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The State Aid "Undertaking in Difficulty" test

07 April 2020
The European Commission apply a prohibition on undertakings in difficulty receiving aid under certain Articles of the General Block Exemption Regulation, the Temporary Framework and ERDF projects.  

The 'Undertaking in Difficulty' test can be found at Article 2(18) of the General Block Exemption Regulation which reads:

‘undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs:

(a) In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. For the purposes of this provision, ‘limited liability company’ refers in particular to the types of company mentioned in Annex I of Directive 2013/34/EU ( 4 ) and ‘share capital’ includes, where relevant, any share premium.

(b) In the case of a company where at least some members have unlimited liability for the debt of the company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses. For the purposes of this provision, ‘a company where at least some members have unlimited liability for the debt of the company’ refers in particular to the types of company mentioned in Annex II of Directive 2013/34/EU.

(c) Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.

(d) Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan.

(e) In the case of an undertaking that is not an SME, where, for the past two years:

(1) the undertaking's book debt to equity ratio has been greater than 7,5; and

(2) the undertaking's EBITDA interest coverage ratio has been below 1,0.

Evidence should be collected at the point of award which shows that the recipient of funding does not meet any of the conditions above.  Where there is uncertainty about how to apply the test then it is sensible to obtain legal advice.  We have extensive experience in this area. 

DWF has a breadth of expertise in State aid law matters. We are able to draw upon a team of leading experts based in offices in the UK, Brussels and many other locations.  Our team has extensive experience in this area including working in DG Competition on the drafting of the General Block Exemption Regulation and within Central Government.

For more information please contact one of our experts below.

Further Reading