State subsidies: A dispute concerning cost-free loan guarantees to two district heating companies may be brought before the Supreme Court, but the municipal initiatives should continue.

On 25 January 2016, the Western High Court ruled that the Municipality of Sønderborg's cost-free loan guarantees to two district heating companies constituted illegal state subsidies. This means that the municipality must collect guarantee commission amounting to more than DKK 70 million in the guarantee period. Horten assists the Municipality of Sønderborg.

Based on the ruling, several municipalities are evaluating their loan guarantees.

The two district heating companies have applied for permission to have the matter tried before the Supreme Court. The Appeals Permission Board must first decide whether it can grant permission to appeal against the ruling to the Supreme Court, and if permission is granted, it may take up to two years before the case has been heard.

WHAT ARE THE CONSEQUENCES IF THE COST-FREE LOAN GUARANTEES CONTINUE?

The ruling means that municipalities providing guarantees are generally to charge a market-related guarantee commission. If not, the lacking commission will constitute an illegal state subsidy to the district heating company. Illegal state subsidies are generally to be repaid to the state treasury. The state subsidy will thus not benefit either the municipality or the company. The amount one risks having to pay to the state treasury will increase the longer the subsidiary scheme continues.

It is therefore important that the legal action does not stop the municipal procedures to bring the loan guarantees in accordance with the ruling by charging a market-related guarantee commission. If you wait or fix a commission which is too low, you risk that the amount ends up in the state treasury.

MARKET-RELATED GUARANTEE COMMISSION AND PROCEDURE FOR CHANGE OF PROVISION OF GUARANTEE

It is not considered state aid if a loan guarantee is provided on terms that would be acceptable to a private investor operating under market-economic terms. The fixing of the guarantee commission should therefore generally take place on terms equal to those of borrowers on the capital market.

In this connection, it is less probable that a one-off commission will meet this requirement. Other things being equal, the market price of the interest rate with and without a loan guarantee should be calculated. In general, the guarantee will be the difference between these two amounts. The credit rating of the borrower may also be taken into consideration when making the assessment.

The municipalities initiating a procedure to ensure that the municipality's guarantees are lawful, must also ensure that changes are made in accordance with correct administrative procedures.

 

contacts

Andreas Christensen

Partner

Marie Løvbjerg

Attorney