August 2011 – This article draws attention to a state aid case dating back to 2004. The European Commission ordered the Slovak Republic to recover unlawful state aid from FRUCONA Košice, a.s. (“Frucona”). Following the Commission’s decision, the Slovak Republic, having at that time no other legal means of recovery under Slovak law, filed a court action against Frucona for the payment of the EUR 13.8 million state aid. The Slovak courts dismissed the action and drew their own conclusions about the state aid provided to Frucona and also concluded that the Commission’s order to recover the EUR 13.8 million in state aid is only binding on the Slovak Republic and not on Frucona. Slovakia subsequently found itself in breach of EU law on the grounds that it failed to fulfil the Commission’s order for recovery. The amendment to the Act on State Aid and to the Enforcement Code unofficially known as ‘Lex Frucona’ is the Slovak Government’s response to enable that the Commission’s decisions on unlawful state aid are directly enforceable in Slovakia.
An amendment to the Slovak Act No. 231/1999 Coll. on State Aid, as amended (the “Act on State Aid”) and to Slovak Act No. 233/1995 Coll. the Code of Enforcement of Judicial Decisions, as amended (the “Enforcement Code”), was passed on 23 March 2011, enabling that decisions of the Commission on the recovery of state aid are directly enforceable against the beneficiary, which, prior to the amendment, was not possible under Slovak law. The amendment will take effect on 1 June 2011 and as at the date of this article has not been published in the Collection of Laws. The amendment is a part of an interesting story, the beginning of which dates back to 2004.
The unlawful state aid
In 2004, Frucona, a producer of alcoholic and non-alcoholic beverages, incurred a tax debt of EUR 21.2 million. In the course of proceedings on arrangement with creditors, the Tax Authority of Košice wrote-off the debt in the amount of EUR 13.8 million.
The European Commission (the “Commission”) launched proceedings against the Slovak Republic under Regulation 659/1999 and on 7 June 2006 the Commission ruled in its decision 2007/254 that the write-off of EUR 13.8 million qualified as unlawful state aid and that the Slovak Republic was required to take all necessary measures to recover from Frucona the unlawfully granted aid. Frucona sought annulment of the Commission’s decision before the General Court in proceedings T-11/07. However, the General Court dismissed the action on 7 December 2010.
Enforcement of the Commission’s decision
As a result of the Commission’s decision on the tax debt write-off, the Slovak Republic sought recovery of the unlawful state aid from Frucona. At that time, the Tax Authority of Košice had no means of recovering it, other than to pursue Frucona in court by an action to pay the amount of EUR 13.8 million. The proceedings before the District Court of Košice II were initiated by an action lodged by the Tax Authority of Košice dated 21 July 2005 and on 1 June 2007 the District Court of Košice II dismissed the action. The grounds for dismissal were that the order of the Commission to recover the unlawful state aid from Frucona was binding only on the Slovak Republic (i.e. it imposed no direct duty on Frucona ) and that no duty was imposed on Frucona by the Commission’s decision. Also, the Slovak court reasoned that the tax claim ceased to exist by operation of law (Act No. 328/1991 Coll. on Insolvency and Arrangements with Creditors then in effect) and that no new claim against Frucona has been established by the Commission’s decision. In addition, the court, exercising its independent judicial power, drew its own conclusions about the state aid provided to Frucona with reference to an expert appraisal which concluded that, in the proceedings on arrangement with creditors, the sale of Frucona’s assets would have not provided its creditors with more compensation for its creditors than the write-off. In any event, in court’s opinion, the court was not allowed to review the proceedings on arrangement with creditors, as they were finally decided and were subject to res judicata, binding on everyone, including the court. The decision of the District Court of Košice II was upheld on appeal by the Regional Court of Košice on 21 April 2008 and the action of the Tax Authority of Košice was dismissed.
Infringement proceedings against Slovakia
Given that Slovakia failed to recover the unlawful state aid from Frucona, the Commission initiated infringement proceedings before the European Court of Justice (“ECJ”). By its judg ment of 22 December 2010, the ECJ ruled that Slovakia failed to take all the measures necessary to recover the aid from Frucona and thus failed to fulfil its obligations under the fourth paragraph of Article 249 EC and Article 2 of the Commission’s decision.
Before the decision on infringement was delivered by the ECJ, the Slovak Parliament passed an amendment (effective from 15 October 2008) to Act No. 99/1963 Coll. Code of Civil Procedure to enable that judicial proceedings, once finally closed by a decision, be reopened in the event that such decision is in conflict with a decision of the ECJ or another body of the European Union. Advocate General Mr Pedro Cruz Villalón appreciated, in his opinion presented to the ECJ on 9 September 2010, this effort taken by the Slovak Republic to ensure enforcement of the Commission’s decision. Nevertheless, the final judg ment of the ECJ was that Slovakia effectively failed to fulfil its obligations.
The reaction of the Slovak Government
In the aftermath of the ECJ’s decision, the Slovak Government prepared an amendment to the Act on State Aid and the Enforcement Code. The amendment expressly inserts a provision into the Act on State Aid that a decision of the Commission on unlawful state aid is directly enforceable against the beneficiary from the day it is delivered to the Slovak Republic, and provides for the procedure for recovery.
In the legislative procedure, the Government reasoned that the existing system of recovery under Slovak law requires that, in the event the beneficiary fails to voluntarily return the state aid provided, an action for pecuniary performance can be filed with a court against the beneficiary. Such system renders the Commission’s decisions on state aid difficult to enforce in Slovakia. Although the travaux préparatoires of the amendment do not expressly mention the Frucona case, it can be reasonably assumed that the amendment has been tailored to deal with the situation relating to Frucona. Also, the amendment amends the Enforcement Code in a way that makes the Commission’s decisions on state aid directly enforceable.
The amendment was submitted to the Parliament on 9 February 2011 and, when passed by the Parliament on 11 February 2011, was vetoed by the Slovak President. The reason for the presidential veto was that the amendment provides that recovery under the new rules would also apply to state aid that was not successfully recovered under any decision of the Commission rendered before 28 February 2011. Among other objections to the amendment, the President saw retroactivity in the said provision and that was the major reason why he required that the Parliament pass the statute again without the retroactive provision. However, the Parliament overrode the presidential veto and passed the amendment on 23 March 2011. The amendment will take effect on 1 June 2011 and the new rules on recovery will also apply to the recovery of state aid under Commission’s decisions rendered prior to 31 May 2011.
For further information please contact Zuzana Hodonova, Counsel, at .
Published in e-Competitions, N° 35307, www.concurrences.com.