What to look for when submitting an application for state aid for restructuring?

The Act of 16 July 2020 on granting public aid for the purpose of rescuing or restructuring entrepreneurs (Journal of Laws of 2020, item 1298; hereinafter: the “Act”) adopted under the government program New Chance Policy establishes financial support instruments for entrepreneurs located in in a difficult economic situation. The entity applying for aid does not have to be subject to court restructuring proceedings, however, it has to meet a number of other statutory criteria. This article will discuss the basic criteria for receiving aid, the forms of support provided for in the Act, and the practical aspects that should be considered when preparing an application for aid.

Forms of assistance

The Act provides for three forms of aid: rescue aid, temporary restructuring aid and restructuring aid. Various forms of support are provided for entrepreneurs at various stages of advancement of remedial actions – from short-term support to the development of a rescue plan, to further measures for entrepreneurs at a later stage of restructuring. All three types of aid are characterized in detail here.

Conditions for getting help

The Act provides for a number of criteria that an entrepreneur must meet in order to be eligible for aid.

First of all, entrepreneurs in a difficult economic situation, i.e. entrepreneurs meeting the conditions provided for in Art. 141 sec. 1 of the Restructuring Law. State aid will be available to the entrepreneur if:

• undertook business activity in a given sector in the period of at least 3 years before the date of submitting the application,
• it is not active in the iron and steel sectors, coal mining or the financial sector or in a market where long-term structural overcapacity is or may be present.

In addition, an entrepreneur who meets the above conditions, but operates in a capital group, can only count on help if he proves that his difficult economic situation:

• it is internal in nature and does not result from unjustified cost sharing within the capital group,
• it is too serious to be dissolved by the entrepreneur or entrepreneurs belonging to the same group of companies.

Moreover, in order for an entrepreneur to be considered an entrepreneur in a difficult economic situation, he must meet certain criteria in relation to his financial situation. Therefore, it must be considered an insolvent entrepreneur within the meaning of the Bankruptcy Law. The act does not formulate further detailed conditions regarding the financial results of entrepreneurs. In relation to entrepreneurs who are not insolvent, but only threatened with insolvency, the act provides for additional criteria qualifying them to be considered as an entity threatened with insolvency. These criteria vary depending on whether the entrepreneur has the status of a micro, small or medium-sized entrepreneur (SME).

An entrepreneur considered to be an SME finds itself in a difficult economic situation if it has lost more than half of its capital. In particular, if: the sum of profit (losses) from previous years, net profit (loss) in a given financial year, supplementary capital, revaluation capital and other reserve capitals (funds) is negative and its absolute value is greater than 50% of the capital primary (fund). In relation to other entrepreneurs, the aid will be available if in the last 2 years the ratio of debt to equity was greater than 7.5 or the operating profit increased by depreciation / interest was lower than 1.

Exceptionally, rescue aid and temporary restructuring support may be granted to an SME that is not in difficult economic situation but who, due to exceptional and unforeseen circumstances, has urgent liquidity needs. This exception may be used by entrepreneurs who do not meet the financial performance criteria. This exception may therefore be the basis for applying for aid for entrepreneurs struggling with temporary problems due to the economic consequences of the COVID-19 pandemic.

Establishing the status of an SME

One of the necessary steps that an applicant must take before submitting an application is to determine whether it has the status of a micro, small or medium-sized enterprise (SME).

Three criteria are taken into account to determine the SME status:

• full-time employment,
• balance sheet total,
• net revenue value.

	Microentrepreneur	Small trader	Medium entrepreneur
Employment	< 10	< 50	< 250
Balance sheet total	≤ 2 mln EUR	≤ 10 mln EUR	≤ 43 mln EUR
Net turnover	≤ 2 mln EUR	≤ 10 mln EUR	≤ 50 mln EUR

The last two criteria are alternative. This means that if the entrepreneur does not exceed the threshold in relation to his / hers, he still meets the definition requirements and maintains the SME status. When determining the number of people employed, employees should be taken into account, as defined by the Labor Code, and thus excluding people working under civil law contracts.

When determining the level of employment, it should be converted into the so-called Annual Work Units, which correspond to the number of full-time employees working for the enterprise over the entire reference year considered. People working part-time or only for part of the year are indicated as fractions.

To determine financial data, accounting data is used as at the date of closing the books of accounts for a given period, i.e. currently data for 2019. Conversion into EUR should be made at the average exchange rate announced by the National Bank of Poland on the last day of the financial year.

The situation is simple for independent and independent enterprises. In contrast, for a company operating in a group, establishing SME status can become more complicated. The provisions introduce an obligation to consolidate the data taken into account for the purposes of determining the SME status for the entire capital group, i.e. related companies and the so-called partner enterprises.

Related enterprises are those which have a majority of the voting rights in another enterprise or are entitled to control it on another basis (e.g. contract). As a rule, enterprises may also be considered indirectly related when through at least one enterprise, natural person or group of natural persons acting jointly. In this case, the data taken into account for determining the SME status should be fully consolidated.

Partner enterprises are enterprises that own at least 25% of the downstream enterprise or the voting rights of such enterprise. There are exceptions to this rule. Obviously, partner enterprises cannot have more than 50% of the votes, otherwise they would become linked enterprises. In the case of partner enterprises, consolidation should be done in proportion to their share.

For entrepreneurs operating in a group, establishing the status of an SME may prove to be a complex and lengthy undertaking.

Previously received forms of assistance

The application for granting aid should contain information about the state aid received by the applicant in the last 10 years. Entrepreneurs wishing to obtain aid for restructuring should therefore carefully examine the forms of public aid received in the past. Due to such a long period for which the entrepreneur must provide information on previously received aid, even entrepreneurs who carry out thorough documentation of their activities may have a problem with meeting this requirement.

Entrepreneurs who do not have full information about the aid received in this period may supplement it using the register of granted public aid kept by the President of the Office of Competition and Consumer Protection. The register contains most of the information needed to complete the application.

However, caution should be exercised in relying on information obtained from the registry. Although public entities granting state aid are required to enter current data, practice shows that not all forms of aid are disclosed in the register. For this reason, the applicant, knowing about the public aid received in the past, which for some reason is not included in the register, should complete the data in the application on his own.

Achieving the statutory economic and social goals

Pursuant to the Act, aid may be granted if it prevents and leads to the reduction of social difficulties or overcoming market imperfections, if, without granting it, this objective would not be achieved or would be achieved to a lesser extent.

Therefore, the regulations require the granting of aid to achieve certain general social, desired effects, which can be defined as positive externalities of the entrepreneur’s activity. The existence of this requirement also makes the aid conditional. According to the EU rules of state aid, the aid must create the so-called incentive effect.