Why COVID support applications may be refused: INVEGA explains what a struggling company means

Commenting on why some companies are not eligible for certain state aid measures for mitigating the effects of the COVID-19 pandemic, the national development agency Investicijų ir Verslo Garantijos (INVEGA) explains that they are being assessed in the light of the European Commission's Communication on the coordinated economic response to the outbreak.

The European Commission's Communication on aid to those affected by the COVID-19 outbreak stipulates that public funding can be provided to establishments that were not considered to be  companies in difficulty at the end of the year 2019. This criterion is assessed on the basis of the company's financial statements for 2019.

Inga Beiliūnienė, Deputy CEO of INVEGA, said that the business support measures notified by the European Commission were aimed at companies that had been operating sustainably before the current quarantine and that began experience the lack of working capital only now, due to the extraordinary economic situation.

“Often one of the reasons why a company is recognised as having been in difficulty is that it had declared negative equity in its annual accounts for 2019, submitted to the Register of Legal Entities. This means that even before the quarantine, the accrued losses were more than half of the company’s subscribed share capital. Therefore, before applying for financial assistance, companies should carefully assess their finances and the data provided to the register,” said Ms Beiliūnienė, noting that companies will not be able to apply for these financial instruments unless they meet the criteria.

INVEGA recalls that a company is considered to be in difficulty if at least one of the following criteria apply:

a) the company is a limited liability company (AB, UAB, ŽŪB, etc.), and more than half of its subscribed share capital has been lost due to the losses accrued. This is the situation where the owners’ equity less accrued losses amounts to less than half of the company's subscribed share capital. This requirement does not apply to SMEs that have been operating for less than three years.

(b) the undertaking is a legal person with unlimited liability (sole proprietorship, partnership, etc.) in which more than half of its capital has been lost due to losses accrued. This requirement does not apply to SMEs that have been operating for less than three years.

(c) the undertaking is the subject of collective insolvency proceedings or meets the criteria under national law where collective insolvency proceedings may be initiated or opened against it at the request of its creditors.

(d) the company has received bailout aid (i.e. urgent and temporary state aid with the aim of keeping the company in difficulty viable for the short period needed to draw up a restructuring or liquidation plan) and has not yet repaid the debt or its guarantee has expired, or the company has received restructuring aid (longer-term aid intended to restore the long-term viability of the beneficiary under an ongoing, coherent and comprehensive restructuring plan) and is still implementing the restructuring plan;

(e) the following criteria apply to the company covering  the last two years: 1) the company's balance sheet debt-to-equity ratio exceeds 7.5 and 2) the company's  EBITDA (earnings before interest, taxes, depreciation and amortization) and interest coverage ratio is below 1.0 (this requirement does not apply to SMEs).

The requirement that an applicant company cannot be in difficulty applies in all cases when applying for loans: loans to the businesses most affected by COVID-19, the ASAP factoring scheme and the Portfolio Guarantee Loans 2 scheme.

These criteria do not apply when seeking crowdfunding loans via the Avietė measure, borrowing from the funds of the Alternatyva scheme or when applying for 100% interest reimbursement from state funds in cases where the lender has deferred loan payments due to the quarantine.