EIS- Companies in Financial Difficulty – New Rule from 6 April 2011

A new condition has been added which must be satisfied before an investor can qualify for the enterprise investment scheme (EIS). It has been introduced to comply with the general principle of EU law that says there should not be state aid for businesses in difficulty.

The new EIS condition is that the company issuing the shares must not be "in difficulty" when the EIS investment is made. A company will be regarded as "in difficulty" where it is reasonable to assume that it would be regarded as a firm in difficulty for the purposes of the "2004 Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty".

The 2004 Community Guidelines specify that a company is in difficulty:

1. If it is in formal insolvency proceedings; or

2. 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.

They go further by saying a company may still be considered to be in difficulty where the usual signs of a firm being in difficulty are present, such as: increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges and falling or nil net asset value.

It remains to be seen how the 2004 Community Guidelines will be interpreted if HM Revenue & Customs decide to take an EIS case on the "in difficulty" point.

The new condition only applies to investments made on or after 6 April 2011. If there is any doubt about an imminent EIS investment, making it before that date will avoid anxiety over whether or not the company is "in difficulty".

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.