CMS Expert Guide to cash pooling in Norway

a) Intro 

Generally speaking, Norwegian law permits most types of cash pooling arrangements whether administered by a bank or established in-house. However, there is no legal framework specifically governing such arrangements. The establishment and operation of a cash pooling system are instead subject to general principles of contract law as well as legislation applying generally to contracts and banking arrangements. 

Most large Norwegian banks will offer cash pooling arrangements to their corporate customers. In addition to offering zero balancing, it is common to arrange the cash pool with a single legal master account held by the parent where subsidiaries have access through virtual sub-accounts. In the latter structure, the bank has a claim against the master account holder only and the net postings from time to time by a subsidiary in its sub-account become an intra-group receivable between that subsidiary and the master account holder.

The provision of security (including cross-stream guarantees and security over bank accounts and claims) and lending within a corporate group as necessitated by many cash pooling arrangements, have few restrictions. Set-off rights are also well protected under Norwegian law and will under most circumstances survive the bankruptcy of participants in a cash pool. All in all, Norwegian law offers both flexibility and certainty to operators, lenders and participants in cash pooling arrangements. Such arrangements have indeed become an important tool in the effective liquidity management of a large number of Norwegian companies.

Partly due to the generality of applicable rules, however, prospective participants in a cash pooling arrangement would be well advised to consider certain company law related limitations, including implications for its capital structure, autonomy and risk of liability for its management and directors. Certain tax related matters should also be taken into consideration in cash pooling arrangements involving more than one company.

b) Social interest and due diligence

A Norwegian limited company is represented by its board of directors, which is ultimately responsible for the operations of the company, including its participation in a cash pooling arrangement. Management may hold sufficient powers to commit the company to participate in a cash pool, but the board must ensure that the company is organised and managed in a manner which ensures that sufficient due diligence is observed when entering into contractual arrangements.

According to the Norwegian Accounting Act, large companies are required to include an account for social responsibilities in their annual reports. Companies falling within the scope of the Norwegian Transparency Act also have a duty to carry out due diligence and embed responsible business conduct in the enterprise’s policies. This includes identifying and assessing actual and potential adverse impacts on fundamental human rights and decent working conditions that the enterprise has either caused or contributed toward, or that are directly linked with the enterprise's operations, products or services via the supply chain or business partners.

Further, social interests and other special interests may be required to be taken into consideration under a company’s articles of association or resolutions of the general meeting.

c) Shareholder’s loan provisions

As a general rule under Norwegian law, only entities with a valid banking licence or equivalent (issued in Norway or passported from another eligible jurisdiction) may lend money on a regular basis. One exception from this rule is loans (and guarantees) provided within the same corporate group. This exemption permits intra-group loans occurring in most cash pooling arrangements.

d) Liquidity protection

A Norwegian limited company must at all times maintain a level of liquidity which is adequate taking into consideration the risk and scope of operations of the company. The effects of making available its operating cash flow to other members of the group in a physical cash pooling arrangement should be considered in light of such obligation. Depending on the cash position of other group members, also considering seasonal variations, participation in a group cash pool may have both positive and negative implications for cash management of the company. 

The company should be particular aware in cash pooling arrangements where the group's cash management is centrally orchestrated. Such central management often limits the company's own ability to control cash flows, and the board must ensure that agreements and arrangements are in place to reduce the liquidity risk of the company and to maintain an appropriate control at company level. 

e) Hidden distribution of profits

Distributions of profits from a Norwegian limited company are strictly regulated under Norwegian company law and can only be made on the basis of the most recently approved annual accounts or audited interim accounts. Certain transactions benefiting the shareholders may be reclassified as dividends. In the context of a cash pooling arrangement, a hidden distribution could have its basis in, for instance, an erroneous intra-group interest level or an allocation of group costs to the wrong entity. Such hidden distributions may become subject to claims for restitution or even criminal liability in qualified cases.

It should be noted, however, that providing up-stream and cross-stream security in a cash pooling arrangement within a group of companies is legal and will not be considered a distribution of profits provided pricing and other terms are made on arm's length basis. Also, if the ultimate parent company of the corporate group is not a Norwegian entity, the liquidity made available in the cash pool must be for the "economic interest" of the group. For all practical purposes, this means cash and security should not be made available for, or support, dividend payments or other distributions to shareholders in the ultimate parent.

f) Insolvency proceedings – contestation of transactions

Ordinary transactions in a cash pool as well as cash sweeps (such as for zero balancing arrangements) will normally not be contested by a Norwegian administrator in insolvency proceedings. Extraordinary payments, however, may be contested on an objective basis if made up to three months prior the opening of insolvency proceedings and up to two years prior to the opening of proceedings if evidence cannot be provided that the company was undoubtedly solvent at the time of payment. Further, transactions made up to ten years prior to the opening of insolvency proceedings can in principle be contested on a subjective basis, but such rule is unlikely to be invoked in the context of cash pooling arrangements except where there is evidence of fraud or other serious offences.

a) Intro

Cash pooling may be an invaluable tool for the financial management of a group of companies. As such, it forms part of the prudent administration and utilisation of liquidity in the day-to-day business of a wide range of companies in Norway today. However, the flexibility and opportunities offered by such cash management systems across corporate entities also commit boards and management to take active measure to ensure that their implementation and operation do not breach any laws or regulations or fiduciary duties.

b) Liability of directors

Members of the board (or other persons) may be held liable for financial losses and other damage incurred by a company due to their intentional or negligent behaviour (including contributory negligence). Members of the board and other persons in leading positions may also be held criminally liable for causing a breach of the Norwegian Limited Liability Companies Acts and may be fined or (in qualified cases) imprisoned for up to one year.

Notably in this respect, board members may be held liable in a bankruptcy if the company, by becoming a participant in a group cash pooling arrangement, has guaranteed the obligations of another insolvent group company or has undertaken a risk or incurred costs which significantly outweighed the benefits of the company's participation. This is of particular concern in situations where the wider group, or a part of the wider group, experiences financial issues and money is moved between financially healthy group members and loss-making group members.

Members of the board have a personal responsibility to the company they represent and may be held liable for losses incurred by the company through placing control over the cash pool with another group member (such as a central financial unit in the group). In such cases, the board must take appropriate measures to limit the risk of losses occurring at company level.

c) Liability of shareholders

A shareholder (including those companies who are shareholders of other members of the group) can be held liable for losses caused to a company in the same manner as members of the board. This should be taken into consideration by the master account holder (in cash pooling arrangements which include balancing of participating accounts) which holds a particular responsibility for cash management of the group.

a) Intro

Structuring of a cash pooling arrangement is key to ensuring an efficient cash management of a group of companies. However, it must also take into consideration the autonomy and financial interests of the group members in order to reduce the risk of transactions which may be illegal or otherwise could incur liability on the participating entities or their respective directors or management.

b) Corporate power

Generally speaking, participation in a cash pooling arrangement lies within the management of a Norwegian company unless its articles of association restrict or prohibit such participation.

In most cases no shareholder resolutions are required since there are applicable exceptions under Norwegian company law for intra-group transactions, including the provision of loans and guarantees within a corporate group.

Since participation in a cash pool could have significant implications for the liquidity of a company, board level involvement is expected in most cases. It is recommended to document the approval of a board in the minutes of a board meeting assuring that management receives adequate powers to enter into required agreements and implement the system.

Agreements relating to a cash pooling arrangement can be signed on behalf of the participating company by persons with registered signatory powers or persons given authority by the board. If the agreements are considered to fall within the day-to-day management of the company, the managing director can sign on behalf of the company.

c) Cash pooling documentation

Cash pooling documentation may consist of little more than a standardised cash pooling agreement with a bank, but can also comprise a wider documentation package which, for instance, could be related to a credit facility offered by the bank or an intra-group cash management system.

However complex the documentation may be, there are some general considerations that should be made in order to limit the liability risk of the individual participants and their respective directors and officers.

Information

Cash pooling arrangements lie at the core of a group-wide cash management system with one group member, usually the parent or a separate finance company, managing and monitoring cash flows in and out of individual accounts. This cash pool leader (or master account holder) is more often than not assisted by cash management services offered by the account bank. In either case, information flows primarily go through the cash pool leader both for the purposes of cash flow control and for acting towards the account bank on behalf of all cash pool participants.

Access to information is not, however, vital just to the cash pool leader, but also to other participants even if they have appointed the cash pool leader to act on their behalf. We therefore recommend that provisions are made to ensure transparency of the cash pooling system within the group. Information should be exchanged with the participants on a frequent basis and should include financial statements, interim statements, quarterly reports, budget calculations and plan calculations (including ongoing liquidity planning). Furthermore, it makes sense for the cash pool leader to frequently provide information about the liquid funds available on the master accounts and a liquidity plan for the cash pool leader, taking account of the liquidity requirements of all subsidiaries in the cash pool for the following 12 months (or such longer period as is appropriate for the forecasting of the group).

Termination and repayment

Each participant should be able to take immediate corrective steps to respond to significant (adverse) financial or operational changes within the cash pooling group. One key element is the ability to unilaterally terminate its participation in the cash pool at any time with immediate effect and without having to prove a valid reason for the termination. In practice it may prove difficult to execute such termination for a company which is operationally integrated with the wider group. It is nevertheless important that such termination rights are available to ensure the participant's autonomy and to avoid the risk of a breach of law or regulations and to limit the risk of surplus liquidity escaping to the detriment of the creditors and other stakeholders of the participant in a precarious situation.

The right of termination should be supplemented by a right to immediately being repaid the net deposited amount by the terminating participant. Repayment can be combined with right of set-off of claims.

To the extent there is both a cash pooling agreement with a bank and an intra-group cash pooling or cash management agreement, termination and repayment rights should be aligned to the extent possible.

Joint and several liability and security

External cash pooling agreements frequently provide that the participating group companies are jointly and severally liable for any negative balance on the master account(s) and require them to provide security, including over all accounts of each of the group’s companies with the bank. If possible, the participating companies should avoid such joint and several liability and security or limit the maximum liability/secured amount although we appreciate that this may only be feasible for companies with a strong bargaining position towards the cash pooling provider (which is invariably a bank). The liability of a company should in any case be limited to the extent it otherwise would violate relevant company law.

In the case of physical cash pooling, interest may be payable on sums lent and borrowed by the participating companies. Such interest payments will be subject to the usual tax rules regarding interest – in particular, taxation of interest earned on sums lent, deductibility of interest incurred on sums borrowed under interest deduction restrictions ("max 25% of EBITDA"), thin capitalisation issues and withholding tax on interest paid to non-EU recipients located in low-tax countries. In a Norwegian Court of Appeal ruling from 2010, the Court found that a Norwegian E&P company participating in a group cash pool arrangement was not sufficiently compensated for by the benefits it created for the other cash pool members, as it was consistently cash positive and interest rate was equal for credit and debit positions. It remains uncertain if the Court would have reached the same conclusion based on applying the more recent 2020 OECD transfer pricing guidelines for cash pooling.