MINISTERS failed to notify the EU about nationalising a shipyard at the centre of a ferry building fiasco despite being earlier found to have given £50 million of "illegal state aid" to two airports.

Documents seen by The Herald on Sunday reveal that illegal aid was found to have been made to Sumburgh Airport on Shetland and Inverness Airport after both received taxpayer support that had not been approved by the European Commission.

The EU has confirmed it was not notified of the state takeover or the issuing of two commercial loans to Ferguson Marine Engineering Limited in Port Glasgow totalling £45m before the yard fell into administration and then public ownership.

Under EU rules, member-state governments are expected to notify the European Commission – which is in charge of treaty compliance – about proposed state aid moves.

The intent of state aid rules is to avoid financial assistance given by a government that favours a certain company or commercial group and has the potential to distort market competition.

The Herald on Sunday can reveal the European Commission has already found that Scottish Government support to two airports was illegal aid through the Highland and Islands Airports Limited (HIAL) company that it owns.

Ministers had told the commission it considered Inverness, which carried over 600,000 passengers a year, and Sumburgh, which carries over 300,000, would close to scheduled passenger services without public funding.

But the European Commission found that more than £20m provided to Inverness between 2012 and 2017, and £35.4m to Sumburgh were "illegal state aid" in breach of the Treaty on the Functioning of the European Union (TFEU), which states that aid measures must not be put into effect before it had authorised it.

The commission also found that HIAL, the state operator of both airports, was "not selected by a public procurement procedure for the public service obligations it was entrusted with" and did not comply with its so-called Altmark Criterion which aims to ensure competition and transparency.

It said in both cases: "The public funding under examination distorts or threatens to distort competition and affects trade between the member states."

In separate rulings about the Scottish airports in 2017 and 2018, the directorate general for competition "regretted" that the UK had allowed the aid to be put into effect before the commission had made any decision authorising it. But it decided not to raise objections to financial support going forward.

EU sources have confirmed that no state aid notifications about the Scottish Government's involvement with Ferguson have ever been made to the European Commission.

The EU has refused to comment on the latest case, but if a state aid investigation was launched and found proven, the commission could ultimately demand the recovery of money pumped into Ferguson before and after its financial collapse.

The Scottish Government took control of the last civilian shipyard on the Clyde in August after it went under because of the soaring costs of a contract with Caledonian Maritime Assets Ltd (CMAL), the taxpayer-funded company which owns ferries and other infrastructure used by publicly owned operator CalMac.

READ MORE: Law Society of Scotland issues state aid warning to government over ferries fiasco

A £97 million project for two ferries is now costing nearly £230m with no sign yet that either will available to passengers in the near future.

The previous Ferguson Marine owner, tycoon Jim McColl, who rescued the yard when it went bust in 2014, blamed repeated design changes by CMAL.

One of the ferries being built by the publicly owned FMEL, MV Glen Sannox – which is destined for the Arran-Ardrossan route – was due to enter service in the summer of 2018, but construction delays meant that was put back.

The second vessel, known only as Hull 802, was supposed to be delivered to CalMac in the autumn of 2018 for use on the Uig-Lochmaddy-Tarbert triangle, but that has also been held up.

According to a briefing on EU state aid regulations referred to The Herald: "Aid measures can only be implemented after approval by the commission. Moreover, the commission has the power to recover incompatible state aid.

"Unlawful aid is aid granted without prior commission authorisation. The commission must examine all information it receives concerning alleged unlawful aid immediately."

The commission has powers to use injunctions to obtain information about the aid from member states and suspend the further granting of aid. It can even impose a "provisional recovery obligation" to reverse what has happened.

READ MORE: Scottish ferries fiasco - EU not told of shipyard deals as illegal 'state aid' cases emerge

The development comes after the Law Society of Scotland, the professional body for more than 12,000 Scottish solicitors, warned ministers that nationalised Ferguson would be "under scrutiny" to ensure it was not a donor and recipient of "unlawful state aid" in future.

The Competition and Markets Authority has also expressed its concern about the "potential risks" of state control over the way ferries are operated, run and paid for.

However, in a response to a Freedom of Information question in 2018 seen by The Herald on Sunday, the Scottish Government said it did not believe there was any state aid issue to address with regard to the loans to Ferguson.

Ministers were asked to provide proof that it had applied for EU exemption for the transactions or had confirmation that they were not subject to state aid regulations.

The official response was: "Scottish Ministers have provided two commercial loan facilities to Ferguson Marine Engineering Limited. Both loan facilities were negotiated on fully commercial terms following detailed due diligence, and with the benefit of independent third-party verification.

"On this basis we concluded there was no state aid present in the loan facilities provided to Ferguson Marine."

According to government papers from 2018, seen by The Herald on Sunday, the Ferguson loan debt could be converted into shares in the company "depending on whether certain events happen".

It was intended that at least £30m of the £45m borrowings surrounded having the option to convert some or all of it into equity in the company.

A redacted report into the deal said it "can be repaid" unless its warrants had been exercised to convert the debt to shares.

A Heads of Terms document, relating to the loan includes a heavily redacted "debt to equity" section.

The Scottish Government held a security or charge over the assets of Ferguson as a result of their support for the shipyard.

A Scottish Government spokesperson said: “No state aid has been given to Fergusons through the loans or acquisition of the business so there is no notification requirement.”

State aid rules – how they work

The UK is in a transition period to leave the EU by the end of the year, but in the meantime is still bound by its rules while the future trade arrangement is negotiated.

The Treaty on the Functioning of the European Union generally bans state aid unless it is justified by reasons of general economic development.

Article 107 of the Treaty on the Functioning of the European Union (TFEU) ensures that aid granted by a member state or through state resources does not distort competition and trade within the EU by favouring certain companies or the production of certain goods.

But there is a requirement that prior notification is given of new aid measures and that member states must wait for the Commission's decision before they can put the measure into effect.

Under the rules, interventions in favour of companies can be considered free of state aid when they are made on terms that a private operator would accept under market conditions.

Glen Sannox was 'launched' on November 21, 2017 by the First Minister Nicola Sturgeon

A government can own a company under state-aid rules – but it is not allowed to keep it going if it would otherwise fail.

In 2016 the commission ordered Belgium to recover 211m euros in illegal state aid it had given to its steel industry.

Last month, the European Commission ordered Estonia to recover 'illegal aid' given to an agricultural company AS Tartu Agro through the rent of agricultural land below market price.

Last September, the EU's General Court found that Luxembourg had breached state aid rules in the tax treatment of the Fiat group's treasury and financing services and ordered the recovery of £17-25 million from the company.