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What is cash pooling? Pros and Cons of the “Single Box”

Cash pooling is a system by which a company or group of companies concentrates or centralizes their balances in order to obtain a global net position, either in a current account or in consumer credit.

The rule of thumb is: the fewer banks operate and the fewer accounts there are, the better. As the name suggests, since only one balance is obtained for each bank with which a company or a group of companies operate, companies can manage interest charges and the balance of accounts more effectively.

There are a few models of cash-pooling. The first is notional pooling, this means that there are no actual account sweeps, and what is generated are simply for the consideration of corporate net positions. This way of pooling incurs no interest charge from balance transference.

Picture 1: Notional Account

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Secondly there is physical cash pools, also known as Cinderella or one-day loans for its quality of having the credit and debit balance swept into one account on a daily basis in order to achieve the target balance desired. Within this category there are also zero-balancing and target balancing. Zero balancing just means that there is no balance left within the account every business day, while target balancing would have the accounts left with a pre-determined balance.

Picture 2: Physical Cash-Pool Account (Zero Balance and Target Balance)

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Furthermore, physical cash-pools can also be extended from radial cash-pool system to a spider web system, where all the accounts are connected to each other).

Benefits of Cash-Pooling

Generally, the advantages of cash-pooling could be summarized as follows:

  1. Reduction of banking costs
  2. Reduction of financing needs by offsetting debit account with credit account avoiding over-financing
  3. Optimization of financial resources: greater availability of funds is avoided with dispersed balances across accounts
  4. Greater bargaining power with banks
  5. Greater retribution of the treasury
  6. Better risk anticipation and management

Cash-pools can improve risk management effectively due to the ease of monitoring changes in interest rates. However, this is more complex at an international level due to the differences in currencies, banking processes, legal and fiscal regulations. Nevertheless, an international cash-pool can be achieved through the creations of accounts in different currencies in order to avoid loss through foreign-exchange.

Luckily, the creation of the Economic and Monetary Union and the introduction of euro notes and coins in Europe have been exponential change for the existence of a single market in the European Union. Moreover, the creation of SEPA (Single Euro Payments Area) had further improved the conduction of business in Europe. Since 2002, SEPA has been facilitating as the following, “transactions in euros made between the participating countries will be subject to a set of rules and homogeneous conditions, so they will be processed with the same ease, speed, security and efficiency that they currently are within each one of the national markets.”

Nonetheless, when designing cash-pool systems, treasuries will have to take into account aspects such as the legal and fiscal applicable regulations in the country of origin and destination of the funds (e.g. revision of the regulations as required by the Bank of Spain, withholdings, double international taxes, the treatment of inter-company loan interest, etc.). The system design should also take into consideration issues such as, if not less important, the choice of the personnel that directs its management, limitation of his/her powers, number of banks and accounts involved, and inter-bank communications.

Directors of Subsidiaries directly affect the competence of the cash-pooling system designed.

The Legal Risks of Cash Pooling

The potential legal problems of cash-pools are found in Corporate Law and Bankruptcy Law. In the corporate sphere, cash pooling could bring certain expropriation risks to the minority shareholders of the subsidiaries by the group’s parent company. Due to the reasons of, depending on the conditions of cash pooling, a subsidiary may be adversely affected by the group, either through having a major part of its cashflow diverged to the parent company, or having its funds lent to another umbrella company, both of which could affect its daily operations. In this regard, it is worth mentioning that the Sentence 2/2014 of the Provincial Court of Barcelona, ​​dated January 20, dictates on the right of information of the partners on the centralized management of the treasury.

Furthermore, the creditors of the subsidiary companies may be affected for the abovementioned reasons when they see an increasing risk of collecting their loans if the cash-pooling system sweeps the balance of the debtor subsidiary. Facing these challenges, these titular shareholder and creditors may challenge certain established agreements (e.g. the approval of annual accounts, exercising the right of information regarding the cash pooling contract or challenging the conclusion of the contract established by the administrators).

Likewise, the practice of cash pooling may entail more responsibilities for the subsidiary administrators due to the potential damages brought by the signing and executing a cash-pool contract. In these cases, the application of the doctrine of Lifting-the-Corporate-Veil as well as other doctrines and rules on fraud of creditors are not put at risk if the contract has not been concluded and has not been executed correctly, However, if a cash-pool contract maintains the accounting and ensures that the solvency of the subsidiaries that, due to their business or economic situation, maintain creditor positions vis-à-vis other group companies.

A Precedent to Consider for Cash-Pooling Risks

The Sentence 00169/2014 of the Commercial Court No. 12 of Madrid on incidental insolvency arose from the Qualification Section no. 734/2010, Administration of VIAJES CRISOL, S.A.U. v. General Attorney. Long story short, the court determined, that VIAJES CRISOL, SAU was a company, which declared insolvency, used by MARSANS GROUP for its umbrella accounts under its central cash-pool, and the pool was not used for providing resources for the company that made up the group.

In the case, the distribution of dividends with credits as compensation was already previously agreed upon in the contested agreement; and the compensation would not be with existing credits, but with credits created for future compensations. In such, the assets held by the bankrupt party from the partners, which were receivables and liquidated in the accounts, was extinguished. As well as the dividends distributed– as agreed upon in a situation of insolvency – are rescindable. For this reason, this legal business is understood as being placed in the middle of the cash pooling system, so that those related persons did not have to face the company’s credits.

In summary, the court’s decision for this case is determined by: the existence of insolvency, the organization that sells of shares with an unrealistic price, and the stating of the stipulated price in order to carry out the cash-pool. Therefore, because the subsidiary companies, that are neither debtors nor creditor, more or less linked to the insolvent company have a worse situation regarding the collection of their loans, this business must be rescinded.

[1] Image from https://www.treasury-consulting.ch/e/cashpooling.htm

[2] Ibid.

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