Undertakings in difficulty in times of Corona

For this reason, the European Commission adopted a "Temporary Framework for State Aid Measures" on 19 March 2020 - as it had already done during the financial crisis. This European law instrument is intended to enable Member States to support undertakings affected by the corona crisis.

Each Member State is free to decide on the concrete measures to be taken. The "Temporary Framework for State Aid Measures" allows Member States to provide aid in the form of direct grants, repayable advances or tax advantages, public guarantees on bank loans to undertakings, subsidised public loans to undertakings, guarantees and loans channelled through credit institutions and shortterm export credit insurance.

However, undertakings wishing to receive state aid must in any case fulfil one condition. The
Temporary Framework for State Aid Measures formulates this condition as follows:

„The aid may be granted to undertakings that were not in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019; it may be granted to undertakings that are not in difficulty and/or to undertakings that were not in difficulty on 31 December 2019, but that faced difficulties or entered in difficulty thereafter as a result of the COVID-19 outbreak”.

This means that “undertakings in difficulty“ cannot receive the promised support in any case.

The definition of an undertaking in difficulty can be found in the EU Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty. According to these Guidelines “an undertaking is considered to be in difficulty when, without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term”.

This open wording is substantiated by the following regulations. According to these, an undertaking is in difficulty:

• in the case of a limited liability company, where more than half of its subscribed share capital has disappeared as a result of accumulated losses;
• in the case of a company where at least some members have unlimited liability for the debt of the company, more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses;
• where the undertaking is subject to insolvency proceedings or fulfils the criteria for being placed in insolvency proceedings at the request of its creditors;
• in the case of an undertaking that is not an SME, where the undertaking's book debt to equity ratio has been greater than 7.5 and the undertaking's EBITDA interest coverage ratio has been below 1.0.

If an undertaking is classified as an undertaking in difficulty, no aid can be granted. This means that undertakings in difficulty are excluded, for example, from tax relief under the German Energy Tax Act or the German Electricity Tax Act and from payments to compensate for electricity prices.

The current BAFA leaflet on the special equalisation scheme also deals with this issue. Anyone who is considered to be an undertaking in difficulty when the decision to limit the EEG surcharge for electricity is issued - i.e. regularly in December - will not receive a limitation decision to start with. Which by its very nature only aggravates the situation for the undertaking concerned.

The idea behind the exclusion of undertakings in difficulty is that state aid should not be used to keep non-economic undertakings artificially alive. This is intended to ensure undistorted competition between undertakings in different Member States.

In the current crisis, however, this provision is causing problems. On the one hand, the aim is to support, if not save, undertakings in financial difficulty. On the other hand, it is precisely these companies that are normally excluded from state subsidies.

The Temporary Framework for State Aid Measures therefore makes a strict distinction according to when the undertaking concerned started to be in financial difficulty. Undertakings that are in difficulty only after 31 December 2019 can claim that their financial problems are related to the outbreak of coronavirus.

On the other hand, it is likely to become much more difficult for undertakings that were already classified as undertakings in difficulty last year to benefit from the newly created public funding options.

The European Commission has created the framework in order to allow to provide state aid in an easy way. Now, it is the turn of the Federal Government and the governments of the German federal states. They must now draw up the national and regional legal frameworks for subsidies for distressed companies. It remains to be seen whether, for example, tax relief under the German Energy Tax Act or the German Electricity Tax Act will also be granted to undertakings that have become undertakings in difficulty after 31 December 2019. It is not possible to foresee the impact on other environmental aid at this stage either.

Regardless of the concrete measures that are now being decided, it will not become any easier for undertakings when applying for subsidies, loans or tax relief. Undertakings must demonstrate that the difficulties are due to the Corona pandemic and that they were "healthy" before 31 December 2019. If the undertakings succeed in this, they can have legitimate hopes of receiving support from the state.

The situation is probably different for undertakings that were already in difficulty before the corona pandemic, which has only exacerbated their situation. Affected companies should therefore find out at an early stage whether they meet all the legal requirements for state subsidies.
 

Dr Gernot-Rüdiger Engel:  The European Commission's Temporary Framework for State Aid Measures is a good and necessary step to sustain our economy. It is important now for undertakings to check whether the conditions for an undertaking in difficulty are met. Only in this way can enormous damage be averted from the company.

Christoph Schnoor:  The corona pandemic poses unprecedented challenges to our
society and economy. The relaxation of the rules on state aid for
undertakings in difficulty may be a decisive factor in limiting the
economic impact. It remains to be seen how the Federal Government will implement the relaxation of the state aid rules provided for in the Temporary Framework in practice.