In Practice Author Matt Evans Im about to go insolvent and Im not a - - PDF document

Corporate Rescue and Insolvency December 2012 231

IN PRACTICE

In Practice I’m about to go insolvent and I’m not a bank – can and will the government bail me out?

Tie fjnancial crisis following the collapse of Lehman Brothers and the subsequent sluggish European economy has thrown a spotlight

• n European Union (EU) state aid

rules and, in particular, in what circumstances governments can and will intervene to support a fjrm in diffjculty. Tiis feature looks beyond the banking sector and provides an overview of the rules governing state aid to all other fjrms in diffjculty, fmags some recent state aid measures by the UK and considers what the future may hold in terms of state aid support for fjrms in diffjculty. State aid – the baSicS Tie rules governing the provision of state aid form an important limb of EU competition policy and go to the heart of the goal of providing a single market across the Union. Tie aim, in a nutshell, is to protect competition between fjrms across the Union and prevent subsidy races between member states, an efgect of which can be not only to waste public resources, but to protect ineffjcient companies at the expense of their competitors. State aid comes in many forms, most typically as a capital grant, a soft loan or a loan guarantee. It is defjned at Art 107(1)

• f the Treaty on the Functioning of the

European Union as: “any aid granted by a Member State

• r through State resources in any

form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, insofar as it affects trade between Member States.” Member states (not the aid benefjciary) must notify the proposed state aid to the European Commission (Commission), and await a clearance decision before granting the aid. Tiis is known as the “standstill obligation”. Tie standstill obligation applies to all aid unless it:

• falls within the terms of the General

Block Exemption Regulation;

• is of a small amount falling within

the scope of the Commission’s De Minimis Regulation; or

• is awarded pursuant to an aid

scheme which has received prior Commission clearance. In the months following the onset

• f the fjnancial crisis, the Commission

showed itself to be fmexible in applying its state aid approval procedures. In addition to taking the pragmatic step of allocating more stafg within DG Competition (the part of the Commission responsible for competition law enforcement) to process state aid KEY POINTS

• Rescue and restructuring aid is the only state aid option for fjrms in or close to

insolvency.

• Aid recipients must downsize or otherwise sufger some pain in return for the aid.
• Special rules apply to banks, everyone else subject to the same rules since 2004.
• If you are not a bank or building society, UK government is in general reluctant

to help. applications fmooding in from member states, the vast majority of which related to aid for the banking sector, the Commission issued new guidelines as to how it would apply the state aid rules during the fjnancial crisis. Chief among these were a temporary framework for state aid measures to support access to fjnance during the fjnancial economic crisis (Temporary Framework) and a range of new guidance on the application of state aid rules to measures to support banks. Excluding the fjnancial sector, however, it is important to note that if a fjrm is “in diffjculty” it will not be eligible for state aid under the block exemptions listed above. In fact, of the myriad frameworks setting out the legal bases upon which the Commission will approve state aid, only one can be used for aid to fjrms in diffjculty. Tiis exception is rescue and restructuring aid (Community guidelines on State aid for rescuing and restructuring fjrms in diffjculty). ReScue and ReStRuctuRing aid – the pRincipleS Outside the banking sector, the legal framework governing the award

• f state aid to fjrms experiencing

fjnancial diffjculties has not changed since 2004. Tie Commission has twice consulted third parties as to whether to amend the rescue and restructuring aid guidelines – fjrst in autumn 2007 and more recently in December 2010 – but to date has chosen to leave them unchanged. At the beginning of October 2012, the Commission decided to extend the 2004 guidelines indefjnitely pending

Author Matt Evans

Jones Day has 2,400 lawyers in 37 offjces around the globe, and is one of the world’s largest, most geographically diverse law

• fjrms. We are long-standing advisers to around half of the Fortune 500, the Fortune Global 500 and the FT Global 500,

and our lawyers have extensive experience of working across disciplines, sectors and national boundaries. Our Business Restructuring & Reorganisation team is one of the leading practices in the world, and our insolvency lawyers are intimately involved in various global workout transactions and multijurisdictional reorganisation and bankruptcy proceedings. With a presence in every major commercial centre worldwide, we can readily deploy the skills and resources required to promote or safeguard our clients' interests in cross-border insolvency or restructuring proceedings.

December 2012 Corporate Rescue and Insolvency 232

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the outcome of a wider review – so- called “modernisation” – of EU state aid rules. Tie key principles of when a member state may grant rescue or restructuring aid are summarised below. FiRmS in diFFiculty Tie starting point for assessing the availability of aid is to understand whether the proposed aid benefjciary constitutes a “fjrm in diffjculty”. If it is not a fjrm in diffjculty, then in theory a wide range of aid may be available, under difgerent parameters, and this should be explored fully with public (and publically funded) bodies, which may already be running approved aid schemes. If, however, a potential aid benefjciary constitutes “a fjrm in diffjculty” then the only aid available is rescue and restructuring aid. Tiere is no EU defjnition of what constitutes a fjrm in diffjculty, but the rescue and restructuring aid guidelines identify three circumstances in which a fjrm qualifjes as such:

• the company concerned fulfjls

domestic law criteria for being subject to collective insolvency proceedings –for example, if it has already gone into administration or is subject to a Company Voluntary Arrangement;

• more than half of the registered

capital of a limited liability company has disappeared and more than one quarter of that capital has been lost

• ver the preceding 12 months; or
• more than half of the capital as shown

in the accounts of a company, where at least some members have unlimited liability for the debt of that company, has disappeared and more than one quarter of that capital has been lost

• ver the preceding 12 months.

Even if a fjrm does not fulfjl one of these three criteria, it may still be deemed to be in diffjculty if it can demonstrate that it cannot recover through its own resources or with funds it obtains from its owners/shareholders or from market

• sources. Finally, it should be noted that

a newly created fjrm – defjned as in

• peration for no more than three years –

is not eligible for rescue or restructuring aid, regardless of its fjnancial position. Tie Commission has also sought to limit the availability of rescue and restructuring aid by forming a general principle that a fjrm belonging to or being taken over by a larger business group is not normally eligible for rescue and restructuring aid unless it can be demonstrated that that fjrm’s diffjculties are intrinsic and not the result of an arbitrary allocation of costs within the group. Furthermore, the fjnancial diffjculties must be too serious to be dealt with by the group itself. One time, laSt time A fjnal, crucial element of the state aid regime for rescue and restructuring aid is the one time, last time principle. Tiis provides that if a fjrm has previously received rescue and restructuring aid, it cannot do so again. In other words, there may be good reasons to intervene

• nce in order to keep a fjrm afmoat,

but ultimately market forces should be allowed to prevail and repeat state intervention is not permitted. ReScue aid Rescue and restructuring aid consists of two difgerent types of aid. Rescue aid is a form of emergency funding, required to keep the benefjciary fjrm afmoat. It must consist of liquidity support in the form

• f loan guarantees or loans only. Tie

loans must be granted at an interest rate at least comparable to those observed for loans to healthy fjrms and with reference to offjcial reference rates published regularly by the Commission. What is more, it must be short term. Loans must be reimbursed and any guarantee must end no more than six months after disbursement of the fjrst aid instalment. Tie aid must be limited to the minimum required to keep the fjrm in business for the period during which the aid is

• authorised. It must also be warranted on

the grounds of serious social diffjculties. A recent example from the UK is the rescue aid awarded in 2012 to a Harris Tweed producer in the Outer Hebrides, one of the poorer regions of the EU where job losses arguably cause especially “serious social diffjculties”. Another UK example is the bailout of British Energy in 2002, warranted on the grounds that it safeguarded Britain’s nuclear energy provider. Tie aid must also have no unduly adverse spillover efgects on other member states —in practice, this condition is applied with some fmexibility, such that distortions of competition brought about by the provision of rescue aid can be mitigated during the restructuring process. Member states are meant to notify rescue aid to the Commission before it is granted and must provide an undertaking at that stage that within six months of the aid being authorised, either the loan will be reimbursed in full and the guarantee terminated (and proof of this provided to the Commission) or a restructuring or liquidation plan must be developed and provided to the Commission. In the real world, of course, events can move quickly and it is not always possible to anticipate the requirement for urgent rescue aid. In such circumstances, governments, including the UK government, can be persuaded to grant the rescue aid forthwith and then subsequently notify it to the Commission. Where this happens, a restructuring or liquidation plan, or proof that the loan has been reimbursed in full or the guarantee terminated, must be provided to the Commission within six months of implementation of the rescue aid measure. ReStRuctuRing aid Following the provision of rescue aid, the Commission will undertake a separate analysis of the compatibility of restructuring aid to a fjrm in diffjculty.

Corporate Rescue and Insolvency December 2012 233

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IN PRACTICE

Tie principle behind the guidelines is to ensure that a detailed restructuring plan is agreed with the Commission, restores the long term viability of the fjrm within a reasonable timescale and does this without undue distortions

• f competition. It is usually the case

that, unless the aid recipient has a small market share, a condition of aid approval is the implementation of compensatory measures to outweigh the adverse efgects of public funding

• intervention. Such measures typically

consist of the divestment of assets and/or reductions in capacity or market presence. UK consumers have recently witnessed examples of such compensatory measures taken in return for the approval of restructuring aid in the fjnancial sector, in the form of Lloyds TSB selling 632 high street branches to the Cooperative and the Royal Bank of Scotland agreeing to sell 316 UK high Street branches (in respect of which a sale to Santander collapsed in mid- February 2012). As with rescue aid, the amount of aid must be limited to the strict minimum required, in this case the minimum costs necessary to implement the agreed restructuring plan, in light of the existing fjnancial resources of the company, its shareholders or the business group to which it belongs. Aid benefjciaries are expected to make a signifjcant contribution to the restructuring plan from their own resources, such as the sale

• f assets that are not essential to the fjrm’s

survival or the procurement of external fjnancing at market conditions. In other nOn banking ReScue & ReStRuctuRing aid appROvalS, 1 JanuaRy 2011 – 30 SeptembeR 2012 Country

• no. of Cases

Capital Grants/ Debt write off loans loan Guarantees total UK 3 £1,198,000,000 £275,000

• £1,198,275,000

Germany 4

• €8,000,000

€196,286,000 €204,286,000 Italy 12

• €167,550,000

€167,550,000 Spain 1

• €4,500,000
• €4,500,000

France 1 €4,039,000

• €4,039,000

source: Commission published decisions

words, if an insolvent fjrm is to receive state assistance to exit insolvency, it must be ready to sufger some pain in return for that assistance. State aid FOR FiRmS in diFFiculty Since the OnSet OF the Financial cRiSiS Unprecedented levels of state aid have been granted to European companies since the collapse of Lehman Brothers. Tie Commission reported earlier this year that state aid worth €1.6trn has been deployed to support Europe’s banks since 2008, of which €400bn consisted

• f recapitalisation and the treatment
• f impaired assets. As noted above,

the Commission rapidly developed a new set of guidelines specifjcally for the application of state aid rules to the banking sector and such bespoke measures remain in force today. Outside the banking sector, however, and in particular since January 2011, there have been fewer applications by member states to provide rescue and restructuring aid than some might have expected, given the continued challenges facing European

• economies. Tie table below sets out the

number of rescue or restructuring aid applications approved by the Commission per major EU economy between 1 January 2011 and 30 September 2012, and the total value of aid granted, divided by capital grant or debt write ofgs; soft loans; and loan guarantees respectively. Perhaps surprisingly, given its stated commitment to a free market economy and reputation for not providing large amounts of state, although the UK has received just three non banking sector rescue and restructuring aid approval decisions since 1 January 2011, it accounts for by far the greatest amount of such aid among the EU’s top fjve economies. Tie picture is distorted by aid of more than £1bn the UK has granted to Royal Mail, including, in particular, writing ofg more than a billion pounds of debt owed by Royal Mail to the UK government. It is worth noting in that case that although the Royal Mail Group was not insolvent, the UK was able to demonstrate to the Commission that it faced severe fjnancial diffjculties such that it qualifjed as a fjrm in diffjculty. In particular, at the end of 2010/11, its working capital and net operating assets were negative; its letter business revenues were declining; it had a substantial pension defjcit; and the UK was able to demonstrate that without state intervention, it would not have suffjcient funds to pay for its day to day operations in the near future. Leaving aside the aid to Royal Mail, the UK received rescue and restructuring aid approvals for less than £400,000 in total in 2011 and the fjrst three quarters of

• 2012. Tiis illustrates the UK’s preference

not to grant such aid. uk’S gOveRnment’S attitude tO ReScue & ReStRuctuRing aid Given the Royal Mail’s universal service

• bligation to provide letter services in

the UK, it is perhaps not surprising that the government was willing to step in and provide a signifjcant level of rescue and restructuring aid. However, the UK government’s response to

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In Practice

the Commission’s 2010 consultation

• n the possible reform of the rescue

and restructuring aid guidelines (the Response) makes it clear that it believes strongly that the opportunity to give rescue and restructuring aid should be closely monitored and limited in scope. Indeed the government states that “In the majority of instances, bankruptcy proceedings or resolution (for the fj nancial sector) should be the normal course of action for a fj rm facing insolvency”. What is more, notwithstanding the government’s assistance for the Royal Mail, the Response takes the fj rm view that rescue and restructuring aid should only be given to a company once it is actually insolvent. Ti e government noted “that companies can experience a period of diffj culty which may be severe and trade through”, that “intervening too soon may actually prevent a non assisted recovery” and it cited a report by the economists Oxera (“Should aid be granted to companies in diffj culty?” A study on counterfactual scenarios in restructuring aid, December 2009) which suggested that 77% of non aided companies in crisis actually survive three years after the onset of crisis. Ti e UK government also suggests that an assessment of the necessity of aid should take into account an analysis of the steps a company might have taken in

• rder to survive, or to stave ofg

insolvency, for as long as possible, without state

• intervention. For example, it might sell

subsidiaries, withdraw from secondary markets or reduce production capacity, all of which it may ultimately be required to undertake in any event as part of a restructuring plan, in order to minimise distortions of competition. Ti e Response recommends that such an analysis should form part of the initial assessment of the necessity of aid, rather than assuming that the counterfactual (ie the position in the absence of state intervention) would be the exit of the fj

• rm. In other words,

the company should undertake these restructuring steps of its own accord, before even applying for aid. Ti e government’s public statements suggest that its preference is to see fj rms in fj nancial diffj culties resolve those diffj culties without recourse to state aid, or ultimately exit the

• market. Outside the fj

nancial sector, it appears to be the case that it is only in exceptional circumstances – perhaps because a struggling fj rm is an important local employer in an area of high unemployment, or is engaged in activities

• f strategic importance to the UK – that

fj rms in diffj culty can expect to be able to rely on government support to keep them afm

• at and set them on a more sustainable
• course. Advisers to companies heading

for insolvency should therefore take note – you may have an uphill battle on your hands to persuade a public body to lend a hand.  Biog box

Matt Evans is Of Counsel in Jones Day’s Antitrust & Competition practice in London. He Matt Evans is Of Counsel in Jones Day’s Antitrust & Competition practice in London. He advises clients on European Union and UK competition law matters, including state aid, UK advises clients on European Union and UK competition law matters, including state aid, UK and EU merger control, and UK and European Commission investigations into anticompetitive and EU merger control, and UK and European Commission investigations into anticompetitive

• practices. He represents clients before the European Commission, Offj

ce of Fair Trading and

• practices. He represents clients before the European Commission, Offj

ce of Fair Trading and Competition Commission. Email: Competition Commission. Email: mevans@jonesday.com or +44 207 039 5180.

• r +44 207 039 5180.