Cash pooling enables corporate groups to minimise expenditure incurred in connection with banking facilities through economies of scale.
Under a cash pooling arrangement, entities within a corporate group regularly transfer their surplus cash to a single bank account (the “master account”) and, in return, may draw on the funds in that account to satisfy their own cash flow requirements from time to time.
The master account is usually held by the parent company or by a “treasury company” established specifically for this purpose. Depending on the type of cash pooling arrangement, the participating entities may transfer either their entire cash surplus (“zero balancing”) or cash exceeding a certain surplus level (“target balancing”).
In general, all entities participating in the cash pooling arrangement will be liable for any negative balance on the master account, irrespective of the amount they have contributed.
Transfers and draw-downs of funds to and from the master account by the participating companies have the nature of the granting and repayment of intra-group loans.
In addition to physical cash pooling, there is also “notional” (or “virtual”) cash pooling. This does not involve the physical transfer of funds, but rather the set-off of balances of different companies within the group, so that the bank charges interest on the group’s net cash balance. This optimises the position of the group as regards interest payments, but does not achieve optimal allocation of liquid funds between the group members.
Notional cash pooling will not result in the creation of intra-group loans, since funds are not physically transferred. As such, many of the risks outlined in this brochure do not apply to a purely notional cash pooling arrangement.
In practice, however, a notional cash pooling arrangement will frequently involve the granting of cross-guarantees and security by the participants to the bank, in order to maximise the available overdraft facility. To this extent, many of the risks outlined in this brochure could be relevant, even if the cash pooling arrangement is predominantly notional in nature.
The specific structure of individual cash pooling arrangements can vary. For example, transfers to the master account may be undertaken by each participating group member individually or may instead be undertaken automatically by the bank on the basis of a power of attorney given by the relevant group company.
In addition to the facility agreement with the respective bank, each participating group company will usually enter into a cash pooling agreement. These agreements must be carefully structured in order to minimise the risks of civil or criminal liability of the participating group companies and their officers. Tax issues must also be carefully considered when structuring cash pooling agreements.
This guide provides an overview of the risks of civil / criminal liability associated with cash pooling in the various CMS jurisdictions and discusses the various means by which such liability may be avoided.
