Is an indebted affiliate really the fifth wheel? About financial support from PISF

Providing financial support by the Polish Film Institute is undoubtedly an important aspect of creating conditions for the development of Polish audiovisual projects. However, when filling in applications for grants and incentives, the applicant may be in doubt whether the condition of its affiliated entities may prevent it from receiving funding. Therefore, does the bad situation of a company related to the applicant affect the granting of financial support from the Polish Film Institute?

Financial support as state aid

Both the financial support provided for in the Act on Incentives[1] and that provided for in the Act on Cinematography fall into the category of state aid. Both acts also indicate categories of entities to which financial support may not be granted.

In accordance with art. 22.2.3 of the Cinema Act, Polish Film Institute cannot grant co-financing to an entity which

1. has arrears in public and legal dues or
2. remains in receivership or is under liquidation, bankruptcy or restructuring proceedings, or
3. has, within 3 years prior to submitting the application for project co-financing, seriously violated the agreement concluded with the Institute.

However, Article 10 of the Act on Incentives indicates that financial support shall not be granted to an entrepreneur who:

1. has arrears of public and legal liabilities or
2. remains in receivership or is undergoing liquidation, bankruptcy or restructuring proceedings, or
3. did not submit a final report on the works covered by financial support, hereinafter referred to as “the report”, within 3 years before submitting the application for financial support, or
4. failed to return public aid granted by the Republic of Poland and recognized as incompatible with the law and the internal market on the basis of a European Commission decision, or
5. is an entrepreneur being in a difficult situation within the meaning of Article 2 item 18 of the Regulation No. 651/2014, or
6. has been convicted by a final judgment of an offence of: making false statements, bribery, an offence against the credibility of documents, property, economic turnover, trading in money and securities, the banking system, a fiscal offence or another offence related to the performance of business activity or committed with the aim of achieving a financial benefit or whose partner or member of the body is a natural person convicted by a final judgment of such offences, or
7. within 3 years before submitting the application for financial support, grossly violated the co-financing agreement referred to in art. 23 paragraph 3 of the act of 30 June 2005 on cinematography in such a way that it did not settle the co-financing in accordance with this agreement.

Who is an entrepreneur in distress?

The concept of an entrepreneur in difficulty is introduced by Article 2(18) of Regulation No 651/2014[2], which lists circumstances such as, for example, the situation of a company where more than half of its subscribed share capital has been lost as a result of accumulated losses or the case where a company is subject to collective insolvency proceedings or meets the criteria under the applicable national law to be subject to collective insolvency proceedings at the request of its creditors. Furthermore, the concept will also cover an entrepreneur who has received rescue aid and has not yet repaid a loan or terminated a guarantee agreement or received restructuring aid and is still subject to a restructuring plan.

What about groups of companies?

The above provision does not dispel all interpretative doubts and, as a result, the European Commission issued questions and answers[1] relating to the regulation in 2015. One of the questions referred to the issue of whether, where the beneficiary is a daughter company, the economic situation of the entire group should be established and, furthermore, whether aid can be granted to the group and other companies that belong to the group if, for example, another daughter company within the group is in difficulties.

In answering these questions, the European Commission referred to the case law according to which “an undertaking is defined as a single economic entity which has a common source of control”. Accordingly, “insofar as a group acts as a single economic unit, it should be considered as a single undertaking and the economic situation of all group entities should be taken into account when granting the aid referred to in the GBER (in Regulation 651/2014). Otherwise, a company in difficulty could circumvent the prohibition of aid to companies in difficulty by setting up a subsidiary and transferring all liabilities to it.”

The above position was also adopted by the Voivodship Administrative Court in Warsaw in one of its judgments[2], in which it indicated that in accordance with the established case law of the CJEU and the functional definition of an enterprise, entities with a complex structure should be treated as a single economic organism (as one enterprise). Hence, public aid granted to one such entity goes, in principle, to the undertaking as a whole and, therefore, it must meet a number of criteria as a whole. “Thus, in the case where even one of the related entities independently fulfils the criteria of economic difficulties, this still does not prevent the payment of the subsidy, as long as the whole enterprise, forming a single economic organism, is in a good economic situation.”

It should be emphasised that in this judgment, the WSA indicated that the definition of “undertaking” should not be sought in national regulations, but in EU regulations, or, alternatively, national regulations should be interpreted in this respect “in the spirit” of EU regulations.

In the Voivodship Administrative Court’s opinion, “the mere fact that one of the entities constituting one economic organism is in a difficult economic situation does not prejudge the possibility of granting aid to a party which is part of one economic organism and at the same time is not in a difficult economic situation.”

This does not mean, therefore, that in order for an applicant to receive public aid, none of the entities comprising the economic unit may be in a difficult situation. The EU regulations, in accordance with the concept of a single entity, are aimed at preventing a situation in which entities would benefit from aid that they would not normally receive, and in order to obtain undue aid, they artificially create factual situations. An example could be the creation of a company and the transfer to it of all the debts of the other entities forming the single body.

Therefore, only a difficult economic situation of the entire group will exclude the possibility of receiving public aid. In the aforementioned judgment, the WSA emphasized that under EU law, one cannot prejudge the fact that information about a bad economic situation of one of the related entrepreneurs will automatically mean difficulties for the applicant. It is not the case, therefore, that a bad situation of one company immediately means a bad situation of the entire group.

The above view is also confirmed by the position of the Office of Competition and Consumer Protection[3], presented in connection with the OCCP’s request to the services of the Directorate General for Competition of the European Commission for a final indication of the correct interpretation and procedure regarding the examination of the economic situation of related entities. The OCCP indicates that ‘the examination of the condition for granting aid should concern the applicant and the group of entities related to it treated as a whole (and not each entity related to the applicant)’. According to the letter of the Commission services, if the applicant is in a good economic position and there are no difficulties at the level of the whole economic unit, the aid may be granted. However, it cannot be granted if the applicant himself or the group as a whole is in difficulties. Moreover, if, despite the applicant’s difficulties, the economic entity as a whole is in good standing, the granting of aid cannot be automatically ruled out.

Author: Marlena Kudła – an intern at LSW Leśnodorski Ślusarek & Partners.

[1] https://ec.europa.eu/regional_policy/sources/conferences/state-aid/rdi/8gber_practical_quite_faq.pdf

[2] Judgment of the WSA in Warsaw of 22.11.2017, V SA/Wa 3185/16, LEX nr 2598313

[3] https://www.uokik.gov.pl/wyjasnienia2.php#faq3030

[1] Act of 9 November 2018 on financial support of audiovisual production

[2] Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty