CJEC, July 10, 1986, No 40-85

THE COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES,

1. By an application lodged at the court registry on 11 February 1985, the Kingdom of Belgium brought an action under the first paragraph of article 173 of the EEC treaty for the annulment of Commission decision no 85-153 of 24 October 1984 (Official Journal 1985, l 59, p. 21) in which it is declared that the subscription in 1983 by a public regional investment agency, Societe Regionale d'Investissement de Wallonie (hereinafter referred to as 'SRIW'), of capital of bfr 83 million in a ceramics undertaking at la louviere constitutes an aid which is incompatible with the Common Market within the meaning of article 92 of the treaty and must therefore be withdrawn.

2. Among the reasons given for the decision in the preamble thereto is the fact that the undertaking concerned lost bfr 134 million in 1979, bfr 243 million in 1980, bfr 302 million in 1981 and bfr 168 million in 1982 representing respectively 23%, 39%, 45% and 20% of the undertaking's turnover in those years. The Commission therefore takes the view that it was unlikely that the undertaking could have raised on the private capital markets the sums necessary for its survival. Accordingly, in the normal course of events market forces would have caused the undertaking to close, which, in a market characterized by over-production, would have permitted more efficient competitors to develop. As a result, the aid was likely to have a particularly adverse effect on the conditions of competition and, since the undertaking exported more than 70% of its output of ceramic sanitaryware to other member states, the aid was likely to affect intra-community trade.

3. It is also stated in the preamble that four member states, one trade association and two individual firms from the industry informed the Commission that they shared its concern about the aid granted to the undertaking in question. Three of those member states, the trade association and the two firms considered that the repeated assistance given by the Belgian Government caused serious distortions of competition. Lastly, according to the preamble, the Belgian Government was unable to give, or the Commission to discover, any justification for finding that the aid in question fulfilled the conditions for the application of one of the exceptions provided for in article 92 (3) of the treaty.

4. At the court's request, the Belgian Government has provided detailed particulars and a breakdown of the undertaking's capital. It appears that before the first injection of public funds the undertaking's capital stood at bfr 150 million. In 1979, when its capital had fallen to bfr 3 million - even after the capitalization of reserves amounting to bfr 172 million - the public authorities took part in the financial reconstruction of the undertaking by contributing capital of bfr 140 million, whilst private shareholders contributed a little over bfr 40 million. When, in 1981, that new capital was exhausted a further bfr 475 million of fresh capital was subscribed, this time by the public authorities alone. In 1983, when SRIW subscribed the capital at issue in these proceedings, the undertaking's capital had been reduced to bfr 30 million. In January 1985 the undertaking was put into liquidation.

5. The Belgian Government has submitted figures relating to the undertaking's market share, also at the court's request. According to those figures, from 1979 to 1984 the undertaking had a share of 20 to 25% of the Belgian and Luxembourg market in ceramic sanitaryware. Over the same period the proportion of its output accounted for by exports increased from 58 to 76% and its share of total intra-community trade in ceramic sanitaryware grew from 8 to 15%. Its export prices were between 72 and 82% of the average community export prices.

6. As far as the administrative procedure preceding the contested decision is concerned, it is to be noted that on 31 December 1983 the Commission, alarmed by reports in the Belgian press, asked the Belgian Government to notify the planned aid to it in accordance with article 93 (3) of the treaty. In a telex message of 18 February 1983 the Belgian Government merely replied that no new decision was involved. The planned aid was based on a 1981 decision designed to implement a medium-term renewal plan over the 1981 to 1984 financial years, the first stage of which was the aforementioned capital injection of bfr 475 million. In that connection, it should be observed that by decision no 83-130 of 16 February 1983, against which an action was not brought, the Commission held that that capital injection was incompatible with the Common Market, and the court, in its judgment of 15 January 1986 (case 52-84 Commission v Belgium (1986) ecr 89), held that the Kingdom of Belgium had failed to fulfil its obligations in so far as it had failed to comply with that decision.

7. Despite numerous reminders from the Commission, the Belgian Government did not provide it with any more details of the subscription of new capital or of the renewal plan mentioned in the telex message of 18 February 1983. By a letter dated 25 may 1984, the Commission therefore informed the Belgian Government that it had decided to initiate the procedure provided for in article 93 (2) of the treaty with regard to the subscription of new capital. By a letter dated 6 august 1984 the Belgian Government replied that, in its view, the objections set out in the letter of 25 may were inadmissible since the Commission should have reacted faster to the telex message of 18 February 1983. Those were the circumstances in which the Commission issued the contested decision.

8. In support of its application for a declaration that the contested decision is void, the Belgian Government relies essentially upon three submissions :

(a) misapplication of article 92 (1) of the treaty, in so far as the contested subscription of capital does not constitute an aid within the meaning of that provision ;

(b) misapplication of article 92 (1) and inadequacy of the statement of reasons on which the contested Commission decision is based, in so far as it does not establish in what respect the subscription of capital affects trade between the member states and distorts competition ;

(c) infringement of the right to a fair hearing in so far as the Commission did not notify to the Belgian Government the complaints made by the member states and trade associations which took part in the administrative procedure.

(a) the nature of the subscription of capital

9. The Belgian Government contends that, by prohibiting the Belgian public authorities from taking part in an increase of capital, the Commission is discriminating against them by comparison with a private shareholder. In its view, it is normal and legitimate for a shareholder to support, by subscribing additional capital, an undertaking which that shareholder controls and which is experiencing temporary difficulties, in particular where, as in this case, the subscription of capital is part of a renewal plan designed to increase the undertaking's productivity and reduce its staff numbers. The assessment of the undertaking's financial situation should have taken account of the fact that it consisted of a crockery division and a ceramic sanitaryware division and that the latter's results had shown a constant improvement, attaining a positive balance of bfr 6 million in 1983.

10. In the Commission's view, public authorities, in their capacity as shareholders, are not debarred from supporting an undertaking. However, if they do so they must, as is clear from article 90 (1) of the treaty, observe the competition rules.

11. Despite the repeated requests made by the Commission in pursuance of the procedure under article 93, the Belgian Government failed to provide any information about the capital increase at issue and the Commission quite properly based its assessment on the financial results of the undertaking as a whole, which had been negative for a long time in spite of the earlier subscriptions of capital. In view of those results and of the past record of the undertaking until its liquidation in January 1985, it could not have survived without the injections of public funds. The Commission was therefore correct in its claim that the subscription of capital was aid in the form of a state rescue operation since, in the circumstances, the undertaking would have been unable to raise any capital whatsoever on the private capital market or from a private shareholder.

12. It must be observed that by virtue of article 92 (1) of the treaty, the provisions of the treaty concerning state aid apply to aid granted by a member state or through state resources' in any form whatsoever '. It follows, as the court held in its judgment of 14 November 1984 (case 323-82 Intermills v Commission (1984) ecr 3809), that no distinction can be drawn between aid granted in the form of loans and aid granted in the form of a subscription of capital of an undertaking. Aid taking either form falls within the prohibition contained in article 92 where the conditions set out therein are fulfilled.

13. An appropriate way of establishing whether such a measure is a state aid is to apply the criterion, which was mentioned in the Commission's decision and, moreover, was not contested by the Belgian Government, of determining to what extent the undertaking would be able to obtain the sums in question on the private capital markets. In the case of an undertaking whose capital is almost entirely held by the public authorities, the test is, in particular, whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional-policy and sectoral considerations, would have subscribed the capital in question.

14. As the Belgian Government has observed, a private shareholder may reasonably subscribe the capital necessary to secure the survival of an undertaking which is experiencing temporary difficulties but is capable of becoming profitable again, possible after a reorganization. However, in this case, at the time when the capital was subscribed the undertaking in question had for several years been making very substantial losses relative to its turnover, its survival had already necessitated several injections of capital by the public authorities in order to restore its depleted capital and its products had to be sold on a market in which there was excess capacity.

15. It is immaterial that the undertaking in question consisted of two divisions, one of which had better trading results than the other and achieved even (very modest) profits in the year in which the contested subscription of capital was made. The two divisions were part of the same undertaking and the nature of the contested subscription of capital must be assessed in relation to that single undertaking.

16. As regards the renewal programme referred to by the Belgian Government, of which the subscription of capital at issue was the final stage, it must be observed that the information provided to the court concerning that programme by no means indicates that it included measures which were likely to guarantee profitable operations in the future and hence to provide a sufficient basis to attract the requisite private capital. Indeed, the programme had already failed when the capital at issue was subscribed, since the bfr 475 million constituting the first stage had been almost entirely absorbed by the trading losses incurred in the meantime.

17. In those circumstances, the Commission was right to consider that the undertaking would very probably be unable to raise the sums essential to its survival on the private capital markets and that the additional subscription of capital by SRIW therefore constituted a state aid.

18. The Belgian Government's first submission must therefore be dismissed.

(b) the statement of the reasons on which the decision was based and the effects of the aid

19. The Belgian Government submits that the contested decision is a stereotyped measure containing nothing from which it can be inferred that the subscription of capital in question is capable of affecting trade between the member states or of distorting or threatening to distort competition. The Commission did not analyse the market or trade in products in the sector in question or take account of information relating specifically to the undertaking in question. That submission therefore challenges both the statement of the reasons on which the decision is based and the Commission's assessment of the effects of the aid.

20. The Commission refers to article 5 of the treaty and to the reciprocal duty of cooperation which exists between the member states and the Commission. It contends that, in view of the lacunae in the information furnished by the Belgian Government, it was not possible to provide a fuller statement of the reasons on which the decision was based. The Commission, and the United Kingdom, which intervened in the proceedings, stress that the undertaking in question, whose products were sold on a market characterized by excess production capacity, exported more than 70% of its output to other member states, from which it can be inferred that the aid threatened to distort competition and affected trade between member states. Furthermore, according to the figures supplied by the Belgian Government at the court's request, the undertaking increased its exports to the other member states at prices that were consistently below average community prices whilst continuing to incur substantial trading losses.

21. As regards the statement of the reasons on which the decision was based, the court has consistently held that the statement of reasons for a decision adversely affecting an undertaking must be such as to allow the court to review its legality and to provide the undertaking concerned with the information necessary to enable it to ascertain whether or not the decision is well founded.

22. Despite its concise nature - which is due in part to a lack of cooperation by the Belgian Government - the statement of reasons makes it clear that, in order to establish that the two material requirements were fulfilled, the Commission took account of the fact that the undertaking concerned exported more than 70% of its output of ceramic sanitaryware to other member states and of the fact that the undertaking would have inevitably disappeared from the market if the aid had not been granted, enabling more competitive rivals to develop in view of the excess production capacity in the market in question. In the absence of any information to the contrary, those findings entitled the Commission to conclude that the aid in question affected trade between member states and distorted, or threatened to distort, competition within the meaning of article 92 (1) of the treaty.

23. It must be added that the supplementary information provided by the Belgian Government during the proceedings before the court has largely confirmed the Commission's assessment. Despite trading losses which on several occasions exhausted its capital, the undertaking was able, as a result of the additional subscriptions of capital, virtually to double its share of intra- community trade in the ceramic sanitaryware sector by applying export prices considerably lower than the community average.

24. The submission must therefore be dismissed in its entirety.

(c) the right to a fair hearing

25. The Belgian Government claims that the Commission did not disclose to it the identity of the parties which, according to the contested decision, share its concern, or the substance of the complaints which they submitted. As a result, it could not prepare its defence effectively. It submits that, by so acting, the Commission infringed an essential procedural requirement within the meaning of article 173 of the treaty. The Belgian Government rejects the view that the duty not to divulge information relating specifically to the undertakings concerned implies that the administrative procedure should be kept entirely secret. It is paradoxical that a member state affected by a procedure initiated under article 93 of the treaty should receive less information than a non-member country which is the subject of anti-subsidy proceedings pursuant to council regulation no 2176-84 of 23 July 1984 (Official Journal 1201, p. 1).

26. The Commission contends that, in the case of state aids, there is no procedure involving the hearing of all the parties and disclosure as between them comparable to the procedure applied to undertakings for the purposes of competition rules or to non-member countries in connection with dumping and subsidies. The giving of notice in a procedure relating to aid is simply designed to enable the Commission to receive all the information necessary to evaluate the compatibility of the aid with the Common Market. The member state concerned enjoys no privileged position in a procedure initiated under article 93 (3).

27. The United Kingdom takes the view that as a matter of fairness it should perhaps be recognized that the Commission has an implied obligation to pass on to the member state concerned the comments received from other parties to the administrative procedure, with the exception of confidential commercial information. But, in any event, the Commission is not obliged to notify comments which do not raise any points other than those already covered in the correspondence between the Commission and the member state concerned. In its view, there is no reason to suppose that the Commission should have notified to the Belgian Government the comments which it received in this instance.

28. In that connection, it is appropriate to stress that, as the court held in particular in its judgment of 13 February 1979 in case 85-76 Hoffmann-La Roche v Commission (1979) ecr 461, observance of the right to be heard is, in all proceedings initiated against a person which are liable to culminate in a measure adversely affecting that person, a fundamental principle of community law which must be guaranteed even in the absence of any rules governing the procedure in question. The court has consistently held that, in order to respect the principle of the right to be heard, the person against whom an administrative procedure has been initiated must have been afforded the opportunity, during that procedure, to make known his views on the truth and relevance of the facts and circumstances alleged and on the documents used by the Commission to support its claim that there has been an infringement of community law.

29. By stating in its decision that four member states, one trade association and two individual firms in the same industry shared its concern and that three of those member states, the trade association and the two firms emphasized the serious distortions of competition caused by the repeated assistance given by the Belgian Government, the Commission in fact gave the impression that it had used those documents to support its finding that the aid in question was incompatible with the Common Market and hence had to be abolished.

30. In that connection the Commission cannot rely on the existence in those documents of information covered by business confidentiality. In so far as the member state concerned was not afforded an opportunity to comment on that information, the Commission may not use it in its decision against that state.

31. Nevertheless, it appears from the above findings made by the court with regard to the Belgian Government's second submission that the contested decision is sufficiently supported by the objective information referred to in the statement of the reasons on which it was based, of which the Belgian Government was fully apprised and in respect of which it was afforded every opportunity to make known its views. It follows that, even without the comments which the Commission received from interested third parties in the course of the procedure, the decision could not have been substantively different. In those circumstances the mere fact that the Commission mentioned those comments in its decision without having afforded the member state concerned an opportunity to comment on them does not justify a declaration that the decision is void.

32. Consequently, the application must be dismissed in its entirety.

Costs

33. Under article 69 (2) of the rules of procedure the unsuccessful party is to be ordered to pay the costs if they have been asked for in the pleadings. Since the applicant has failed in its submissions it must be ordered to pay the costs, with the exception of those incurred by the United Kingdom, the intervener in these proceedings, which did not ask for costs.

On those grounds,

The court

Hereby :

(1) dismisses the application.

(2) orders the Kingdom of Belgium to pay the costs, with the exception of those incurred by the intervener.

(3) orders the United Kingdom, the intervener, to bear its own