CMS Expert Guide to cash pooling in Montenegro

a) Intro 

No specific legislation regulating cash pooling and cash pooling arrangements exists in Montenegro. Since cash pooling is not a concept recognized by the Montenegrin statutory framework, cash pooling arrangements should comply with general corporate and banking regulations. Cash pooling is also not a widely used financing method in Montenegro. 

Central Bank of Montenegro can, for the purpose of controlling and monitoring cash flows and dealings of banking institutions and other entities, proclaim specific measures and other obligations as well as publish provided information and data. Further, if cash flows seriously endanger or are threatening to jeopardize the monetary policy or financial position of Montenegro, the Central bank of Montenegro can import protective measure. For example, it can limit payments based on any capital operation, ban loaning (providing as well as obtaining the loan), guarantees, and warrants, etc. 

b) Social interest and due diligence

Managing directors, directors, members of the supervisory board, members of the managing board, legal representatives, procurators, auditors, and liquidation managers owe a general duty of care and loyalty to the company, and they are subject to corresponding liability for breach of any of those duties. They are primarily required to perform their duties with the care of prudent businessmen and in good faith, with the reasonable belief that their actions are in the best interest of a Company. These obligations also relate to the shareholders of a company. In certain situations, under the Law on Companies of Montenegro, there would be no liability for the damages inflicted on a company, primarily, if it was believed that those actions were indeed in the best interest of a company.  

The primary obligation of the shareholders and the company’s duly diligent directors (the same applies to all other persons subject to the duty of care) is to prevent the company from becoming insolvent. Consequently, the concern of the shareholders and directors is that an inherent risk in cash pooling is the insolvency of one participant threatening the solvency of all other participants.  

Under the Company Law of Montenegro, directors have a duty to perform their role with care and due diligence, and in line with the provisions of Company Law and/or the company's constitution. Failure to do so may make directors liable for damages. In the context of cash pools, due care and diligence may require that the director ensures his/her company is able to seek repayment of the funds contributed and/or is able to benefit from partaking in the arrangement through, for example, preferential interest rates or easy access to liquid finance.

c) Shareholder’s loan provisions

the duty of care or other persons that are subject to the duty of care (or their related persons) are deemed to be “transactions involving a personal interest.” Therefore, transactions involving a conflict of interest require the approval of the competent corporate body. Failure to comply with this requirement will render the cash pooling agreement between the conflicting parties null and void.  

However, in court proceedings and if proved that the agreement, entered without the appropriate approval, is beneficial (to the company), a “fairness opinion” on the effects of the conflicted cash pooling agreement, delivered by a reputable auditor, might be considered as the required proof. Further, it is also possible to prove in the court proceedings that one did not have the knowledge nor were obligated to have the knowledge that conclusion of the agreement and/or legal actions had any personal interest involved.

d) Liquidity protection

The Law on Companies of Montenegro provides that if a shareholder is stepping out of the company, shareholder is obligated to provide a notification to the company, in the timeframe regulated by the provisions of the law. The assembly is equipped with the power to rule on a request made by shareholder. If the request is denied, a shareholder could initiate court proceedings so the court could decide on its request. The court is under obligation to consider the liquidity of the company and is prevented from making any rulings which could negatively impact the liquidity of the company. 

Directors have a duty to act with due care and diligence in order to keep the company solvent. In the context of cash pooling, this may mean the directors of the parent company ought not to draw on a subsidiary’s cash if to do so would put the subsidiary in a state of insolvency. Similarly, directors ought to have regard to the consequences that joining a cash pool would have on their company’s solvency. 

Directors owe their duties first and foremost to the company. They are to put their company’s success and interests above those of the group. Under the Company Law of Montenegro, if the company shows new losses that surpass certain amount of the value of its assets, or the share capital, the directors must, without delay, prepare a written report and call a general meeting of the shareholders.

e) Hidden distribution of profits

The distribution of profits in a company is primarily regulated by the provisions of the Law on Companies of Montenegro. The law states that if the profits have been distributed contrary to the structure of ownership in the company, the shareholder is provided with the option to require that the company buys its shares. To use this right, the shareholder must provide the company with a notification of its intention. There is also a possibility of initiating court proceedings if the shareholder is not satisfied with the company's decision upon the submitted request. 

There are three types of hidden profit distribution. Namely:

• Provision of services or goods to shareholders or to their related parties at terms below the market ones;
• Application of lower interest rate than the market rate upon the provision of loans to the above persons;
• Purchases from the above persons at terms which exceed market ones.

Hidden profit distributions make up part of the annual corporate income tax (CIT).

f) Insolvency proceedings – contestation of transactions

According to the Law on Companies, insolvency proceedings can be voluntary and involuntary. Provisions of the law regulating bankruptcy proceedings are applied to the insolvency proceedings.

Under the Law on Bankruptcy, any legal action taken by the debtor before the insolvency proceedings have commenced could be contested, if those actions were negatively impacting the equal treatment of creditors or creating damage to the creditors, as well as any legal action and other legal affairs which position certain creditors in an unequal and better position than the others. Failure to conclude agreements or perform legal action is also considered equal to active behaviour of a company, also available for contestation. If the creditor has been provided with the security or settlement to which the creditor was not entitled to or was entitled but not in the manner that the creditor had sought such a settlement, it could be contested if taken within the timeframe provided by the Law. 

Some legal actions do not directly damage the creditors or create the unequal treatment of the creditors. Therefore, the law allows that actions which have an indirect effect on the position of creditors can also be contested. 

a) Intro 

As a general rule, the company’s directors and shareholders should ensure that the company does not become insolvent or fail to maintain the minimum capital requirements because of the cash pool arrangement. 

b) Liability of directors

Criminal liability

The law imposes criminal liability on a director who causes the insolvency of a company or causes damage to the company for his failure to comply with relevant laws, constitutional documents (of the company), and evident negligence in discharging his duties. Accordingly, any intra-group borrowing must not prejudice the interests of minority shareholders and creditors, and if it does, the director risks criminal liability. To prevent this, the borrowing must be concluded on an arm’s length basis (i.e., subject to standard market conditions) without causing any insolvency issues to the cash pooling participant.

Civil liability

Under the Montenegrin Companies Act, both the company’s shareholders, members of the supervisory board, and/or directors may be liable to the company/minority shareholders for damage the company suffers because of a breach of corporate legislation. Therefore, it is important that directors implement cash pooling arrangements with due adherence to the minimum capital requirements and relevant corporate approvals.

c) Liability of shareholders

Piercing of the corporate veil

The Companies Act of Montenegro provides for liability of the company’s shareholders if they abuse the company. The company is deemed to have been abused, especially if the shareholder: 

1. uses the company to achieve a goal which is prohibited; 
2. uses or disposes of the company’s assets as if they were his/her personal assets; 
3. uses the company or its assets in order to cause damage to the company’s creditors;
4. to reduce the company’s assets procures personal gain or gain for third parties, although the person has been aware or must have been aware that the company would not be able to fulfil its obligations. In such an instance, the company’s shareholders share a joint, several and unlimited liability for the unsatisfied debts of the company. 

Civil liability

Under the Montenegrin Companies Act, both the company’s shareholders, members of the supervisory board, and/or directors may be liable to the company/minority shareholders for damage the company suffers because of a breach of corporate legislation. Therefore, it is important that directors implement cash pooling arrangements with due adherence to the minimum capital requirements and relevant corporate approvals.

a) Intro 

Apart from the obligations and liabilities imposed on directors and shareholders with the purpose of reducing liability risks, law imposes a structure whose primary goal is to further reduce liability risks. One of the possible ways of securing the risk is a facility agreement and warrant provided by the bank. When it comes to the cash pooling agreement, as previously stated, there are no specific provisions in the law since the cash polling agreements are not frequent in Montenegrin law. Still, there are certain restrictions imposed by corporate law and banking regulations. 

b) Corporate power

Montenegrin Companies Act provides that the Shareholders and directors are primarily required to perform their duties in good faith, with the care of a prudent businessman, and in a reasonable belief that they are acting in the company’s best interests. The primary obligation is to prevent the company from becoming insolvent, therefore, the concern of the shareholders and directors is that an inherent risk in cash pooling is the insolvency of one participant threatening the solvency of all other participants. In addition, certain transactions undertaken by a company up to five years prior to the commencement of insolvency proceedings may be challenged if they were detrimental to creditors. If the transaction is annulled, the parent will have to pay back the sum representing the withdrawal.

c) Cash pooling agreement

As it was stated above, no specific provisions regulate cash pooling in Montenegro, therefor, cash pooling arrangements should comply with general corporate and banking regulations. As cash pooling is not as frequent financing method in Montenegro, only number of Montenegrin banks is offering national cash pooling arrangements. 

Transactions between a company and its shareholders who are subject to the duty of care or other persons that are subject to the duty of care (or their related persons) are deemed to be “transactions involving a personal interest”. Transactions involving a conflict of interest require the approval of the competent corporate body. Failure to comply with this requirement will render the cash pooling agreement between the conflicting parties null and void. However, if in court proceedings it can be proved that the agreement, entered without the appropriate approval of non-conflicted board members / shareholders, is beneficial (to the company), a “fairness opinion” on the effects of the conflicted cash pooling agreement, delivered by a reputable auditor, might be considered as the proof required under the Montenegrin Companies Act.

d) Facility agreement

Apart from the definition of a facility agreement, the Law on Obligations provides that facility agreement must be concluded in writing and provide clear and precise information about the amount of credit, as well as the conditions of lending, using, and returning the credit. Termination of the facility agreement is also regulated by law, as well as the waiver of the contract before the determined deadline. The Law on Obligations’ provisions also regulate several types of facility agreements, namely facility agreement based upon the collateral of securities, credential, and bank guarantee.

e) Guarantee

The Law on Obligations regulates the warrant given by the bank. As stated by the provisions, banks are obligated to, in the case that a third party does not fulfil its liabilities towards the warranty recipient, settle its obligations towards a third party, if all the requirements listed in the warrant are fulfilled. Bank settles the obligation in monetary value, even if the warrant secures non-cash liability.  It is possible that other bank corroborates the obligation arising from the warrant, in that event, warrantee can impose its requests as stated in the warrant to both bank which has issued, as well as to the bank which has corroborated the warrant. What is also possible is to transfer the rights from the warrant to a third party by a warrantee, but only in the event of transferring of the warranty secured outstanding debts to a third party, as well as transferring its obligations to a third party, existing in connection to a outstanding debt. One more subject is covered with the provision of a relevant law, which is a possibility that a warrant contains a non-objection clause. In that event the bank is disabled to make any objections towards the warrantee.

Montenegro does not have any tax provision specifically regulating cash pooling. However, if pool members are considered related parties for corporate income tax purposes, the transfer pricing requirements should be observed. If interest rates are not by the arm’s length principle, this may result in a subsequent adjustment of the pool member’s corporate income tax base.