Officials from the European Commission will press ahead with demands for the repayment of £6.5 million (€8.25 million) in forestry grants improperly paid to Coillte, The Irish Times has learned.

The move, which follows the failure of internal conciliation procedures to resolve the matter with the Government, is likely to be confirmed by the Commission shortly.

It will also call into question some £30.2 million in further funding which Coillte sees as essential to its land-buying plans up to 2013.

At Coillte's recent annual meeting, chairman Mr Ray MacSharry warned the consquences would "be a very serious matter" for the company.

The Department of Marine and Natural Resources, which covers forestry, is preparing an appeal to the European Court of Justice which must be lodged, subject to Government approval, within two months of the Commission's final decision, a spokesman said yesterday.

The grants are a "loss of income" premium normally paid to farmers to assist them financially while their trees grow. Such payments are not supposed to be made to "public entities" and Coillte's dispute with the Commission arises from its definition as such.

Coillte argues that it is covered by the phrase "any other private-law natural or legal person" in the relevant 1992 EU regulation. The company insists that it functions in the market place as any other private company and the denial of premiums, while others retain them, would make buying new land to put under afforestation unviable.

The Commission argues that Coillte is a state company and it points to a recent ruling to that effect by the EU's court, the ECJ, although the latter concerned a different directive and a public procurement issue.

The Commission's determination to pursue the issue has been applauded by Friends of the Irish Environment (FIE), which said the payments are intended to help farmers stay on the land. Coillte's use of such premiums, FIE said, is contributing to the destruction of the countryside.

At stake initially are payments to Coillte in 1997 and 1998 of £3.8 million, following the notification of the change of attitude to such use by the Commission.

It is these payments that the Commission is attempting immediately to claw back from the next tranche of the Irish block grant. The Department would then be expected to recover the amounts from Coillte.

Failure to do so could be seen as illegal State aids.

To date, however, Coillte has received some £6.5 million in such payments and has expectations of a further £30.2 million up to 2013. Mr MacSharry also told the a.g.m. that the effect on the company "would be further compounded by the fact that, in order to finance the purchase of land necessary to achieve its contribution to the National Forestry targets during the period 1993 to 1999, Coillte borrowed certain amounts which were to be serviced from the premiums receivable into the future. "Such a loss would put strains on the company's borrowings and on its operating flexibility in the future."

Coillte sources insist that it has functioned all along on the understanding from discussions with the Department that the payments were correct.