The Administrative Court of Montenegro has rejected as unfounded the lawsuit filed by “Barska plovidba” AD Bar (“Barska plovidba“) against the decision of the Agency for the Protection of Competition (“Agency“) ordering the recovery of incompatible state aid, thus making the Agency’s decision final and irreversible. This is the first decision of a Montenegrin court substantively addressing state aid control. It lays the foundation for future jurisprudence in this area and strengthens the enforcement in state aid control area.
Background
The dispute revolved around a decision of the Agency dated 17 Augus 2022, which determined that the state aid granted to Barska plovidba was incompatible with the State Aid Control Act (“Official Gazette of Montenegro”, No. 12/18) (“SACA“).
In 2012, the Government of Montenegro (“Government“) approved the majority state-owned Barska plovidba’s plan to acquire cargo ships in partnership with Chinese PolyTechnologies. Later in the same year, Barska plovidba entered into a loan agreement with the Export-Import Bank of China for a sum of USD 46.4 million, and the Government approved this credit arrangement The term of the loan agreement was 20 years, with a fixed annual interest rate of 2%. The loan was repayable in semi-annual instalments, starting from July 2018.
In January 2013, the Ministry of Finance issued an unconditional guarantee in favour of the lender, covering the entire loan amount, including principal, interest, and costs. The Government subsequently provided on multiple occasions the financial support to Barska plovidba to cover its loan repayments to the lender, so to avoid a call under the sovereign guarantee.
The Agency issued in 2022 a decision ordering the Ministry of Capital Investments (as the legal successor of the Ministry of Transport and Maritime Affairs whom the Agency considered the grantor) to determine the total amount of incompatible state aid granted through the financial support for the loan arrangement and to take necessary measures to recover the incompatible state aid, with interest accruing from the date of each aid award to the date of the recovery decision.
Barska plovidba challenged the Agency’s decision before the Administrative Court of Montenegro. The court upheld the Agency’s recovery order.
Jurisdictional issues
Barska Plovidba challenged SACA’s applicability to its case, on grounds that the relevant events took place before SACA’s entry into force. However, the court rejected this argument, holding that what matters is that SACA was rendered before the Agency initiated its proceedings. In any case, the argument had no substantive merit, as the state aid in this case would have been assessed in the same manner on the basis of the previous State Aid Control Act.
Barska plovidba also argued that the Agency did not have jurisdiction to make a recovery order given that the litigation before the Commercial Court, initiated by the state to condemn Barska plovidba to compensate the state for the amounts the state expended to repay the loan instalments, was still pending. The court rejected the lis pendens objection, holding that the proceedings before the Agency were independent from the proceedings before the Commercial Court. Indeed, the fact that the state has initiated litigation for recovery of the amounts paid to the lender in settlement of Barska Plovidba‘s debt can lead to recovery in compliance with the recovery order, but this is without prejudice to the Agency’s competence to assess the aid and order its recovery.
Existence of State Aid
Pursuant to SACA, state aid is any financial support that is (i) directly or indirectly granted from the state budget, pursuant the Government’s decisions, from municipal budgets, pursuant to decisions by relevant municipal authorities, including European Union funds and other public funds; (ii) provided to beneficiaries engaged in economic activities, placing them in a more favourable position compared to other market participants; (iii) granted to undertakings under different conditions, or granted selectively to undertakings according to their size, location of business, or registration, or is intended for a single company; and (iv) distorts competition and affects trade between Montenegro and other countries, contrary to established international agreements. SACA also provides a non-exhaustive list of possible state aid instruments, including state guarantees.
Barska plovidba disputed, both in the proceedings before the Agency and in the court proceedings, that they received state aid. It argued that the company did not request any such aid, and that the Government financed the loan repayments because it was in the public interest to avoid the call on the sovereign guarantee.
When analysing whether the issuance of the state guarantee constituted state aid, the Agency determined that the criteria of state resources, selectivity, and effect on competition and trade were undisputably met. Further analysis concentrated on whether the guarantee conferred an advantage to Barska plovidba.
When a guarantee is issued, the assumption of risk by the guarantor is typically compensated with an appropriate premium. The debtor who is not charged the premium or pays a below-the-market premium, gains an economic advantage. State-backed guarantee enabled the borrower to secure better financial terms than those that would have been offered on the market in the absence of the guarantee, whether in the form of lower interest rates or weaker security requirements. Consequently, subsidized guarantee can confer advantage to its recipient, distorting competition on the market
The Agency assessed against the facts of the case whether four cumulative conditions required to potentially exclude the presence of state aid on the basis of market economy investor principle (MEIP) were present:
i) the borrower is not in financial difficulty (at the time the state aid was granted);
ii) the extent of the guarantee can be properly measured when it is granted (i.e. linked to a specific financial transaction, for a fixed maximum amount and limited in time);
iii) the guarantee does not cover more than 80 % of the outstanding loan or other financial obligation; this limitation does not apply to guarantees covering debt securities;
iv) a market-oriented price is paid for the guarantee.
The Agency confirmed that the amount of the guarantee could be properly quantified at the time it was granted (second condition).
However, the first condition was not met, since the Agency determined that, without state intervention, Barska Plovidba would have likely ceased its operations in the short or medium term, which made it a company in difficulty under the guidelines for state aid for the rescue and restructuring of non-financial firms in difficulty.
The third condition required to exclude state aid is that the guarantee must not cover more than 80% of the outstanding loan and must decrease proportionally as the loan is repaid and must never exceed 80% of the outstanding loan, to ensure risk sharing. The Agency found that this condition was not met, as the guarantee covered 100% of the loan obligation.
Lastly, the fourth condition was also not met, as the plaintiff did not pay any premium for the guarantee.
The Agency concluded that the issued guarantee constitutes state aid under the SACA, which was unlawful because it was not notified to the State Aid Control Commission for prior assessment of its compatibility with state aid rules.
In the court proceedings, Barska plovidba argued that it had not requested any state aid. The court rejected this argument, considering it irrelevant.
In the reasoning of the verdict, the Court added that state aid is a specific and clearly defined form of government intervention. It is widely accepted in literature that cases where capital is obtained under more favourable terms than other market participants lead to a distortion of competition, thus constituting state aid. Issuing guarantees, such as ensuring repayment of principal and interest under conditions more favourable than the market rate, reduces the cost of capital for the recipient of the aid. This lowers their overall expenses, giving them a competitive advantage over others in the market. Frequently, governments issue sovereign guarantees, which cost nothing for the credit recipient but reduce interest rates due to the higher credit rating of the state compared to companies. These guarantees essentially imply subsidized interest rates. Sovereign guarantees are typically issued when public enterprises or state-majority-owned companies borrow, and they are considered state debt, thus affecting the national debt calculation.
Compatibility assessment
The Agency further determined that the state aid received by Barska plovidba was not only unlawful but also incompatible.
The Agency took a view that the aid is deemed granted already at the point when the guarantee is issued, and not only if and when the guarantee is called or the payment thereunder made. Consequently, the state aid equals the difference between the market premium for the guarantee and the premium actually paid for the guarantee.
The Agency assessed that negative effects of the aid in the form of sovereign guarantee issued free of charge and the payments made to settle the borrower’s obligation under the loan, i.e. distortion of competition resulting from the subsidy, outweighed its positive effects. Those positive effects were not even outlined in the decision but presumably consist of shielding Barska plovidba from bankruptcy and preventing the activation of the sovereign guarantee. In that respect, the Agency determined that Barska plovidba qualified only for the state aid in line with the Rescue and Restructuring Guidelines, because it was a company in difficulty at the time the aid was granted. Hower, no restructuring plan was submitted to the Agency for evaluation.
The court confirmed that state aid in the present case was incompatible state aid because the guarantee was issued free of charge for the entire debt. The court did not separately analyse the payments by the state in settlement of the borrower’s debt.
Recovery and the subsequent payments
There is no publicly available information on whether the Ministry of Capital Investments has recovered the state aid. The Government has continued to pay the loan instalments to the Chinese lender even after the recovery order. On 30 January 2025, the Government adopted a report on the repayment of a USD 1,815,442.97 loan instalment, stating that it will seek compensation.
Any such payments to Barska plovidba or directly to EXIM Bank constitute new incompatible state aid, which will have to be recovered.
Main takeaways
The state aid granted to Barska Plovidba through a state guarantee and the coverage of several loan instalments was not a particularly complex or sophisticated case for assessment. However, it is significant for the development of future case law because the Agency’s decision contains a comprehensive analysis of all four state aid criteria. Furthermore, this is the first recover order in Montenegro that was upheld by the court after a challenge. What strikes a reader when reading the decision is the extent to which the state-owned company was not aware of the basic state aid rules. This highlights the need for enhanced advocacy and training within public sector entities.
