In this article, we explore in detail the criteria that define a company in crisis and how companies can resolve this situation before the final accounting closures.
Definition of a company in crisis
The definition of “company in difficulty” is regulated in Article 2, paragraph 18, of Commission Regulation (EU) No. 651/2014, of June 17, 2014, also known as the General Category Exemption Regulation (RGEC). Under this regulation, a company is considered to be in crisis if:
- In the case of a limited liability company (SL), more than 50% of its subscribed share capital has disappeared due to accumulated losses.
- In a company where a partner has unlimited liability for the debt, more than 50% of their own funds have disappeared due to accumulated losses.
- You have voluntarily requested a declaration of bankruptcy or you have been declared bankrupt.
- The company is not aware of its tax or Social Security obligations.
CDTI specific criteria
For the CDTI, it is crucial that the ratio of a company in difficulty is not met. In other words, the share capital plus the issuance premium divided by two must not exceed the own funds both in the last closed accounting year and in the current financial year.
This criterion is detailed as:
(Share Capital + Issue Premium) /2 < Own Funds.
It should be noted that participatory loans such as Enisa, by their very nature, are not included in own funds for the purpose of this calculation. Along the same lines, and contrary to what the accounting criteria say, convertible loans cannot be considered as own funds, unless they are reflected in the company's Net Worth as “Other contributions from partners”.
Verification of the crisis situation
To check if a company is in crisis, it is essential to review certain items on the balance sheet. Here are the most important ones:
- Social Capital: It is the nominal value of shares subscribed by shareholders. It represents the contribution of partners and is a fundamental part of own funds.
- Emission Premium: This is the additional price that shareholders pay for new shares issued by the company above their nominal value.
- Own Funds: It includes the share capital, reserves, the results of previous years and the result of the current year.
- Other Partner Contributions: These are additional contributions from partners that are not part of the share capital. They can be in cash or in kind and increase the company's own funds without altering the nominal value of the shares.
Numerical example
Suppose a company with the following figures on its balance sheet:
- Social Capital: 100,000€
- Emission Premium: 20.000€
- Own Funds: 150,000€
To determine if this company is in crisis according to the CDTI, we performed the following calculations:
Share Capital + Issue Premium: 100,000+20,000 = 120,000€. AND, 120,000/2 = 60,000€.
The company's own funds are 150,000€, which is much higher than the capital + premium divided by 2, so, in this case, the company would not be in a crisis situation according to the CDTI criteria, since it meets the required ratio.
Necessary settings
If the company does not meet this ratio, it is necessary to evaluate if it is possible to make adjustments before submitting the accounting closing to the Registry. Some strategies may include:
- Increase Social Capital: Issue new shares or request additional contributions from partners.
- Capitalize Debts into Equity: Negotiate with creditors to convert part of the debts into share capital.
- Loss Reduction: Implement strategies to reduce costs and improve operational efficiency to reduce cumulative losses or, if possible, carry out R+D+i activations to reduce negative results.
Recommendations to avoid being in a crisis situation for CDTI
If a company does not meet the ratio stipulated by the CDTI, it is necessary to evaluate if it is possible to make adjustments before submitting the accounting closing to the Registry. These adjustments not only ensure that the requirements for obtaining funding are met, but they also reinforce the company's financial stability.
It is important to keep in mind that public entities are guided by the last accounts submitted to the Mercantile Registry, so if the 2023 Autonomous Communities present a crisis situation, the company will not be able to qualify for any aid that is governed by this criterion throughout 2024, even though the provisional accounts have resolved this situation.
Financial Strategies
- Increase Social Capital: One of the main strategies for adjusting financial ratios is to increase the company's share capital. This process can be carried out by issuing new shares. Issuing new shares involves attracting new investors through what is known as a funding round or allowing current investors to increase their participation in the company. The sale of these shares provides the company with additional funds that are incorporated directly into its own funds, improving its balance sheet and the perception of solvency before potential investors and creditors.
- Capitalize debts into equity: Another useful tactic is to convert debts into capital. This process, known as debt capitalization, involves negotiating with creditors to transform part of existing debt into social capital. Debt capitalization can be particularly effective when creditors are interested in maintaining the company's long-term viability and are willing to become shareholders. By converting debt into equity, liabilities on the balance sheet are reduced, improving the leverage ratio and increasing the company's own funds.
In addition, reducing the debt burden can free up cash flow that was being used to service the debt, allowing the company to reinvest these funds in more productive areas.
- Reduction of losses: Reducing cumulative losses is another critical approach to ensuring that the company is not considered to be in crisis. Implementing cost-reduction strategies and improving operational efficiency can help reduce cumulative losses. This process begins with a thorough review of all company processes and expenses to identify areas where cuts can be made without compromising quality or operability.
Compliance with Obligations
Keeping up to date with all tax and Social Security obligations is crucial to avoid future legal and financial problems. Delinquency in these areas can lead to penalties, late payment interest and a poor financial reputation, which could further complicate the company's situation. In addition, timely compliance with these obligations is an indicator of good financial management and corporate responsibility, improving the perception of the company before investors and financial institutions.
Continuous Assessment
Regular assessments of the balance sheet and financial statements are vital to detect any signs of financial deterioration and to take corrective action in a timely manner. These evaluations must be comprehensive and frequent, allowing the company's management to have a clear and up-to-date view of its financial situation. Internal audits and the use of financial analysis tools can help identify problems before they turn into crises, allowing the company to make informed and proactive decisions.
DNSH principle
In addition to avoiding a financial crisis situation, all actions financed under the National Recovery, Transformation and Resilience Plan (PRTR) must comply with the DNSH (Do Not Significant Harm) Principle, which implies not causing significant harm to environmental objectives according to Regulation (EU) 2020/852.
Compliance with this principle is crucial, because just as with the beginning of a company in crisis, its non-compliance could lead to the declaration of non-bankability of the actions.
As we can see, applying for CDTI aid is an excellent opportunity for companies looking to finance R&D projects. However, it is essential to ensure that the company is not in a crisis situation according to the established criteria. Reviewing and adjusting balance sheet items, keeping tax and Social Security obligations up to date, and complying with the DNSH Principle are fundamental steps to ensure eligibility and success in obtaining these grants.
