Funding institutions most commonly demand repayment where they conclude that the funds have been used for purposes inconsistent with their intended purpose, that procedures relating to project implementation have been breached, or that the funds were received where they were not due or in an excessive amount. These are statutory grounds, but in practice they most often involve allegations concerning:
- the manner in which the funds were spent,
- irregularities in procurement procedures,
- failure to achieve project indicators,
- breach of project sustainability requirements,
- material changes to the project made without the institution’s approval,
- changes in the funding recipient’s ownership structure,
- loss of SME status where that status was relevant to the award of funding.
The institution’s position may arise following a project control or an analysis of documents submitted by the funding recipient. Many cases begin with the institution challenging a single item of expenditure or a particular aspect of project implementation and only later develop into a demand for repayment of part or all of the funding.
The institution’s finding that an irregularity has occurred does not automatically mean that an obligation to repay actually exists or that it extends to the entire amount of funding. Very often, the dispute concerns precisely whether the institution assessed the project correctly and whether there are sufficient grounds for demanding repayment of funding.
When can repayment of funding be avoided?
There is no single answer to the question of whether the funding recipient will have to repay the funding. In many cases, the nature of the identified irregularity, the scope of the institution’s concerns and the course of project implementation are decisive.
The assessment should take into account the project control findings, but also the project documentation, earlier correspondence with the institution and the precise issues raised by the institution in relation to project implementation.
It is also important whether the institution’s allegation concerns primarily the manner in which the expenditure was documented or whether it concerns an actual breach of the funding conditions. A situation in which a document is missing, but its content or significance can be reconstructed on the basis of other materials, should be assessed differently from one in which the project was in fact implemented in a manner inconsistent with the agreement or the funding application. In practice, it is therefore necessary to distinguish between deficiencies in the documentation and what actually occurred in the project, and then to determine whether the identified deficiency could have affected the eligibility of the expenditure or the amount of funding awarded. Only then is it possible to assess the validity of the institution’s position and the scope of further action.
The stage at which the funding recipient responds is important
In many cases, the timing of the funding recipient’s response and the way in which it reacts to successive letters concerning the project are important. The matter very often does not begin with a decision requiring repayment of funds. Earlier stages may include a project control, requests for explanations, a post-control report and a demand for repayment of funds. At those stages, the funding recipient may still submit documents and explanations and present its position on the implementation of the project.
Some companies postpone taking action. They assume that the matter will resolve itself or that the institution’s position is already final. In practice, however, subsequent proceedings very often rely on findings made earlier during project controls or in correspondence with the funding recipient. This is why leaving such letters unanswered may significantly hinder the funding recipient’s ability to defend its position at a later stage.
Every repayment case is different
Funding recipients often try to compare their situation with other cases and look for similarities in stories heard from acquaintances, online discussions or the experiences of other businesses implementing publicly funded projects. In practice, however, repayment cases are rarely as clear-cut as they may appear from a cursory reading of a letter from the institution. Almost every aspect of the case may be relevant, including:
- the terms of the grant agreement,
- the course of project implementation,
- the project documentation,
- earlier correspondence with the funding institution,
- the nature of the deficiencies identified,
- earlier project controls,
- the reasoning given by the institution for its position.
Similar-looking cases can lead to entirely different consequences for funding recipients, so the risk of repayment always has to be assessed on the basis of the entire project documentation and the circumstances of the individual case.
Funding recipients often do not realise when the situation is becoming serious
In many cases, the first letters from the institution do not yet look like the beginning of a dispute concerning repayment of funding. Funding recipients may treat them as another formality connected with a project control or as ordinary correspondence concerning the settlement of expenditure.
Only later does it become clear that the institution is beginning to challenge the manner in which the project was implemented, the eligibility of expenditure or compliance with the funding conditions. It also happens that a business remains convinced for a long time that the explanations submitted to the institution have closed the matter or that the problem concerns only part of the project.
Cases concerning repayment of funding often develop gradually. As a result, assessing the situation solely on the basis of a single letter or individual conversations with the funding recipient may lead to incorrect conclusions about the actual level of risk associated with the project.
Repayment of funds may also result in exclusion from future projects
Funding recipients often focus exclusively on the obligation to repay the funds. However, the legislation also provides for additional consequences connected with irregularities in project implementation. In certain circumstances, it may also be possible to exclude a funding recipient from applying for further European funding, including where the funding recipient:
- fails to repay the funds within the deadline specified in the decision,
- used unreliable documentation,
- the irregularities identified were connected with the commission of a criminal offence.
The exclusion period may last for several years and affect the funding recipient’s ability to apply for further funding. In practice, businesses often do not realise that a case concerning one project may also have consequences for future investment plans and subsequent funding applications.
Is it really possible to avoid repayment of funding?
Yes. There are cases in which the funding recipient ultimately does not have to repay the funds, or in which the dispute ends differently from what the institution’s initial correspondence appeared to suggest.
The difficulty is that, after receiving information about irregularities or a demand for repayment, most businesses are not in a position to assess for themselves what situation they are actually facing. This is understandable. A funding recipient usually looks at the project through the prism of months of work, the costs incurred, the pressure involved in implementing the project and the conviction that it acted in good faith and in accordance with the grant agreement.
Some businesses therefore try to convince themselves that the problem cannot be serious and that the institution will eventually abandon the matter. Others react in exactly the opposite way — after the first letter, they assume that everything was done incorrectly and that repayment is inevitable.
Neither reaction usually makes it possible to assess the project’s actual situation properly. The answer to whether repayment can be avoided very rarely follows from a demand for repayment or a single project control document alone. It is often only an analysis of the project documentation, the course of the control and the institution’s position that makes it possible to assess how serious the funding recipient’s situation is and what the dispute actually concerns.
In matters concerning repayment of funding, the worst approach is to make decisions under the influence of emotion or in the belief that the situation has already been definitively determined. In some cases, repayment of funding can be avoided or its scope reduced. This requires, however, an assessment of the legal basis for the institution’s demand, the project documentation and the course of the matter to date.
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.
