The demand for repayment of funding referred to in Article 207(8) of the Public Finance Act concerns funds allocated to the implementation of programmes financed with European funds. If the institution finds that one of the grounds specified in Article 207(1) of the Public Finance Act applies, it calls on the funding recipient to repay the funds or to consent to a reduction in subsequent payments. The funding recipient has 14 days from the date on which the demand is served to do so. If that period expires without compliance, the authority issues the decision referred to in Article 207(9) of the Public Finance Act.
The repayment of grants awarded from the state budget under Article 169 of the Public Finance Act is governed by different rules. I discuss this mechanism separately in the article The authority demands repayment of a grant – what does such a letter mean?
In the demand, the institution indicates which of the grounds set out in Article 207(1) of the Public Finance Act forms the basis for its claim. It may conclude that the funds were:
- used for purposes inconsistent with their intended purpose,
- used in breach of the applicable procedures,
- received where they were not due or received in an excessive amount.
A demand for repayment is very often preceded by a project control, following which the institution prepares a post-control report, or by earlier correspondence concerning reservations about project implementation. Only in the demand itself does the funding recipient often learn that the institution has formally classified a particular error or deficiency as an irregularity justifying repayment of the funds.
In the demand, the institution specifies:
- the amount subject to the demand,
- the legal and factual basis for the demand,
- the deadline for repayment,
- the bank account number,
- the method for calculating interest.
A demand for repayment of funding does not yet mean that repayment is required
Many funding recipients treat a demand for repayment of funding as the final determination of the matter. However, simply receiving the demand does not mean that the institution’s assessment is correct. A demand for repayment precedes the issuance of an administrative decision. If the funding recipient does not repay the funds after receiving the demand, the institution initiates administrative proceedings and issues a decision specifying the amount to be repaid. This is important because many funding recipients assume that the demand itself determines the outcome of the matter and deprives them of the opportunity to continue defending their position.
Funding recipients very often disagree with the institution as to:
- the existence of an irregularity,
- the scope of the expenditure challenged by the institution,
- the amount demanded for repayment,
- the method for calculating interest,
- whether the project implementation was assessed correctly.
These issues may become the subject of administrative proceedings, in which the funding recipient presents its position and defends its arguments, and subsequently – once a decision on repayment has been issued – may also be subject to judicial review.
Repayment following a demand may be treated as acceptance of the institution’s position
Before repaying the funds after receiving a demand, the funding recipient should consider the consequences of taking such a step. Repayment of funding before an administrative decision is issued may be regarded as confirmation that the funding recipient agrees with the institution’s assessment that an irregularity has occurred. This approach is also reflected in the case law of the administrative courts. The Supreme Administrative Court has indicated that where a funding recipient repays the funds following a prior demand, it may be considered to have accepted the position of the institution seeking repayment.
This does not, of course, mean that repayment of the funds necessarily prevents the funding recipient from subsequently challenging the institution’s position. It may, however, significantly affect the later course of the dispute, particularly where the funding recipient subsequently wishes to argue that:
- no irregularity occurred,
- the institution assessed the project incorrectly,
- the demand for repayment was unfounded.
Repayment of funds before an administrative decision is issued should therefore be preceded by an analysis of the legal basis for the demand and of the possible procedural consequences of making the repayment.
Does failure to repay after receiving a demand constitute a breach?
Failure to comply with a demand under Article 207(8) of the Public Finance Act does not determine whether the institution’s claim is justified and does not deprive the funding recipient of the right to challenge it. The funding recipient is entitled to disagree with the institution’s assessment and to challenge the grounds for the demand for repayment of funds.
If the funding recipient does not repay the funds after receiving the demand, the institution initiates administrative proceedings and issues a decision specifying the amount to be repaid, together with interest. The decision marks the next stage of the dispute and may itself be challenged.
Many funding recipients abandon their defence as soon as they receive a demand for repayment, assuming that the institution’s position is final. In fact, administrative proceedings are precisely the stage at which the funding recipient may present its position, explanations and arguments concerning the implementation of the project.
This does not mean, however, that a demand for repayment or subsequent letters from the institution may simply be ignored.
Demand for repayment of funding and the right to challenge the institution’s findings
A demand for repayment of funding very often refers to control findings or to the institution’s assessment of project implementation based on submitted payment applications or reports. This does not, however, mean that the institution’s position is correct. The funding recipient has the right to challenge both the basis for the repayment demand and the amount specified in the demand.
Funding recipients most often challenge:
- whether an irregularity actually occurred,
- whether the institution correctly assessed the way in which the project was implemented,
- whether the challenged expenditure should in fact be regarded as ineligible
- whether there is a sufficient link between the identified breach and the financing of the project.
Funding recipients also frequently challenge:
- the manner in which the project control was conducted,
- the scope of the institution’s findings,
- the amount of interest charged,
- the institution’s interpretation of the provisions of the grant agreement.
As a result, proceedings concerning repayment of funding often focus not only on the project documentation itself, but also on an assessment of how the project was implemented, the funding recipient’s obligations and the consequences of the irregularities identified.
Failure to repay means that interest continues to accrue
Under Article 207 of the Public Finance Act, it is not only the principal amount that matters. Interest at the rate applicable to tax arrears is, as a rule, calculated from the date on which the funds were transferred. If the funding recipient repays the funds, interest ceases to accrue on the date of repayment. Where the funding recipient consents to a reduction in subsequent payments, interest ceases to accrue on the date on which that consent is received by the institution.
For many funding recipients, it comes as a surprise that interest is calculated from the date on which the funds were transferred, rather than only from the date on which the demand was served or the administrative decision was issued. This method of calculating interest means that the longer the dispute over repayment of the funds continues, the higher the amount of interest will be if the institution’s position is ultimately upheld.
In cases concerning repayment of funding, disputes often relate not only to whether the demand for repayment is justified, but also to:
- the date from which the institution calculates interest,
- the method used to calculate the interest,
- whether the interest has been calculated correctly.
Before deciding whether to repay the funds, it is therefore worth considering not only the amount of funding itself, but also the amount of interest.
What should a funding recipient do after receiving a demand for repayment?
After receiving a demand under Article 207(8) of the Public Finance Act, the first step is to determine which ground the institution relies on, what amount the demand concerns and what findings it is based on. Only then is it possible to assess whether repayment within the 14-day period is justified or whether there are grounds to challenge the institution’s position.
It is worth checking, among other things:
- what exactly the institution’s concerns relate to,
- whether an irregularity actually occurred,
- whether the institution correctly assessed the implementation of the project,
- what portion of the funding is covered by the demand for repayment,
- from what date interest is being calculated.
A demand under Article 207(8) of the Public Finance Act is the point at which the funding recipient must make a specific decision. Immediate repayment may have consequences for any subsequent challenge to the institution’s position, while failure to repay leads to the next stage of the proceedings and the continued accrual of interest. The response to the demand should therefore be based on an assessment of the documentation and the legal grounds for the claim, rather than solely on the fact that the institution has set a 14-day deadline.
In many cases, a demand for repayment of funding does not bring the matter to an end, but it may have a significant impact on how the case develops further. The worst course of action is to leave it unanswered and return to the matter only after administrative proceedings have been initiated or a decision has been issued. In companies, the liability of management board members may also arise at a later stage if recovery from the company itself proves ineffective.
Have you received a demand for repayment of funding, a post-control report or an administrative decision? See how the Law Firm supports recipients of public funding in matters concerning project controls and repayment of funding: Services – project controls and repayment of funding.
