Cash Pooling

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 credit consumption.

In this way, only one balance is obtained for each bank with which we operate, which makes it easier for the financial department to control the settlement of interest. The fewer banks operate and the fewer accounts there are, the better.

There are other modalities such as the conceptual cash pool (where there are no account sweeps, and what is generated are net positions), the overnight cash pool (known as Cinderella or one-day loans), or the conditional cash pool (this one of the more complex systems, since it goes from a radial cash pool system to a spider web system, where all the accounts are connected to each other).

In a generic way, the advantages of cash pooling could be summarized as follows:

Reduction of bank costs

Reduction of financing needs by offsetting debtor and creditor positions avoiding over-financing

Optimization of financial resources: greater availability of funds is avoided with dispersed balances

Greater bargaining power with the bank

Greater retribution of the treasury

Better risk anticipation

Improvement in risk management due to the change and the interest rate. At an international level, this is more complex due to the different currencies and banking, legal and fiscal regulations. The creation of the Economic and Monetary Union and the introduction of euro notes and coins have been decisive for the existence of a single market in the European Union. Taking SEPA (Single Euro Payments Area) as its source, “Since 2002, in all countries of the eurozone it has been possible to make cash payments in the same currency with the convenience and simplicity with which payments were made in the past, in the respective national currencies. However, in the area of ​​payments not made in cash, a situation of fragmentation remains, which ultimately hinders the achievement of that objective.” For this reason, to avoid this fragmentation of electronic payments, the Single Zone of Payments in Euros, known under the acronym SEPA, came into effect. As established by SEPA, “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.”

When designing cash pooling, the financial department will have to take into account aspects such as the legal and fiscal regulations applicable in the country of origin and destination of the funds (revision of the regulations required by the Bank of Spain, withholdings, double international taxes, the treatment of inter-company loan interest, etc.). This design also influences no less important issues such as, among others, the choice of the personnel that directs this management, the limitation of its powers, the number of banks and accounts and banking communications.

The competence to organize a cash pooling system corresponds to the administrators of the participating companies


The Legal Risks of Cash Pooling


The legal problems of cash pooling are found in Company Law and Bankruptcy Law. In the corporate sphere, cash pooling misses certain expropriation risks to the minority shareholders of the subsidiaries by the group’s parent company. Depending on the conditions of cash pooling, a subsidiary may be adversely affected by the group, either because the risk of its activity is increased by having a good part of its cash flow with the group, or because the conditions in which it lends its treasury to other group companies are not balanced. In this regard, it is worth mentioning Sentence 2/2014 of the Provincial Court of Barcelona, ​​dated January 20, on the right of information of the partners on the centralized management of the treasury.

On the other hand, the creditors of the subsidiary companies may also be affected for similar reasons when they see an increase in the level of risk of their loans or have difficulties in collecting them if the cash pooling system empties the liquidity of the debtor subsidiary. Faced with these actions, the minority shareholders and creditors of the subsidiaries may challenge certain agreements (approval of the annual accounts, exercise of the right of information regarding the cash pooling contract or the challenge to the conclusion of the contract by the administrators).

Likewise, the practice of cash pooling may entail the responsibility of the administrators of a subsidiary for the damages that derive from this because they have organised or executed the cash pooling contract. In these cases, the application of the doctrine of lifting the veil – confusion of assets – and other doctrines and rules on fraud of creditors, are not put at risk if the contract has not been concluded and, above all, has not been executed correctly maintaining the accounting and ensuring that the solvency of the subsidiaries that, due to their business or economic situation, maintain creditor positions vis-à-vis other group companies.

Taking as example the Sentence 00169/2014 of the Commercial Court No. 12 of Madrid on insolvency incident arising from the Qualification Section no. 734/2010, being the claimant the Insolvency Administration of VIAJES CRISOL, S.A.U. and the Fiscal Ministry, in this specific case, “it was not disputed that the so-called MARSANS GROUP had a centralized cash pool system (cash pooling), which was not used to provide the necessary resources to the companies that made up the MARSANS GROUP, but it was destined for companies that were not part of it.

(…) a special characteristic of all the companies of the MARSANS GROUP was that the administration was taken from VIAJES MARSANS SA, as well as the consideration that the management of payments to suppliers and collections to customers was coordinated from the group’s parent company, VIAJES MARSANS SA ., and the debit and credit balances resulting from these operations were supported through intra-group current accounts in which the Treasury funds were centralized (Cash Pooling), the voluntary omission of the precise provision, and the conscious alteration of the image that the annual accounts of VIAJES CRISOL SAU conferred on third parties.

In line with punishable insolvencies, the Sentence No 42/2014 of April 2, 2014 of the Court of First Instance and Instruction No. 1 of Cáceres, declares the ineffectiveness, due to the effect of the termination, of the compensations made in the businesses rescinded (using cash pooling):

“(…) Therefore, months before the application for pre-contest and months before the tender (which was declared at the beginning of 2013) through this dividend distribution agreement, the following occurs: a new obligation is created (increase in liabilities) ) that previously did not exist, in spite of the insolvency situation and is compensated with existing (active) credits, with partners, that is, with persons specially linked to the bankrupt party; liquid credits are due. One of the extremes that is considered proven is the one referred by the assistant delegate in the act of the hearing, and who has not even been questioned: that Canalejas Lojoga (which he qualified as the head of the group of companies of the Octavio Jacobo brothers) It was at that time “hyper-solvent”, that is, it had enough capacity to pay in cash the debts that were pending with the bankrupt party, debts that exceeded one million euros before cash pooling, as accounting has shown and that nobody has discussed.

The main reason for discussing the company’s accounts was the exact date on which the cash pooling accounting notes discussed were made. This debate is trivial, notwithstanding that it could have other relevance in other sections of the contest, but not here, because the debate focuses on the rescindable character, for detriment, of these notes, or if its annulment can be introduced in this incident; but, it is not relevant to debate if there is a simulation of their dates. Even if the dates of these notes are correct, it would be possible, in the abstract, to examine their inefficiency if they generate damages to the mass.

But in this case dividend distribution and compensation go hand in hand and one cannot be understood without the other (in fact, in the contested agreement itself, it is already agreed to compensate the distribution of dividends with credits). It is not compensation for existing credits, but the creation of a credit to compensate later. In this way, the assets held by the bankrupt party against the partners, which were receivables and liquidated in the accounts, have been extinguished, with dividends distributed that, on their own – when agreed upon in a situation of insolvency – hurt the estate, they are rescindable. For this reason, it is understood that this legal business was placed in the middle of the cash pooling system, so that those related persons did not have to face those credits, with difficult possibilities of achieving their own satisfaction.

These are circumstances that allow us to conclude the damage to the estate: the existence of insolvency, the organisation of a sale of shares with a manifestly unrealistic price, and that the stipulated price is stated in order to carry out cash pooling; this is done so that before the tender the companies more or less linked to the insolvent company are not debtors and creditors with a worse situation regarding the collection of their loans, with respect to other companies. Therefore, this business must be rescinded.

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