the Commission made an error in the calculation of the amount recoverable and/or failed to respect the principle of proportionality, and that there was a failure to state the reasons on which the decision was based in so far as it ordered recovery from BAe.

2. The Commission disputes all of the submissions made.

A — Failure to respect the applicants' right to be heard

1. BAe and Rover claim that the Commission ought to have commenced the procedure set out in Article 93(2) of the EEC Treaty and given formal notice to the parties concerned to submit their comments as soon as it had formed the opinion that the benefits to BAe and Rover constituted State aids incompatible with the common market. Moreover, this obligation, the importance of which was underlined by the Court in its judgment in Case 84/82 Federal Republic of Germany v Commission [1984] ECR 1451, merely gives particular form to the general principle of Community law that a person whose interests are perceptibly affected by a decision taken by a public authority must be given the opportunity to make his or her point of view known. The Commission cannot argue that the decision in question is not autonomous vis-à-vis the 1988 decision; indeed, the contested decision contained all relevant factual and legal elements for identifying the contested benefits as State aids incompatible with the common market, quantified the amount of such ‘aids’ and ordered their recovery. Furthermore, the Commission itself acknowledges that the computation of the benefits and the obligation to repay them make it necessary to examine the recipient's individual position. The applicants also contend that the Commission's case is flawed by internal inconsistencies, inasmuch as it asserts that the Article 93(2) procedure and an examination to quantify the ‘aids’ would have served no useful purpose, since those questions had been settled by the 1988 decision, while also admitting that that decision could not relate to the benefits in question in the present case and that it was necessary for the Commission to make additional findings and conclusions in the contested decision of 1990. As a subsidiary point, the applicants contend that the 1988 decision did not by itself constitute an adequate basis upon which the Commission could have brought proceedings against the United Kingdom under Article 93(2). In its judgment in Case 70/72 Commission v Germany [1973] ECR 813, the Court ruled that decisions taken under Article 93(2) only take full effect on condition that the Commission indicates to the Member State concerned the aspects of the aid regarded as incompatible with the Treaty and therefore subject to abolition or alteration.

2. The Commission replies that the contested decision is not autonomous in nature and represents nothing more than an extension of the 1988 decision; the latter is fully effective per se, in so far as it imposes specific and enforceable obligations within the meaning of the second subparagraph of Article 93(2) of the Treaty. The Commission could have referred the matter directly to the Court in order to secure implementation of the 1988 decision in respect of the matters at issue in the present case. The applicants' right to be heard is closely linked to the obligation on the Commission to initiate the procedure under Article 93(2). There was no such obligation in the present case and the rights of the applicants were respected in the procedure which resulted in the 1988 decision. The financial concessions at issue were conceived and discussed by the parties concerned prior to the 1988 decision even though the Commission had not been informed of them. They are indissolubly linked to the conditions of sale of Rover and ought to be dealt with exclusively in the context of compliance with the 1988 decision. Only if the United Kingdom had intended to grant additional aid would it have been under an obligation to notify a subsequent plan and thus set in motion the procedure under Article 93(2) of the Treaty. The contested decision includes a full examination of all information provided by the United Kingdom relating to the implementation of the 1988 decision and it establishes that the three financial concessions in question constitute unlawful aid on the ground that they were made in breach of the 1988 decision. As the 1988 decision would have been directly enforceable in relation to the matters here at issue, the present situation differs from that which gave rise to the Court's judgment of 12 July 1973 in Commission v Federal Republic of Germany, cited above. In this regard, the Commission carries out a detailed examination of the 1988 decision, while stressing the limits set for the aid which the United Kingdom was authorized to pay to Rover. Any financial concession granted beyond those limits amounts, in its view, to a breach of that decision.

B — The non-fulfilment of the conditions necessary for recovery of State aid

1. BAe and Rover submit that the Commission has failed to substantiate in any way its contention that the benefits accorded constitute unlawful aid within the meaning of Article 92, in that they distort competition and affect trade between Member States. In this respect, a distinction ought to be drawn between the 1988 decision, regarding the benefits granted to Rover, and the contested decision, which relates to the benefits granted to BAe. If the sole basis for the illegality of the benefits granted to BAe and Rover is that they represent an alteration to the conditions laid down in the 1988 decision, there can be no legal basis for an order for recovery; the mere fact that aid has been granted without authorization does not empower the Commission to order its recovery (judgment in Case C-301/87 France v Commission [1990] ECR I-307). If the illegality is based on different reasons, it should be observed that the Commission does not explain what that basis may be and that the decision is accordingly vitiated by lack of reasoning under Article 190 of the Treaty.

2. In reply, the Commission contends that the applicants are labouring under a misconception as to the legal nature of the contested decision and that they draw an artificial distinction between the benefits granted to Rover and those granted to BAe. Since the 1988 decision was enforceable per se, the Commission was under no obligation whatever to adopt a new decision such as that here in dispute in order to be able to apply the 1988 decision. The contested decision merely records the unlawful nature of the aid, on the ground that it was paid in contravention of the 1988 decision, but does not regard it as aid incompatible with the common market within the meaning of Article 92(1) of the Treaty, such as cannot qualify under one of the derogations provided for in paragraphs 2 and 3 of that article.

C — The erroneous characterization as State aids incompatible with the common market

1. BAe and Rover submit that the benefits to BAe were part of a commercial contract of sale between BAe and the United Kingdom Government; none of the benefits reduced the operating costs of any of BAe's businesses so as to give those businesses an advantage over competing undertakings. The contested decision is defective inasmuch as it is based on the mistaken assumption that the benefits granted do not correspond to ordinary commercial practice; the statements submitted during the written procedure are also defective, in so far as the Commission mistakenly contends that the argument of commercial abnormality did not form part of the essential reasoning of the contested decision. Turning to the acquisition costs of minority shares, BAe points out that, in the contested decision, the Commission describes the assumption of those costs as ‘State aid’ by relying on the allegation that such an act does not correspond to normal market circumstances, before going on to label it as illegal aid in so far as it amounted to an alteration of the notified terms of sale. According to BAe, a majority shareholder may well have an interest in buying out minority shareholders or in covering the costs to the purchaser of acquiring those shares; under English law, minority shareholders have the right to restrict the options open to the acquiring company in respect of the company which it has purchased. If BAe had exercised its legal right compulsorily to acquire the minority shares, it would have paid a much lower price, all of which goes to prove that the only persons who can be said to have received a gratuitous advantage are the former minority shareholders in Rover. Similarly, the Commission fails to provide any evidence whatever in support of its contention that the deferment of payment constitutes a State aid, apart from referring to the alteration of the proposed terms of sale. Such deferment of payment is a common practice in commercial transactions. Since the purchase of Rover entailed no prospect of an immediate cash return for BAe, the effect of the deferment of payment was simply to release the purchaser from having to fund the purchase price through immediate borrowing. With regard to the reimbursement of certain consultation costs, Rover submits that such expenditure contributed to the objective of returning Rover to the private sector, an objective which is also accepted by the Commission, and that if Rover had not itself incurred those costs, the United Kingdom Government would have been obliged to do so. The amount in question, which in any case is minimal, relates to expenses already incurred and in no way represents a gratuitous advantage reducing Rover's operating costs. The mere fact that the payment of this sum was not notified to the Commission cannot justify the conclusion that it was gratuitous.

2. The Commission repeats that it laid down in the 1988 decision, in explicit terms, the limits beyond which the proposed conditions for privatization would constitute State aid. As the benefits in question in the present case clearly go beyond those limits, it is irrelevant whether or not those transactions are in accordance with normal commercial practice. Within those circumstances, the arguments put forward by the applicants lack any relevance. In the alternative, the Commission submits that, quite apart from the issue of whose responsibility it was to assume the cost of acquiring the minority shares, it cannot be disputed that such aid runs contrary to the conditions laid down in Article 1 of the 1988 decision. The argument that BAe could have acquired the minority shares for a lower price is of no relevance. The issue relates to matters which were known at the time of negotiations for the sale of Rover and it is impossible to imagine that the parties failed to take those matters into account. With regard to the deferment of payment, the Commission emphasizes once again that this amounts to a breach of Article 1 of the 1988 decision. The applicants' argument that such deferment is possible under normal market conditions is irrelevant. Furthermore, it cannot be disputed that the deferment of payment of a sales price does have a calculable economic value. Consultation expenses incurred by Rover represent a portion of the company's total indebtedness at the time of its acquisition by BAe. The important point is not whether the reimbursement of those expenses was in accordance with normal commercial practice, but rather the fact that it represented a gratuitous benefit for Rover and one which went beyond the limits of the 1988 decision.

D — Error in the caladation of the amount recoverable and failure to respect the principle of proportionality

1. BAe accuses the Commission of having made mistakes in the calculation of the amount of ‘aid to be recovered’ and of having breached the principle of proportionality by imposing an obligation on the United Kingdom Government to recover amounts paid which went further than was necessary in order to remove the unlawful consequences of the aid. Contrary to the requirements laid down by the Court in its judgment in Case C-142/87 Belgium v Commission [1990] ECR I-959, the Commission failed sufficiently to analyse the facts. With regard to reimbursement of acquisition costs and the deferment of payment, BAe raises the objection that the Commission has failed to identify the markets, if any, in which BAe's position was improved by the benefits and to demonstrate to what extent those benefits are incompatible with the common market. In the alternative, BAe contends that the Commission should at least have analysed BAe's turnover, so as to identify those parts of its business which have no bearing on the present case, to ascertain the proportion of those parts to BAe's total turnover, to apportion the aid as between the relevant and the irrelevant parts of BAe's turnover, and to require recovery of no more than the proportion of aid attributed to the relevant turnover. Turning to the financial estimate of the deferment of payment, BAe criticizes the Commission for its failure to take account of the fiscal consequences which immediate payment would have had. In this context, BAe provides figures different from those in the contested decision with regard to the gross interest cost, i. e. before tax, and the net interest cost of the loans which BAe would have had to negotiate. The purpose of recovery of unlawful aid would be distorted if, instead of restoring a proper balance, the Commission were to penalize the recipient in relation to its competitors. BAe also points out that the Commission, through its failure to take account of the fiscal element, places the Member State, which after all is itself responsible for the breach of Community law, in a substantially better position than it would have been in had it not granted the aid, in so far as it has obtained higher fiscal duties and is to recover the aid. Although it is not easy to compute exactly this fiscal element, the Commission is in a position to obtain all relevant information from the Member State in question and from the recipient of the aid; in any event, the difficulty in determining the exact amount cannot constitute a reason for refusing to take any account whatsoever of the fiscal consequences. The unparticularized reference to a previous Commission practice under which no account was taken of possible tax incidence in a decision to recover aid is the equivalent of giving no reason at all for the decision. Even if such a practice was based on a principle, the absence of any reference to such principle is equally tantamount to giving no reason at all. Still on the subject of the deferment of payment, BAe criticizes the Commission for having used an excessively high rate of interest in its calculations. The reference rates and discounting rates set out in the Communication of the Commission on regional aid systems of 21 December 1978 (Official Journal 1979 C 31, p. 9), to which the Commission referred during the written procedure, are not relevant; the purpose of those rates is to make it possible to compute the amount of any aid carried over from one particular year to another and they therefore have no bearing on the problems faced in the present case. Since the Commission was aware that the method supplied to it by the United Kingdom and followed in the contested decision was based on a reference rate reflecting the average rate of interest in the market in the United Kingdom, the Commission cannot now say that its evaluation of the benefit was based on an accurate assessment of the amount in question.

2. In reply to the argument based on the absence of a properly reasoned allocation of the aid in question among BAe's various activities, the Commission replies that in its 1988 decision it took into account the activities of Rover, its participation in intra-Community trade and its turnover and indebtedness, and that it identified the markets in which Rover would see its position improved. In those circumstances, no useful purpose could possibly have been served by the Commission's going through this exercise of assessment a second time. Moreover, the approach advocated by the applicants is at variance with that adopted by the Court in its judgment in Case C-142/87 Belgium v Commission, cited above, in which it rejected the argument that the business of the aid recipient had no effect on trade between Member States since that company exported upwards of 90% of its production outside the Community. It is standard practice for the Commission to calculate the gross amount to be repaid without taking into account the tax implications for the recipient, which in any case vary from one Member State to another, and the Commission cannot depart from that practice in a particular case without leaving itself open to accusations of discrimination. Even if the applicants had expressed their views on this matter during the procedure which led to the 1988 decision, the Commission would not have altered its position. With regard to the calculation of the deferment of payment, the Commission believes that it is necessary to reconstruct and to evaluate what would have happened if, instead of benefiting by deferred payment of the purchase price, BAe had been required to borrow that sum immediately after its purchase of Rover. With regard to the method of evaluation, it is necessary to refer to an objective reference rate similar to those set out in the Communication of the Commission of 1979, cited above. In this regard, the Commission adopted the approach of the United Kingdom authorities by referring to the average rate of interest in the market in the United Kingdom. The Commission emphasizes that this deferment of payment represents an artificial advantage which benefits BAe. If the Commission had been informed of such deferment prior to the 1988 decision, it would have set out in that decision the limits within which such deferment might have been compatible with the common market. As the issue of deferment was raised and discussed prior to the 1988 decision, the parties concerned ought to have submitted their present observations during the procedure which resulted in that decision.

E — Failure to state the reasons on which the decision is based in so far as it orders recovery from BAe

1. BAe contends that the reasons given why the benefits granted should be treated as State aid and regarded as unlawful are inadequate or defective. The decision also contains no reasoning as regards the compatibility of the aid with the common market or the manner in which it affects trade between Member States and competition.

2. The Commission replies that the arguments based on lack of reasoning would be relevant only if the decision were autonomous in nature, which is not the case.

F — Offer of evidence

1. BAe and Rover offer evidence for the purpose of establishing the cost of a loan to pay the sale price and they suggest that professional experts be appointed for the purpose of resolving other issues which might appear relevant to the Court.

2. The Commission contends that the Court should dismiss such offers of evidence.

F. A. Schockweiler

Judge-Rapporteur

1 Language of the case: English.