Disputes over the recovery of EU funds: are beneficiaries bound to lose?

European Union (EU) funding has long since become a routine element in the financing of Lithuanian business and of the public sector. The subject is usually discussed in positive terms: how much has been allocated, which projects have been financed, what opportunities this opens up for business.

There is, however, another and far less visible side to it. Have you ever encountered a situation in which, several years on, the authority administering the funding concludes that part of the expenditure was ineligible? Or that the project was implemented otherwise than the letter of the rules required?

Funding can turn from an opportunity into a dispute over sums running into hundreds of thousands, or even millions, of euros. Such a dispute may be accompanied by interest and by the attachment of assets, and the proceedings themselves may drag on for several years.

By way of illustration, a company that had built a biogas plant was, several years later, faced with a demand to repay the entire EUR 1.6 million of funding it had received, and the court – at the authority’s request – Immediately attached the company’s assets up to the full amount of that claim. In another case, a farmer who, owing to her contractor’s default, failed to complete the construction of a slaughterhouse had to pay, on top of EUR 215 000 in funding, a further EUR 34 000-plus in interest accrued over the very period of the dispute.

The statistics do not favour beneficiaries

The statistics are not particularly encouraging for beneficiaries. At best, beneficiaries succeed in only one in four disputes with the authorities administering EU funding before the Lithuanian courts. The overwhelming majority of the authorities’ irregularity decisions never reach a court at all: the funds are repaid or recovered by way of set-off well before any litigation, and the aggregate amounts lost by businesses run into tens of millions of euros. This pattern is largely explained by the fact that the authorities adopt irregularity decisions only after a thorough, multi-stage investigation, and therefore come to court with solid legal backing.

That does not mean, however, that their decisions are unassailable. On the contrary – the most recent case law shows that beneficiaries do win cases where they engage actively in the process from the very outset: submitting explanations at the irregularity-investigation stage, testing the authority’s reasoning, raising the questions of proportionality and of damage to the EU budget, and, once a decision has been issued, not leaving it “for later”.

So what should a business do when an authority demands the repayment of EU funding?

The dispute does not begin in court

An EU funding dispute frequently begins well before it reaches the courtroom. Where the authority administering the funding suspects an irregularity, it opens an investigation, requests explanations and gathers documents, and only then adopts its decision on whether or not to apply a financial correction (that is, to recover the EU funding). It is precisely at this stage that the beneficiary can still alter the direction of the dispute, rather than waiting for the authority’s findings to crystallise into a formal demand for repayment. What the beneficiary must provide at this point is not generalised justification but specific documents: it must explain the factual circumstances and examine which constituent elements of an irregularity the authority is in fact seeking to establish.

The authority’s decision may subsequently, as a rule, be challenged before the Administrative Disputes Commission of Lithuania (LAGK) or directly before the courts. The time limit is short – usually one month.

The pre-litigation stage should not be underestimated. In one case, it was the LAGK that annulled a decision of the National Paying Agency, and the administrative courts, in confirming the beneficiary’s ultimate success, also awarded the costs of representation incurred at that stage.

What are the most common grounds of dispute?

Disputes generally develop along two lines. In the first, the beneficiary challenges before the administrative court (or the LAGK) the authority’s decision imposing a financial correction, reducing the funding, terminating the funding agreement or requiring the funds to be repaid. In the second, the authority’s decision has already been adopted and the funds have not been repaid, and the authority applies to the administrative court for recovery of the debt.

The range of issues in dispute is broad: the principal amount of funding, the rate of the financial correction, proportionality, limitation periods, the constituent elements of the irregularity, interest, and errors in public procurement. One of the most prominent categories concerns the artificial creation of the conditions required to obtain funding – cases in which the project appears lawful on its face but is in reality implemented within a circle of related parties.

Because such cases involve the concurrent application of national and EU law, the national court may in some instances have to refer questions to the EU courts for interpretation. This lengthens the proceedings, but in more complex cases it may become a key instrument of the beneficiary’s defence.

The most severe consequence is criminal liability. A falsified application may amount to a criminal offence even where the funding has not yet been disbursed, and the beneficiary’s insolvency will not necessarily shield its manager. In such cases the authority may bring a civil claim for recovery of the funding, the State – acting through the prosecutor – may seek confiscation of the funds, and the pre-trial investigation will considerably extend the overall timeline.

The authority is required to substantiate all the constituent elements of the irregularity. It must demonstrate not merely a formal breach of a rule, but also at least potential damage to the EU budget. Where it fails to do so, the measure imposed may be annulled. Thus, a mere failure to retain a procurement document does not in itself necessarily constitute an irregularity, provided that no damage has been, or could have been, caused to the EU budget.

When can an authority’s decision be successfully challenged?

The measures applied by the authorities may take a wide variety of forms: funding is reduced or withheld altogether, disbursed funds are recovered, the agreement is terminated, flat-rate financial corrections of 5%, 10% or 25% are applied, the debt is discharged by set-off against other payments – and interest is charged on top of it.

Such decisions are not automatically lawful. Recent case law shows that they can be successfully challenged.

First, where the decision is unreasoned: the authority’s reasons must be clearly set out in the decision itself and cannot be “constructed” in the course of the court proceedings.

Second, where not all the constituent elements of the irregularity have been proved, including at least potential damage to the EU budget.

Third, where the financial correction has been applied mechanically: even once an irregularity has been established, its significance, extent and proportionality must be assessed on an individual basis – which is precisely why, in some cases, corrections of 25% have been reduced to 10%. Or, alternatively, where the authority has allowed the limitation period to expire.

All of these matters must be raised by the beneficiary in good time: ideally while the irregularity investigation is still under way, and at the latest when challenging the decision itself. A subsequent information letter from the authority concerning the debt will not, as a rule, open a fresh window for dispute.

A second round with no second chance

Having established an irregularity, the authority adopts a recovery decision and generally allows 60 calendar days for payment of the debt. In certain circumstances payment may be rescheduled in instalments – most commonly over 12 to 24 months – but if that arrangement is breached, the entire outstanding balance may be awarded at once.

If the beneficiary fails to repay the debt, the authority applies to the administrative court for recovery. At that stage the court will generally no longer review the lawfulness of the decision itself: a beneficiary that failed to challenge it in time will, in most cases, have forfeited its second chance to mount a defence.

Interest is added to the debt, generally accruing from day 61 until settlement in full. In debt-recovery proceedings, the attachment of assets may also be ordered.

Is it possible to reach an agreement with the authority?

Sometimes the matter can be resolved before it reaches the courts. Where the beneficiary submits comprehensive legal explanations and supporting documents, it may be found that no irregularity occurred at all.

Once a dispute has come before the courts, the law permits the proceedings to be concluded by settlement agreement at any stage.

A dispute concerning the decision itself may likewise be resolved amicably. In one case the agency acknowledged its assessment error by way of a settlement agreement, undertaking to revoke the irregularity decision and to reimburse part of the applicant’s costs of representation.

That said, a settlement agreement is not a means of simply deferring the problem. Where the agreed payment schedule is breached for more than one month, the authority may refer the entire outstanding debt to a bailiff for enforcement.

What lessons should business draw?

The point of reference for a business is neither the court summons nor even the recovery decision, but the authority’s first notification that an irregularity investigation has been opened. From that moment onwards, the situation is best treated as a risk-management exercise.

The first step is to discuss the matter with lawyers and to assess it comprehensively under both Lithuanian and EU law. An analysis confined to national rules may give a distorted picture – either unduly alarming or deceptively reassuring.

The second is to calculate the real financial exposure independently, without waiting for the authority’s decision: what correction is in prospect – 5%, 10%, 25% or the full 100% – what interest will accrue, and how such a claim would affect the company’s cash flow. That calculation makes it possible to decide in good time when it is worth litigating and when it is more rational to negotiate agreed repayment terms straight away.

The third is to prepare, before any decision is adopted, not only a legal but also a financial defence strategy. Once a recovery decision has been issued, the time limits begin to run immediately, and the authority may apply to the court for recovery of the debt and for the attachment of assets while the company is still deliberating on its course of action.

It is prudent to consider the available lines of defence in advance, to have a schedule of evidence and preliminary arguments in support of suspending the implementation of the decision, rescheduling payment or entering into a settlement agreement. Otherwise, the dispute may move to the enforcement stage faster than the company is able to formulate its position.