CMS Expert Guide to cash pooling in Slovakia

a) Intro

Cash pooling arrangements are not subject to specific legal regulation in Slovakia. However, there are a number of issues relevant to cash pooling arrangements in Slovak corporate, banking and criminal law.

b) Social interest and due diligence

The directors of a company must exercise the care and due diligence of a prudent businessman acting in good faith in the interests of the shareholders and the company’s creditors. A breach of this duty will make a director liable to the company and eventually also creditors for damages caused by his breach. This duty applies to any person in the position of the statutory body of the company as well as de facto directors or shadow directors. Therefore, the directors must weigh up the chances and risks of cash pooling with the care and diligence of a prudent businessman.

c) Shareholder loan provisions

Normally, the collection of deposits and the providing of loans in Slovakia require a company to seek a form of banking licence. However, there is an exception to this rule that, where companies are considered to be related to one other and are providing loans or deposits from their own re-sources (and not from deposits they have received from others), no licence is required. Thus, in relation to cash pooling, so long as the participants can demonstrate through clear lines of accounting that the monies contributed to the cash pool are from their own resources, the participants should not require a banking licence.

The provision of shareholder loans has to ensure (i) the compliance with the prohibition of return of capital contributions (i.e. the interest must be payable on such loans at arm's length conditions) and (ii) that the company is not under threatening insolvency including the crisis (as such loan would be then considered as performance replacing equity and may not be returned while the company is in crisis or would end in crisis).

d) Liquidity protection

Although it may be sensible for an illiquid participant to withdraw from the cash pool, its withdrawal and the return of its deposited funds may cause liquidity problems for the other participants who are relying on those returned funds. In light of this, it makes sense for the participating companies to have the right to receive up-to-date information relating to the liquidity and equity of the participating companies so that their directors can ensure that they are not over-reliant on funds sourced from any particular participant, especially one that may have solvency issues. A practical way of doing this may be for the parent company to provide monthly consolidated accounts for the entire group.

e) Hidden distribution of profits

A Slovak company may only transfer funds to its shareholders if it is a valid shareholder distribution, or is provided on arm’s length terms (e.g. subject to a market rate of interest). Thus, if an intra-group loan from a subsidiary to a parent is found not to be at arm’s length, any sums transferred to the parent will be treated as an unlawful profit distribution or illegal capital repayment. Withdrawals from the cash pool account by the parent company, and payment into it by the subsidiary, should therefore not infringe these rules.

f) Insolvency proceedings – contestation of transactions

Companies in threatening insolvency should be generally excluded from cash pooling, as it involves various risks for all participants to the cash pooling.

One risk is the prohibition of repayment of the loan or similar performance while the company is in crisis or would end in crisis. Such repayment must then be returned to the company and the directors are liable for such return. 

Another risk is based on the contestation rights of a later insolvency administrator (or a creditor if the administrator is not acting based on his motion). The insolvency administrator can challenge transactions of an insolvent company, such as payments granted to other group companies, for statutory reasons (such as preferential treatment, transactions at undervalue, intentionally curtailing creditors’ rights, acts made by the debtor within 6 months after the cancellation of insolvency if the new insolvency was declared over the debtor). The recipients must then reimburse the respective amount.

The general period for the administrator to challenge the transactions occurring as long as one year before the start of insolvency, extended to three years if the transaction was made between close/linked persons, or five years in the case of the intentional curtailing of rights. The administrator has to apply these rights within one year after the declaration of insolvency; otherwise, this right expires.

Moreover, outstanding claims of the cash pool leader against the subsidiary for loan repayment are subordinated to the other claims of the insolvency creditors in the event of insolvency of the subsidiary.

a) Intro

As noted in the introduction, many of the risks outlined in this Slovak submission 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 Slovak submission could be relevant, even if the cash pooling arrangement is predominantly notional in nature.

b) Liability of directors

The directors of a company must exercise the care and due diligence of a prudent businessman acting in good faith in the interests of the shareholders and the company’s creditors. A breach of this duty will make a director liable to the company for damages caused by his breach.

Generally speaking, the primary obligation of a duly diligent director of a Slovak company, acting in good faith, is to prevent the company from falling into insolvency. For a director, this obligation is particularly pertinent as a breach of his duty will not only make him liable to the company, but also to its creditors if they cannot seek repayment of the debts they are owed.

Consequently, the concern of a director is that an inherent risk in cash pooling is that insolvency of one participant may threaten the solvency of all the participants, exposing the directors to liability. The directors of cash pool participants will therefore need to take risk avoidance measures to protect the company. One such measure is to seek the ratification of the members of the company for the cash pooling arrangement. Under Slovak company law, directors are not liable for damages caused to the company if they are carrying out the instructions of the shareholders based on a decision of a general meeting (unless the instruction of the general meeting conflicts with legal regulations). Thus, once a cash pooling arrangement has been agreed it is advisable that the directors seek approval from the shareholders in a general meeting. However, due to the absence of any case law in this respect, it cannot be avoided that such instructions could be found inapplicable due to the conflict with law (e.g. if there were no reasoning concerning the corporate benefits and adequacy of such arrangement).

In addition, it is important that the directors of the company satisfy themselves that there is a corporate benefit deriving from the cash pooling arrangement, outweighing its risks. The directors may wish to document such a consideration in the minutes of their meetings as evidence that they have sought to fulfil their duty to act in good faith.

A director may be found guilty of the criminal offence committing several criminal offences, such as obstructing the insolvency proceeding (bankruptcy or restructuring) in case of failure to perform the statutory duties including the bankruptcy filing or preferential treatment of one creditor and failure to satisfy another creditor. Liability of shareholders.

c) Liability of shareholders

The shareholders of a company are normally liable for the obligations of the company up to the unpaid value of the shareholding which they have been obliged to contribute, as registered in the Commercial Register.  However, pursuant to a written agreement (such as a cash pooling agreement), they may agree to be jointly and severally liable. The cash pooling agreement should therefore be carefully drafted to avoid this.

Moreover, in case of the breach of prohibition on return of capital contributions and/or repayment of shareholder loans by the company in crisis, they must return all such payments back to the company eventually pay the difference between the actual payment and the payment reflecting the adequate consideration. The offset would be possible unless prohibited by insolvency law.

a) Intro

Given that cash pooling arrangements in Slovakia are not subject to explicit legal regulation, it is not possible to eliminate all legal risk. Nevertheless, the following possibilities should be considered.

b) Cash pooling agreement

It is advisable to have a cash pool agreement between the participants that clearly states the duration of the arrangement, the rate of interest payable on any sums borrowed from the fund, and including provisions that enable the participants to withdraw from the arrangement on demand. The ability to withdraw from the arrangement is, as noted above, particularly important, and it should be coupled with a right to have deposited funds returned within 24 hours. This may enable the illiquid company to recover its cash flow, whilst protecting the other participants should the withdrawer become insolvent. 

c) Facility agreement

As a general rule, the individual facility agreement entered into between the bank and the participating companies will provide that the participating companies are jointly and severally liable for any negative balance on the master account, and will require them to provide security. In addition, the standard terms and conditions used by banks in Slovakia contain provisions that create pledges on all of the accounts held with the bank by each of the participating companies. If possible, the participating companies should avoid such joint and several liability, providing security and pledge provisions. If this is not possible, the company’s liability should be restricted, at the very least, to the lesser of:

1. the actual amount of funds withdrawn from the cash pool by the company at any one time; and
2. the amount by which its net assets exceed the minimum required share capital at law

d) Guarantee

If a company that has participated in a cash pooling arrangement is sold, the seller will usually ask for an indemnity regarding potential liabilities arising from the target’s involvement in the cash pooling arrangement. One such liability (and indemnity) may be for capital maintenance matters, since the purchaser will be liable as an incoming shareholder for any payments previously made in contravention of capital maintenance provisions.

In the case of physical cash pooling, interest may be payable on intra-group borrowing 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 and the thin capitalisation rules.

Thin capitalisation rules restrict the deductible interest on related party loans to 25% of the taxpayer's EBITDA. Interest paid on loans and borrowings is otherwise not tax expenditure if the lender is a dependent in relation to the borrower.

According to Act on Income Tax Transfer Prices must comply with the arm's length principle. The arm's length principle is based on a comparison of the terms and conditions agreed in controlled transactions between related parties with the terms and conditions that would have been agreed between unrelated parties in comparable transactions under comparable circumstances. The Act on Income Tax also allows provides for the possibility to request approval of an advance pricing agreement from the Tax Authority.

Under the Slovak Foreign Exchange Act (measure number 280/2018 Coll) a Slovak company must notify the National Bank of Slovakia of all relevant data concerning foreign assets and debts if such assets or debts are, at the end of the month, higher than EUR 2M. Unlike its predecessor, this measure contains a Cash pooling definition that addresses transfers of assets between companies in a group, which are defined as short-term loans. If the cash pooling arrangement operates on a cross-border basis, the Slovak company may therefore have to make a report. In a cash pooling arrangement, such an offense is likely to be committed if, for example, the parent company is in need of liquidity and demands that a subsidiary contribute funds to the cash pool for its withdrawal. If the effect of such a transaction is to cause the subsidiary to have its own liquidity problems, resulting in insolvency, the directors of the subsidiary who actively follow through on the parent company’s demands may be guilty of fraudulent insolvency.