The CFI’s ruling in the WestLB case of 6 March 2003 (Joined Cased T-228/99 and T-233/99) confirms the Commission’s analysis that capital injections by the State in favour of public undertakings must be remunerated at market rates, regardless of whether the recipient is facing financial difficulties or not. Although the Court annulled the Commission’s decision on the basis of inadequate reasoning, in particular in respect of the figures put forward by the Commission, it paves the way for the Commission to adopt a new decision in the WestLB case and six further decisions with respect to other German Landesbanken.

In 1991 the Land of North Rhine-Westphalia transferred to WestLB the Wohnungsbauförderungsanstalt (WFA), a public-law body which is responsible for the granting of financial aid for the construction of housing. The terms of the transfer provided that the Land was to receive a cash remuneration at an annual rate of 0.6% after tax in respect of the capital contributed. Although the funds remained earmarked for general interest activities, the transfer also increased WestLB’s equity base, allowing it to increase its commercial activities.

The Federal Association of Private German Banks lodged a complaint with the Commission, on the basis that this remuneration was significantly below the rate a private bank would have had to pay for its equity capital, and therefore amounted to illegal State aid. In July 1999 the Commission adopted a Decision finding that WestLB had benefited from illegal State aid to the amount of euro 807,7 million, which was appealed by WestLB and the Land North Rhine-Westphalia. One of their main arguments was that the Commission had unlawfully extended the concept of State aid, on the basis that the public resources had been invested in a profitable undertaking, not to rescue a failing enterprise.

In its ruling the Court confirms that the Commission rightly considered that unlawful State aid may exist, even where public resources are invested in a profitable undertaking. Unlawful State aid exists where the return demanded by the State for an investment is less than that which a private investor operating in a market economy would have demanded for a similar investment (the market investor test). For this purpose it is irrelevant whether or not the investment was made in a profitable or in a failing undertaking.

The Court did however annul the Commission’s Decision on the basis that the rate of return it identified in its Decision as being appropriate in order to calculate the amount of illegal State aid to be reclaimed from WestLB was not sufficiently substantiated. The Commission will now review its Decision against WestLB in the light of the judgment and is expected to adopt a new decision in order to recover any competitive advantage enjoyed by the bank during the period under investigation.

Over the last years the Commission has stepped up its enforcement of the State aid rules in the financial services sector, looking in particular at the less obvious forms of aid such as the State guarantees in favour of public sector banks. The Court’s ruling will allow it to pursue other pending cases against regional German banks.

By Dorothy Livingston and Kristien Geeurickx

© Herbert Smith March 2003

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