24 May 2019 | Comment

British Steel insolvency and why they may not receive state aid

With the recent news that British Steel Ltd has been placed in compulsory liquidation, putting 5,000 jobs at risk, there have been growing calls for the government to intervene. We take a look at why State aid rules mean the Government may be restricted in its ability to assist.

 

The Current Situation

British Steel Ltd was created in 2016 when Greybull Capital bought the Long Products Europe business of Tata Steel. The business' primary steel production site is the Scunthorpe Steelworks, with rolling facilities at Skinningrove (UK), Teesside (UK), and Hayange (France).

On Wednesday 22 May 2019, British Steel (Britain’s second-largest steelmaker) entered into insolvency, putting over 5,000 jobs at risk after its requests for an emergency loan from the UK government of £30 million were rejected. These requests were rejected due to the terms of the loan not being commercial, which would have been unlawful under EU state aid rules. British Steel asked for the loan after a fall in orders that it blamed on uncertainty over Brexit.

In relation to the rejected loan request, Business Secretary Greg Clarke said: "The government can only act within the law, which requires any financial support to a steel company to be on a commercial basis. I have been advised that it would be unlawful to provide a guarantee or loan on the terms of any proposals that the company or any other party has made."

 However, Mr Clark also said the government had shown its "willingness to act", having provided the British Steel with a £120m bridging loan in April to meet EU emission rules and avoid a large fine.

 According to reports, the government has also tried to assist British Steel in other ways. Network Rail, which owns and manages the UK’s rail infrastructure, placed a £70m order with British Steel in the past few weeks to assist the company as it tried to avoid collapse.

 

So what is State aid?

State aid is using taxpayer-funded resources on a selective basis to provide assistance to one or more organisations in a way that gives an advantage over others.

In principle, State aid is not allowed in the EU, however, there are some exceptions to this and public authorities are responsible for ensuring their policy measures and projects comply with the rules.

 

What are the State aid rules?

Under EU rules it is illegal for EU countries to give financial help to commercial entities where this would distort fair competition. There are however, exemptions to this rule which allow Member States to provide State aid with approval from the European Commission or if certain pre-defined criteria are met.

The general rule is that if a Government intervention is not on arm’s length, commercial terms and not approved by the European Commission, then it could be deemed as unlawful State aid.

 

How does this impact British Steel?

The EU Commission believes too much steel is manufactured in Europe. As a result, it has been inclined to take a fairly tough approach on State aid in the steel sector. This does not mean State aid is impossible, but the Government would have to show that any assistance was within the rules, or came under one of the exemptions.

In light of British Steel’s risky financial position, the appeal for a £30million loan would be a hard proposal to justify from a State aid viewpoint, as it will be very challenging to prove that a loan to British Steel from the Government is on commercial terms and therefore does not involve unlawful State aid.

Emergency assistance can be provided to a business to save it from immediate collapse and assist it through a restructuring process under the State aid rules, but there are strict conditions and consent is required from the European Commission, although obtaining such consent seems very unlikely based upon the EU’s approach to State aid in the steel sector (as mentioned above).

It is therefore doubtful that the Government will be able to provide any State aid to British Steel and any such assistance will need to be free from State aid (I.e. on commercial terms).

 

A possible lifeline

There may however be a lifeline for British Steel, with the Financial Times having now reported that Mr Clark has drawn up a potential rescue plan for British Steel, which involves the government acting as a cornerstone investor alongside a consortium of private companies and that Mr Clark has commissioned legal advice on whether his new proposal might comply with state-aid rules, unlike an outright loan to a failing company.

For now though, we will have to wait and see what options the Government decide to take to try and save British Steel.

 

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Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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