Identification of Undertakings in Difficulty

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A company is in difficulty if, in practice, its accumulated net losses exceed 50% of its subscribed capital, regardless of whether the subscribed capital is formally written down. The classification of a company as being in difficulty is independent of the sector in which it operates and of whether a private investor would be willing to invest in it.

Temporary Framework

As of Saturday, 25 April 2020, the Commission authorised 88 State aid measures from 27 Member States and the UK. The legal bases for the authorisation were:

Article 107(3)(b): 76 measures; Article 107(2)(b): 8 measures; Article 107(3)(c): 5 measures



The Temporary Framework on State aid to counter the effects of covid-19 is a fairly simple document. The consolidated version, after the amendment of 3 April 2020, is 17 pages long with 52 paragraphs. Yet, judging from the many questions that have been raised, some of its provisions are not as simple to apply. A case in point is the exclusion of undertakings that were in difficulty before 1 January 2020.

The original version of the Temporary Framework of 19 March phrased that exclusion as follows [the same text is repeated at point 22(c) concerning grants, point 25(h) concerning guarantees, and point 27(g) concerning interest rates]:

“the aid may be granted to undertakings that were not in difficulty (within the meaning [of Article 2(18)] 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.”

[Unlike the first edition of the 2008 Temporary Framework, the 2020 Temporary Framework applies to agricultural products and fisheries, it also refers to similar definitions in the Agricultural BER (Regulation 702/2014) and the Fisheries BER (Regulation 1388/2014)].

It is rather obvious that the original exclusion is confusing. The first part of the sentence is clear. Yet, the second part seems to require proof that the difficulties encountered after 1 January 2020 have been caused by covid-19. None of the indicators used in Article 2(18) of the GBER requires evidence of the cause of the problem.

Not surprisingly, the revision of 3 April deleted the confusing part. The new text, which is repeated in points 22(c), 25(h) and 27(g), merely states that “aid may not be granted to undertakings that were already in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019”.

It also replaces the negative verification of not being in difficulty with the positive verification of being in difficulty, which corresponds with the approach of Article 2(18) of the GBER.

A recent judgment of the General Court also reveals that some aspects of Article 2(18) GBER may not be easy to apply. The General Court had to determine, among other issues, whether Valencia football club was an undertaking in difficulty in its judgment of 12 March 2020 in case T‑732/16, Valencia Club de Fútbol v European Commission.[1] Valencia sought the annulment of Commission decision 2017/365 on the State aid that had been granted by Spain to Valencia Club de Fútbol, Hércules Club de Fútbol, and Elche Club de Fútbol. A very similar judgment that was delivered on the same day concerning Elche football club was reviewed here on 20 April 2020 [View it here:].

The main issue in both cases was the correct calculation of the amount of State aid in state guarantees whose premium appeared to be below the relevant market rate. The General Court concluded that the Commission made two mistakes: It did not take into account a collateral that had been offered by the borrower and it did not try to establish the appropriate market rate. It only presumed that a market rate did not exist.

Whereas in the case of Elche there was not much dispute on the indicators that showed that it was in difficulty, Valencia contested vigorously the evidence used by the Commission to conclude that it was in difficulty.

According to Article 2(18) GBER, an undertaking is in difficulty when one or more of the following four situations occurs:

  1. More than half of the capital has disappeared.
  2. It is subject to collective insolvency proceedings.
  3. It is still subject to a restructuring plan.
  4. In case of a large enterprise, its debt to equity ratio exceeds 7.5 and the EBITDA interest coverage ratio is below 1.0 for the past two years.

With respect to the indicator concerning capital, Article 2(18) specifically refers to loss of “subscribed share capital”.

Art 2(18) also cites Directive 2013/34 on annual financial statements in connection to the concept of limited liability company. This Directive uses the term “subscribed share capital”. It repealed Directive 78/660 on annual company accounts which also used the term “subscribed share capital”. The 2014 Rescue and Restructuring Guidelines define difficulty in relation to loss of “subscribed share capital” [point 20]. By contrast, the 2004 Rescue and Restructuring Guidelines refer to “registered capital” [point 10].

In both Guidelines, difficulty occurs when more than half of the capital “disappears”. But the 2004 Guidelines mention “by analogy” “the provisions of Article 17 of Council Directive 77/91”. No such analogy is mentioned in the 2014 Guidelines. Directive 77/91 concerns the formation of limited liability companies. Article 17 of that Directive refers to “serious loss” of subscribed capital. In this context, the notion of “subscribed capital” should be understood to mean the amount of capital paid up at the moment a company is incorporated or authorised to commence business [Articles 3 and 6].

Therefore, in the Valencia case, the General Court had to determine how the concept of registered capital corresponded to that of subscribed capital in order to assess whether the Commission had correctly classified Valencia as an undertaking in difficulty.

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When is an undertaking in difficulty?

The General Court began its analysis on this issue by recalling that, although the Commission enjoys much discretion in assessing the compatibility of State aid with the internal market, “(58) the Commission is bound by the guidelines and notices that it issues, to the extent that they do not depart from the rules in the Treaty […] In particular, those texts cannot be interpreted in a way which reduces the scope of Articles 107 and 108 TFEU or which contravenes the aims of those articles”.

“(63) Paragraph 10(a) of the [2004] Rescue and Restructuring Guidelines provides that, a firm is, in principle and irrespective of its size, regarded as being in difficulty, ‘in the case of a limited liability company, where more than half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding 12 months’.”

“(64) First of all, the Commission states … that, although the applicant’s registered capital was not reduced during the three fiscal years preceding the grant of Measure 1, it had negative equity … According to the Commission, taken together, those elements are sufficient to conclude that the criteria laid down in paragraph 10(a) of the Rescue and Restructuring Guidelines were met, in that if the applicant had adopted appropriate measures to restore its assets by capitalising its losses, for example, all of its registered capital would have been lost, since it was lower than the accumulated losses”.

The Court went on to explain that “(67) it is necessary to define first the scope of the notions of disappearance and loss of registered capital referred to in paragraph 10 of the Rescue and Restructuring Guidelines […] The Commission thus argued at the hearing that the statement ‘more than half of its registered capital has disappeared’ should be understood as covering a situation in which the net worth of an undertaking was so reduced that it was less than half its registered capital. The fact that the value of the registered capital remains constant is irrelevant. By contrast, the Kingdom of Spain argues, in essence, that the Commission confuses the notions of registered capital and own equity, so that the finding in the contested decision that the applicant’s registered capital was not reduced should have led it to exclude the application of paragraph 10(a) of the Rescue and Restructuring Guidelines to the present case.”

“(68) In that regard, the provisions of paragraph 10(a) of the Rescue and Restructuring Guidelines refer ‘by analogy’ to Article 17 of Second Council Directive 77/91/EEC […] which provides that ‘in the case of a serious loss of the subscribed capital, a general meeting of shareholders must be called within the period laid down by the laws of the Member States, to consider whether the company should be wound up or any other measures taken’, and the amount of that loss may not be set by the Member States ‘at a figure higher than half the subscribed capital’. In the context of the above directives, the notion of ‘subscribed capital’ is confused* with the notion of ‘registered capital’ […]. In view of the objective pursued by those provisions, laying down a specific obligation to convene a general meeting, and the structure of the text of which they form part, which is aimed distinctly and separately at cases of ‘reduction of [registered] capital’ and affirms that the general meeting is competent in that respect, it is readily apparent that the ‘serious loss of the [registered] capital’ referred to in Article 17 of Second Directive 77/91 is not tantamount to a reduction in the registered capital decided by the competent executive bodies, but rather covers a situation where the own equity is reduced, which may lead, as the case may be, to the adoption by those executive bodies of a decision to reduce the registered capital of the company concerned. In view of the link established by paragraph 10(a) of the Rescue and Restructuring Guidelines with the provisions of the above directives, the notions of disappearance and loss of registered capital in paragraph 10(a) of those guidelines must be interpreted in a manner consistent with the notion of ‘serious loss of the [registered] capital’ referred to in those directives.” [* The original Spanish text uses the words “se confunde” that indeed translate as “is confused”. But I think a more appropriate translation would have been “is conflated”.]

“(69) Furthermore, the Court has already held that the level of own equity was a relevant indicator for determining whether there was a disappearance or loss of registered capital for the purposes of paragraph 10(a) of the Rescue and Restructuring Guidelines, despite the absence of a finding of a reduction in the registered capital”.

“(70) In the light of the foregoing, it must be held that the Commission could rely on the level of the applicant’s own equity in order to determine whether the criteria laid down in paragraph 10(a) of the Rescue and Restructuring Guidelines were met.”

It follows from the above conclusions of the General Court that, first, the notion of “subscribed capital” in the GBER and the 2014 Rescue and Restructuring Guidelines can correspond to “registered capital” and that, second, even if the registered capital is not formally written down, loss of own equity as a result of successive and significant operating losses can be assimilated to “disappearance” of subscribed or registered capital.

Indeed Article 2(18) of the GBER also clarifies that loss of more than half of the subscribed capital also occurs 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.” Therefore, it does not matter whether the subscribed capital is formally reduced or not. What matters is whether in practice the sum of the net losses exceeds 50% of the subscribed capital.

Then the General Court applied its findings to the present case and noted that “(71) the Commission finds … that the applicant’s annual accounts show negative equity as a result of accumulated losses of more than its entire registered capital […] The Commission also states in the same recital that ‘more than one quarter of [the registered capital] had been lost … That assertion is supported by the applicant’s financial data […] The applicant’s own equity amounted to a little over half of its registered capital in June 2008 … and became negative in June 2009, as has just been stated, with the consequence that over half of the registered capital and therefore a fortiori more than a quarter of its own equity was ‘lost’ […].”

Special status of football clubs?

Valencia argued that the concept of undertaking in difficulty had to be modified when it was applied to football clubs.

The General Court rejected that argument. “(73) In the first place, with regard to the specific nature of the professional football sector, it must be observed, first of all, that the second subparagraph of Article 165(1) TFEU provides that the ‘Union shall contribute to the promotion of European sporting issues, while taking account of the specific nature of sport … and its social and educational function’.”

“(74) In that regard, although the requirements laid down by the second subparagraph of Article 165(1) TFEU presuppose, as the case may be, that the Commission will assess the compatibility of aid in the light of the objective of promoting sport, as part of its broad discretion at that stage …, the fact remains that, at the preliminary stage of the classification of a measure as aid, Article 107(1) TFEU does not make a distinction according to the causes or aims of the measures of State intervention concerned but defines them according to their effects”.

“(75) The Court has thus held, in connection with the need arising from the TFEU to take account of the requirements relating to environmental protection, that that need could not justify the exclusion of a measure from the scope of Article 107(1) TFEU, as such requirements may usefully be taken into account when the compatibility of the measure is being assessed in accordance with Article 107(3) TFEU”. [At this point the Court cited case C-487/06 P, British Aggregates v Commission, paragraph 92.]

“(76) Furthermore, the economic nature of football played by professional clubs, already recognised by the Court …, is not disputed by the applicant.”

“(77) In the light of the foregoing, it should be noted that the Commission was not required under the second subparagraph Article 165(1) TFEU to take account of the specific characteristics of the applicant as a professional football club, other than those which are directly relevant for the examination of the objective notion of a firm in difficulty.”

Book value v market value

Valencia claimed that the book value of professional football clubs did not necessarily reflect their real market value and, as a consequence, private investors would be prepared to pay significant sums in order to take control of football clubs with a negative book value.

The General Court rejected this claim too. “(83) The applicant, however, merely supports that claim with two examples of English football clubs with a negative book value which were bought back between 2007 and 2009. In any event, by its general nature, such a line of argument does not invalidate the finding which the Commission made after the examination of the applicant’s individual situation …, and it should be recalled that the notion of a firm in difficulty is to be assessed only on the basis of the specific indices of the financial and economic situation of the undertaking in question”.

This distinction is important. Whether a private investor is willing to buy a loss-making club to turn it around is one thing, and whether the club is loss-making is an entirely different thing.

“(84) It should be made clear, as a preliminary point, that the Rescue and Restructuring Guidelines, in the version applicable to the present case, provide that the Commission will ‘in principle’ take the view that a firm is in difficulty when it is faced with the circumstances referred to in paragraph 10(a). In doing so, the Commission adopted a guideline the actual wording of which makes it possible to depart from that guideline”.

This nuance, highlighted by the Court, is also important. Those two words, “in principle”, provide to the Commission an escape clause.

The General Court went on to point out, correctly, that the book value of an asset can vary substantially from the value that can be actually realised when that asset is disposed in a forced sale.

“(87) The Commission considers …, that ‘the relatively high book value of Valencia’s football players (assets) cannot mean that the club was not in financial difficulty’. It indicates, in that regard, that ‘a “fire sale” value of the [Valencia CF players] would be relatively low because buyers would use the known fact of the seller’s (Valencia CF) difficulties in order to push for low prices’. In addition, it states that the market value of those players was subject to significant unknown factors, in particular in the event of injuries.”

“(88) It follows that, although, contrary to what the applicant claims, the Commission did not refuse to take into consideration the market value of its players …, it found, by contrast, …, on the basis of depreciation risks in the event of a forced sale and the unknown factors making the value of the players more volatile, that the existence of those assets did not call into question its conclusion that the applicant was a firm in difficulty.”

Although the Commission was successful on the classification of Valencia as an undertaking in difficulty, the General Court annulled its decision because, as in the case of Elche, it did not take into account the value of a collateral and did not try to determine whether a market guarantee premium existed.


[1] The full text of the judgment can be accessed at:

Photo by Markus Spiske on Unsplash



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.


  1. von Alexander Rose

    Thank you Phedon – insightful and directly relevant to the practical issues faced by public bodies distributing funding. Do you think the Commission might revise the definition of Undertaking in Difficulty in the next amendment to the Temporary Framework? It seems to be a sticking point for many Covid-19 measures and therefore the Commission might choose to depart from the definition used in other Regulations.

  2. von Phedon Nicolaides

    Good question. My friends in DG Competition did not mention anything in recent discussions we had. Of course, it does not mean that the Commission is not discussing this issue internally. My guess is that it would be difficult to adjust the definition for a short period. It would be very hard to predict the consequences of such an adjustment. Any change would be of a different nature; e.g. dropping the exclusion of undertakings in difficulty. I am more concerned about the cumulative impact of the state aid on the internal market.

  3. von James Jenkins

    So for clarity, an undertaking is in difficulty if it has lost over 50% of: 1) The total amount paid for various shares (e.g. €1m for €1 each and €1m for €5 each (a total of €2m); or 2) The amount last paid for a share * no. of outstanding shares (€6m in the above example)?

  4. von Phedon Nicolaides

    Since Art 2(18) of the GBER refers to “subscribed capital”, the right answer must be EUR 2m (as in your example).

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