C-404/97

COMMISSION V PORTUGAL

OPINION OF ADVOCATE GENERAL RUIZ-JARABO C O L O M E R delivered on 28 October 1999 *

1. By an application lodged on 2 December In Article 2 of the Decision, the Commis- 1997, the Commission has asked the Court sion ordered Portugal to cancel the aid of Justice to make a declaration against the within fifteen days of the date of notifica- Portuguese Republic pursuant to the sec- tion, and to take steps to recover it within ond paragraph of Article 93(2) of the EC two months. Treaty (now Article 88(2) EC). In particu- lar, the Commission complains that the Member State has failed to implement its Decision C(97) 2130 of 9 July 1997, pub- lished under reference 97/762 1 (hereinafter 'Decision 97/762') within the prescribed period.

I. Facts

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honouring most of its financial commit- operation was entered in the register of ments. non-notified aid under number NN 13/97.

Seeing one of its undertakings in serious difficulties, the Portuguese authorities gave permission to EPAC's board of directors to negotiate a loan on market terms up to a 5. The Commission decided to initiate the maximum of fifty billion escudos, thirty procedure laid down in Article 93(2) of the billion of which would be covered by a Treaty and, to that end, sent a letter to the State guarantee for seven years. The pur- Portuguese authorities on 27 February pose of the loan was to restructure the 1997. It considered that the State guarantee company's short-term bank debt so as to did not fulfil the Community criteria convert it into a medium-term bank debt. applicable to aid and that the refinancing of EPAC had been carried out under conditions which were not justified by the market situation. The Commission believed that the action taken by the Portuguese State was likely to affect trade and to distort competition, and that the operation was prohibited under Article 92(1) of the 3. On 15 October 1996 the Commission Treaty because it was State aid. In light of received a complaint about possible State the information available to the Commis- aid to EPAC in the form described above. sion, it was not eligible for any of the Not having received any notification from derogations provided for by Article 91(2) the Portuguese authorities, the Commission and (3) because it did not satisfy the sent them a letter on 31 October 1996 conditions applicable to restructuring aid requesting information on that aid and for undertakings in difficulty. asking them to notify it, if it had been granted, so that it could be examined.

EPAC with regard to any new commercial notified the Commission of the measures activity on the cereals market. 2 taken to suspend the guarantee, stated that the State had neither taken part nor would take part in the negotiation of the loans granted to EPAC by the banks to finance commercial operations, adding that the State had not participated in the loan 7. On 21 March 1997 the Portuguese Gov- agreement either. According to the Portu- ernment replied that the State authorities guese authorities, the guarantee granted to would not intervene in the negotiation of EPAC did not constitute a financial operat- the bank loans granted to EPAC to finance ing aid to the undertaking and, therefore, commercial operations, and provided addi- had not distorted the conditions of compe- tional information on some of those loans. tition. Nor had it been demonstrated how However, that Government did not men- and to what extent granting the State tion any measure taken to comply with the guarantee to EPAC would affect trade obligation to suspend the State guarantee. between Member States.

8. On 30 April 1997 the Commission 10. In view of this reply, the Commission adopted Decision 97/433/EC 3 (hereinafter was compelled to conclude the procedure 'Decision 97/433') requiring Portugal to under Article 93(2) of the Treaty and suspend with immediate effect the State adopted the negative decision which is guarantee to the undertaking EPAC and to now the subject of the action it has brought notify the Commission within fifteen days against Portugal in the Court of Justice for of the measures it had adopted to comply failure to fulfil its obligations. with that Decision.

12. More than two years have elapsed since those Decisions were adopted and not only have they not been implemented but their validity is being challenged in the Commu- nity judicature under Article 173 of the EC Treaty (now, after amendment, Article 230 EC).

The actions brought before both the Court Firstly, EPAC brought actions before the of First Instance and the Court of Justice Court of First Instance, seeking the annul- sought the annulment of the same acts. ment of Decision 97/433 in Case T-204/97 4 Therefore the Court of Justice decided, and Decision 97/762 in Case T-270/97. 5 pursuant to Article 47(3) of its Statute and The hearings were held on 1 July in both to Article 82a(1)(a) of its Rules of Proce- cases and are now at the deliberation stage. dure, to stay proceedings in the actions brought by Portugal until the Court of First Instance had delivered its judgment in the actions brought by EPAC.

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III. Decision 97/762, which the Commis- taking may affect trade in cereals sion alleges Portugal has failed to imple- between the Member States; ment

13. In the statement of reasons for its Decision of 9 July 1997, the Commission: (V) explains why the guarantee granted by the Portuguese Government could not be covered by one of the derogations established in Article 92(3), and refutes (I) gives a detailed account of the circum- the arguments put forward by that stances in which the State granted a Government, stating that it had ana- guarantee of thirty billion escudos to lysed the conformity of the aid granted EPAC, without giving prior notifica- to EPAC with reference to the provi- tion; sions of the Communication entitled 'Community guidelines on State aid for rescuing and restructuring firms in difficulty'; 8 and

IV. The position of the parties with regard to the failure to fulfil obligations

15. The Commission claims that, by failing In Article 2 it orders Portugal to cancel the to implement the Decision, Portugal is in aid referred to in Article 1 within fifteen breach of Article 189 of the EC Treaty days of notification of the Decision and, (now Article 249 EC), which establishes within two months of that date, to take the that decisions are binding upon those to measures necessary to recover the aid whom they are addressed. By its continued referred to in Article 1. Article 2 provides failure to implement the Decision it is in that recovery of the aid is to be carried out contravention of Article 93(3), because it in accordance with the procedures laid does not acknowledge the suspensory effect down in Portuguese legislation, with inter- of the provision, which is intended to est due from the date on which the aid was prevent the payment of aid incompatible paid, and the interest rate to be applied with the common market. Even if Portugal must be the reference rate used to calculate believed that the aid granted was compa- subsidy equivalents in the context of regio- tible with the common market and that the nal aid. Decision was unlawful, it should have complied with the time limits it was given.

16. The Commission also considers that In Article 3 it imposes on Portugal the dual Portugal has not shown a willingness to obligation of keeping the Commission discuss the specific methods of implement- regularly informed of the measures it ing the Decision and has failed to fulfil its adopts to comply with the Decision, mak- duty to cooperate in good faith under ing its first communication not later than Article 5 of the EC Treaty (now Article 10 one month from the notification of the EC). Nor has it initiated measures to cancel Decision, and of sending the Commission, the guarantee or to neutralise the advantage not later that two months after the expiry afforded to the recipient undertaking. On of the period provided for adopting the the contrary, both the Government and the recovery measures, information to enable it undertaking brought actions before the

Community judicature contesting the leg- absolutely impossible for the State to ality of the Commission's acts, whereas the implement the decision because of insur- Commission itself initially refrained from mountable material and legal difficulties. bringing proceedings against Portugal for failing to implement the Decision of 30 April, in the belief that the Portuguese Government, at the very latest when it received the definitive decision, would stop 19. Several material difficulties have made infringing Community law. it absolutely impossible for Portugal to implement the Decision. Firstly, the opera- tive part contradicts the statement of rea- sons. Throughout the [Portuguese version of the] statement of reasons the Commis- sion refers to a measure, in the singular, which would be a State aid whereas, in the 17. The consequences of the failure to operative part [of the Portuguese version], implement the Decision are serious. EPAC it declares that aid measures, in the plural, continues to enjoy financial support which are illegal and orders them to be cancelled. it would not have if the Portuguese State Furthermore, the Commission, after had not granted it the guarantee. The acknowledging that the Government situation is liable to affect trade between authorised the negotiation of the restruc- the Member States, and competition in the turing of EPAC's liabilities under current cereals market may be distorted, especially market conditions, from which it is inferred in connection with the public tendering that it has not assumed responsibility for procedures which are regularly opened for the payment of interest, orders recovery to the importation of cereals, when EPAC is be carried out in accordance with national able to put in more favourable bids than its law with interest to run from the date on competitors only because of the liquidity it which the aid was paid out. obtained with the State guarantee. The Portuguese State's failure to fulfil its obli- gations — on which the Court of Justice is asked to adjudicate — may therefore be relied upon by EPAC's competitors in the Secondly, the Commission's orders were national courts. completely incomprehensible given the facts of the case, because it is difficult to determine how the State could proceed to recover aid or what, exactly, it was meant to recover, when all it had done was to grant a guarantee for the restructuring of an undertaking's liabilities, without any 18. In its defence, the Portuguese Republic transfer of resources from the State to acknowledges that, in principle, its failure EPAC. to implement the Commission Decision of 9 July 1997 constitutes an infringement of Community law. It claims, in its defence, that no such aid has been given, since there has been no transfer of funds from the State 20. There are also several insurmountable to the undertaking, and that it has been legal difficulties which have prevented

Portugal from implementing the Decision. Portugal in the form of the EPAC Devel- First, the State cannot unilaterally cancel opment Plan, the undertaking would the guarantee which has been granted refrain from participating in Community because, if it were do to so, the creditor tendering procedures for the importation of banks could require EPAC to repay the loan cereals. immediately, which would cause the under- taking to go into liquidation. Secondly, Portuguese law provides for the cancella- tion of a guarantee in only two circum- stances: if it is negotiated with the creditors 21. In its reply the Commission points out (and EPAC's creditors would not agree to that, in these proceedings, Portugal is waive a guarantee which was a decisive attempting to dispute the legality of the factor in the issuing of the loan), or where Decision, under the pretext of finding it there is a decision of a court annulling the impossible to implement. Nevertheless, the act by which the guarantee was granted Commission refutes, point by point, the because it constitutes State aid. Further- arguments put forward by Portugal in its more, the Government states that an action defence. is pending before the Portuguese Supremo Tribunal Administrativo (Supreme Admin- istrative Court) for a declaration annulling the guarantee issued by the State to EPAC's creditors and, finally, the Government itself 22. With regard to the alleged contradic- maintains that the Decision is wholly tion between the Decision's operative part inappropriate and contrary to the principle and its statement of reasons, which had of proportionality. prevented Portugal from understanding what it was to do, the Commission asserts that such an evaluation can only be the result of a hasty and superficial reading of the document. In fact, it clearly emerges, from the account of the facts, particularly from the letters sent by the Commission to It also claims that the Commission knew of Portugal and from the considerations con- the reasons which made it impossible for tained in the statement of reasons of the Portugal to implement Decision 97/762. It Decision, that the measure referred to in does not believe that it has failed to fulfil its the Decision could only be the guarantee duty to cooperate in good faith and com- granted to EPAC by the Portuguese Gov- plains that the Commission ignored its ernment. arguments when it brought this action for failure to fulfil obligations, because the parties had established a satisfactory dia- logue on this matter and Portugal had shown great readiness to negotiate 23. So far as concerns the absence of a throughout the process. In fact, in order transfer of resources from the State to to neutralise the competitive advantage EPAC, the Commission maintains that the which the guarantee afforded EPAC, the State guarantee does not, for that reason, Portuguese Government officially notified cease to be aid or to produce the character- the Commission that, until the Commission istic effects of aid. Those effects could only had expressed a view with regard to the be neutralised by recovering the interest question on the merits submitted to it by relief generated by the guarantee when the

rate applicable to the loan was negotiated, ring to when it insists that Portugal must and by cancelling the guarantee itself. The take steps to recover it. In any event, it has Commission expresses surprise that the already applied to the national courts for Portuguese Government has not invoked cancellation of the guarantee and submitted these unforeseen difficulties nor the abso- to the Commission a proposed solution for lute impossibility of implementing the restoring the economic viability and finan- Decision previously, and that it has not cial health of EPAC and subsequently asked the Commission for clarification or privatising the undertaking, which will put forward suggestions for attempting to make it possible to cancel the guarantee. implement it. Portugal states that the grant of the guar- antee was not gratuitous, but subject to 0.2% interest, and reiterates that the State took no part in determining the rate of interest at which the loan was agreed. It 24. With regard to the legal impossibility, adds that it is the Commission which has the Commission points out that, when aid breached the principle of loyal cooperation has been granted without following the by acting with undue haste in bringing an procedure laid down in Article 93 of the action for failure to fulfil obligations. Treaty, neither the direct beneficiaries nor third parties may rely on the principle of legitimate expectations to avoid returning it. The Commission denies that the Deci- sion breaches the principle of proportion- 26. At the end of the written procedure, the ality because it merely orders the recovery Court of Justice invited the parties to reply of the interest relief and refrains, for the to the questions it put to them. time being, from ordering recovery of the whole of the amount guaranteed. Finally, it points out that although it was aware of the circumstances invoked by the Portuguese Government, it has never conceded that 27. The Commission was asked, specifi- they may amount to the absolute impossi- cally, why, if what it had ordered in its bility of implementing its decision properly. Decision was the cancellation of the guar- As for the informal contacts between the antee, it stated in paragraph 31 of the reply Commission and the Portuguese authori- that, for the time being, it had refrained ties, the purpose of these was to discuss from ordering recovery of the whole of the EPAC's future and the matter of the guaranteed amount and merely ordered implementation of the Decision was not recovery of the interest relief. raised.

view of the unlikelihood that the under- Court of Justice delivers judgment in the taking would repay it. It would therefore be action for the annulment of the Commis- feasible to require recovery of the amount sion Decision. If, in the light of the guaranteed, although the Commission has judgment of the Court of Justice, the not done so because, in this case, it thought national court declares that the guarantee it was enough to require the withdrawal of is void, that ruling will mean that the legal the guarantee so as to eliminate its effects decision to grant it has ceased to exist. The and because, in order to restore the status Government will thus be released from its quo, it asked for recovery of the advantage obligations towards EPAC's creditors in which the undertaking had enjoyed, which respect of the guarantee, but risks incurring was finance at a reduced rate due to the non-contractual liability for having granted existence of the guarantee, that is to say, an unlawful guarantee because, in its the difference between the interest rates for decision, the State assured the banks that the period from the time the loan was the granting of the guarantee did not granted until the guarantee is cancelled. constitute State aid.

32. There is no question, of course, that the For this reason, it has become quite wide- Commission has the power to bring pro- spread practice to seek the annulment of ceedings under the second subparagraph of such decisions before both courts at the Article 93(2) for a declaration that a Mem- same time. In these circumstances, under ber State has failed to fulfil its obligations if Article 47 of the Statute of the Court, the Member State to which is a decision either the Court of First Instance declines declaring aid to be unlawful is addressed jurisdiction so that the Court of Justice may does not implement it within the prescribed deliver judgment in both actions or the period. The Commission is granted this Court of Justice stays its own proceedings power in very clear terms by the Treaty and until the Court of First Instance has deliv- may exercise it whenever it thinks fit. ered judgment, with the possibility that, if the action is declared inadmissible or unfounded at first instance, the undertak- ing may appeal.

33. However, I wish to highlight the state this mechanism has been in since 1993, when jurisdiction in matters of State aid passed from the Court of Justice to the 35. However, the Commission's power to Court of First Instance. 9 apply directly to the Court of Justice for a declaration that a Member State has failed to fulfil its obligations has remained intact and, where the action is brought before only one of the courts, the Court of Justice may make that declaration before a ruling has been made on the legality of the 34. A Commission decision declaring aid to decision. Continuing with this hypothesis, be unlawful may be subject to an action for which looks set to become reality in this

case, a decision could be held to be State, or as the appeal of the undertaking unlawful even where the Court has already would, in practice, amount to suspension of found a Member State to have failed to the implementation of the contested act fulfil its obligations under that decision. when neither the undertaking nor the Member State had applied to the Commu- nity judicature for the adoption of provi- sional measures, even though they could have done so. 36. Of course, this is not a new phenom-

37. However, if, in an action brought by sures are fully effective as long as they have the Commission under the second subpar- not been declared to be invalid. 14 agraph of Article 93(2), the Court of Jus- tice were unofficially to stay the proceed- ings and wait until the Court of First Instance had delivered judgment so as to hear the case at the same time as the action 38. As I have pointed out, dealing with the for annulment brought by the Member cases separately is also not without draw- backs and risks; in the present case Portugal runs the risk that the Court of Justice will 11 — See, for example, Joined Cases 67/85, 68/85 and 70/85 Van der Kooy v Commission [1988] ECR 219 and Case declare that it has failed to implement a 213/85 Commission v Netherlands [1988] ECR 281, and Case 57/86 Greece v Commission [1988] ECR 2855 and Commission decision, the legality of which Case 63/87 Commission v Greece [1988] ECR 2875. it has called into question before this same 12 — In other cases the Member State has brought an action for Court, before it has put forward its argu- annulment within the period established by Article 1 7 3 of the Treaty and, after judgment dismissing the action, the ments with regard to whether that Decision Commission has applied to the Court for a declaration that the Member State has failed to fulfil its obligations, under is lawful. In these circumstances, the action Article 93 of the Treaty.

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for failure to fulfil obligations risks losing at the reference rate used to calculate effectiveness and becoming an almost subsidy equivalents in the context of regio- mechanical exercise, a formality unbefit- nal aid. 17 ting the jurisdiction of a constitutional court because, to be able to judge accu- rately whether the behaviour of a Member State is lawful, it will be necessary to wait until it is ascertained whether or not the action for annulment is well-founded. Nor has any evidence been adduced in these proceedings that Portugal has attempted to implement the Decision or to initiate a dialogue with the Commission with the aim of attempting to find a way to implement it. There are, on the other hand, documents proving that the parties have more or less regular contact, apparently with the aim of considering a possible VI. Examination of the action future restructuring of EPAC, not the recovery of the state guarantee which had been granted to the undertaking. 18

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regard to a decision in those circumstances, account that there has been no transfer of the Court considered that it had such a duty resources by the State to the undertaking only if the measure at issue contained such concerned, it does not know what it has to particularly serious and manifest defects recover; and it is impossible to recover the that it could be deemed non-existent. 22 aid, as the Commission requires it to do, because it is impossible to recover aid which does not exist.

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However, the matter of whether or not illegal aid was granted cannot be considered in these proceedings and will be examined when the actions for annulment currently pend- 47. Furthermore, as the Commission states ing before the Community judicature are in the Decision and in its pleadings, the fact settled. that EPAC had a guarantee from the State for negotiating a loan with private banks has given it undeniable financial advan- tages over undertakings which do not enjoy that support and that those advantages are quantifiable. One of those advantages 49. The insurmountable legal difficulties relates to the difference between the rate preventing Portugal from implementing the of interest which the undertaking would pay on a loan in the free market and the rate actually obtained with the help of the 26 — Commission Communication to the Member States on the application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector (OJ 1993 C 307, p. 3).

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Commission's Decision lie in the fact that 51. It is true that, in its Decision, the the State cannot unilaterally cancel the Commission states that recovery must be guarantee, which was granted for the carried out in accordance with the proce- whole term of the loan agreement, without dures laid down in Portuguese legislation. the consent of the banks which have However, the Court of Justice has ruled granted the loan or a ruling of the Supremo that, in principle, the recovery of aid Tribunal Administrativo annulling the unlawfully paid must take place in accor- administrative act by which the guarantee dance with the relevant provisions of was granted. national law, subject however to the pro- viso that those provisions are to be applied in such a way that the recovery required by Community law is not rendered practically impossible. 28In this connection the Court With regard to the annulment proceedings has added that the interests of the Com- brought before the national courts, Portu- munity must be taken fully into considera- gal states that the Supremo Tribunal tion in the application of the relevant Administrativo is waiting to see whether provisions of national law which requires the Court of Justice holds that the action the various interests involved to be weighed for annulment of the Commission decision up before an unlawful administrative mea- is well-founded. However, it must be borne sure is revoked. 29 in mind that the guarantee was granted in September 1996 for a term of seven years, that the proceedings in the action before the Court of Justice have been stayed until the Court of First Instance has delivered its judgment, and that the action brought by Furthermore, the Court has consistently EPAC before the Court of First Instance is held that a Member State may not plead pending a judgment against which an provisions, practices or circumstances appeal may be brought. existing in its internal legal system in order to justify a failure to comply with its obligations under Community law. 30

52. Portugal maintains that, even if it could unilaterally withdraw the guarantee, the As Advocate General Cosmas points out cancellation would not have any effect on with regard to the possibility that third the legal position of the creditor banks, parties other than the recipients could rely which have concluded the agreement on the on the principle of legitimate expectation in basis that the guarantee would continue respect of recovery of aid, '... it was the during the term of the agreement. However, duty of the creditor banks to exercise the the Court has held that Community law necessary circumspection and care and they requires the competent authority to revoke were obliged to make the necessary check a decision granting unlawful aid, in accor- of the legality of the guarantee. In fact, as dance with a final decision of the Commis- early as 24 November 1983, the Commis- sion declaring the aid incompatible with sion had made it clear in a communication the common market and ordering recovery, published in the Official Journal of the even if the competent authority is respon- European Communities, that the recipients sible for the illegality of the aid decision to of aid not lawfully granted might be such a degree that revocation appears to be required to repay it. The Communication a breach of good faith towards the recipi- stated: "The Commission wishes to inform ent, where the latter could not have had a potential recipients of State aid of the risk legitimate expectation that the aid was attaching to any aid granted them unlaw- lawful because the procedure laid down in fully, in that any recipient of an aid granted Article 93 of the Treaty had not been unlawfully, that is, without the Commis- followed. 31 sion having reached a final decision, may have to refund the aid"'. 32

the Member State by bringing the appro- for refusing to implement the Commission's priate legal proceedings, under national Decision. Indeed, the Court has held: 'The law, in respect of liability for the conduct fact that, on account of the undertaking's of State institutions. financial position, the Belgian authorities could not recover the sum paid does not constitute proof that implementation was impossible, because the Commission's objective was to abolish the aid, and, as the Belgian Government itself admits, that objective could be attained by proceedings 55. The fact that the guarantee may have for winding up the company, which the helped to conclude a loan agreement gov- Belgian authorities could institute in their erned by private law is also irrelevant to the capacity as shareholder or creditor.' 34 mandatory obligation to recover it. Other- wise, as the Commission points out, the Member States could resort to the practice of granting aid in agreements subject to private law in order to evade their obliga- 57. Portugal concludes its arguments with tions under Articles 92 and 93 of the regard to the impossibility of implementing Treaty. In circumstances in which a deci- the Decision for legal reasons by stating sion ordered the cancellation and recovery that the act was not only inappropriate but of aid, granted by a local administration to also contrary to the principle of propor- a private undertaking and consisting of the tionality. However, the Court considers sale of a plot of land at less than the market that the abolition of unlawful aid by means price, the Court of First Instance held that of recovery is the logical consequence of a the fact alone that the administration may finding that it is unlawful. be obliged to resile a clause in the contract relating, in this case, to the purchase price, owing to its alleged irregularity, and to bring proceedings against the recipient undertaking in order to recover the amount Consequently, the recovery of State aid of aid alleged, would not be contrary to the unlawfully granted for the purpose of re- principle of pacta sunt servanda but would establishing the previously existing situa- simply be an application of the principle tion cannot in principle be regarded as that the administrative authorities must act disproportionate to the objectives of the within the law. 33 Treaty in regard to State aid. 35

comply with its demands, it adopted the with the Commission for the purpose of Decision and brought an action against implementing the Decision, and the meet- Portugal for failure to fulfil its obligations. ings to which the Member State refers were Portugal believes that, if the two parties held to negotiate a proposal which was had remained in contact, they could have submitted to the Commission after this achieved an amicable solution. action had been brought and which seeks a long-term solution for EPAC. The same applies to the statement of intent issued by the Portuguese Government at the end of 1997, to the effect that in future EPAC would refrain from participating in Com- munity tenders for the importation of I must say, once again, that the Portuguese cereals. Government seems to disregard the exten- sive case-law of the Court of Justice, according to which where a Member State, in giving effect to such a decision, encoun- ters unforeseen or unforeseeable difficulties or perceives consequences overlooked by the Commission, it must submit those problems for consideration by the Com- 60. As the Portuguese Republic has not mission, together with proposals for suita- shown that it was impossible to implement ble amendments to the decision. In such a the Decision addressed to it by the Com- case the Commission and the Member State mission on 9 July 1997, the application concerned must respect the principle under- should be upheld. lying Article 5 of the Treaty, which imposes a duty of genuine cooperation on the Member States and Community institu- tions; accordingly, they must work together in good faith with a view to overcoming difficulties whilst fully observing the Treaty provisions and in particular the provisions on aid. 36

62. In view of the foregoing considerations, I propose that the Court of Justice should:

(1) declare that, by failing to implement Decision 97/762/EC on the measures taken by Portugal to assist EPAC, the Portuguese Republic has failed to fulfil its obligations under the EC Treaty;

(2) order the Portuguese Republic to pay the costs.

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