Since 25 September 2020 businesses applying for the Coronavirus Business Interruption Loan Scheme (CBILS) or Coronavirus Large Business Interruption Loan Scheme (CLBILS) have benefited from greater flexibility on the assessment of whether or not their business is an ‘undertaking in difficulty’ for the purposes of the schemes. This change is likely to benefit private equity-backed companies in particular.

'Undertakings in difficulty'

The detailed guidance as to which businesses are 'undertakings in difficulty' is here. Businesses will meet the criteria if they:

  • have accumulated losses greater than half of their share capital in their last annual accounts (for limited companies)
  • have entered into collective insolvency proceedings
  • have previously received rescue aid and have not yet reimbursed the loan or terminated the guarantee, or are still under a restructuring plan
  • have failed to meet both the required book debt to equity and EBITDA interest coverage ratios for the previous two years

What has changed?

To be eligible for these schemes, businesses previously had to demonstrate that they were not an ‘undertaking in difficulty’ (a requirement under EU State aid law) as at 31 December 2019.

New guidance allows for the ‘undertaking in difficulty’ assessment to be determined at the date of application for a scheme facility (and not as at 31 December 2019). This means that a business that was an ‘undertaking in difficulty’ on 31 December 2019 but, at the date of application for a scheme facility, is no longer an ‘undertaking in difficulty’ will now (in principle) be eligible for the scheme.

The 'undertaking in difficulty' test has already been relaxed for CBILS applicants. As we discussed here, since 30 July 2020 businesses that have fewer than 50 employees and less than £9million in annual turnover and/or annual balance sheet total are not treated as undertakings in difficulty if their accumulated losses exceed half of their share capital.

Accumulated losses

Notwithstanding the July change for CBILS, one limb of the undertaking in difficulty test which has continued to prove a CBILS/CLBILS access barrier for many larger private equity portfolio companies was the requirement that they did not have accumulated losses greater than half of their share capital in their last annual accounts.

With their high debt to equity ratio structures, significant numbers of these businesses have been unable to tap into the finance schemes even where they had been performing strongly before the Covid-19 pandemic. For these otherwise operationally viable private equity-backed companies their high balance sheet debt levels alone were bringing them within the 'undertaking in difficulty' criteria.

Restructuring to be eligible

Businesses now have until 31 January 2021 to apply for the CBILS/CLBILS, following the announcement earlier this month that both schemes have been extended.

This extension and the change to the 'undertaking in difficulty' assessment date gives businesses the opportunity to take steps to restructure (for example, by converting loan notes into equity) in order to qualify for the schemes. Private equity-backed businesses which are otherwise operationally viable and which have previously been unable to access the CBILS/CLBILS may, after careful examination of the entirety of the schemes' rules, now consider balance sheet restructuring options in advance of the 31 January 2021 cut off for applications. Businesses thinking about restructuring to access CBILS/CLBILS should take legal and tax advice.


Lindsay Lee

Senior Associate