In particular, the “undertaking in difficulty” (UID) test has become the bete-noire of many fast-growing firms, desperate for a lifeline.
The rationale for the UID test is to ensure public funds are not used to prop up failing businesses, in simple terms not to throw good money after bad. It aims to achieve this by obliging funders to check for certain markers that may indicate imminent insolvency.
While not normally attracting attention, the UID test has been included in the European Commission’s Temporary Framework, which relaxes certain state aid rules in the wake of the Covid-19 pandemic. While recognising the crisis has affected solvency now, the rule requires a check that beneficiaries were not an UID as at the end of last year (the rationale being to assist businesses only in difficulty from the crisis).
For funders this creates a significant administrative burden and means arguably viable companies are being excluded from receiving support where their accounts show losses that exceed reserves (and half of the share capital).
The impact of the UID test has been severe in the UK. Many viable SMEs, backed by private equity, or debt-funded, who never would have required a loan last December, are missing out on emergency relief by being held to a difficult test now seemingly at odds with the interventions required during the pandemic.
Firms making purchases and investments, or with natural seasonal peaks and troughs, are being dismissed based on an ultimately arbitrary date. One can see how in the flood of simultaneous applications, banks found it easy to assess based on whether their “accumulated losses” – regardless of context – meant they were ineligible for loans at that point in time.
A pragmatic solution would be for the European Commission to amend the Temporary Framework to simplify the test, either relaxing the UID test (for emergency Covid-19 related support), or removing it altogether. The Commission has shown a willingness to act quickly to relax state aid rules in the wake of the pandemic.