Cash pooling is a staple of corporate treasurers as an efficient way to allocate liquidity and reduce financing costs within a group of companies. Despite its commercial importance, neither Austrian statutory law nor the Austrian Supreme Court has provided any guidance as to whether cash pooling is permissible under Austrian law – in particular whether it is compatible with Austria’s strict capital maintenance laws.
Under capital maintenance law, transactions between a company and its shareholders and sister companies must either comply with a strict arm’s length test or be otherwise commercially justified. This test is not provided for in statutory law but has been established by the courts, which continue to specify various aspects of the test. Any transaction that fails to comply with the test is null and void between the company and its shareholder or sister company, and, in certain circumstances, against a third party; for example, the security provided by the target for an acquisition financing is often considered void to the detriment of the financing bank as well.
Given these strict rules, the legality of cash pooling arrangements has been the subject of much debate in Austria. The Supreme Court has now issued a long-awaited first decision on the matter. Unfortunately, it provides less guidance than it seems at first glance.
In the case underlying the Court’s decision, the insolvency administrator of an Austrian company (the “Participant”) sued a bank in connection with a notional cash pooling implemented between the Participant, its holding company, and several other group members.
As the cash pool was a notional pool there was no automatic cash sweep. However, the holding company had to ensure that no participating account was in overdraft at the end of any one day. Thus, while the text of the decision is ambiguous in this regard, there may have been certain trans-fers between the members of the cash pool. In addition, the members pledged any surplus on their accounts to the bank as security for any debt of another member of the cash pool.
Unbeknownst to the bank, the holding company instructed the Participant to provide any excess cash flow to the cash pool.
The group’s financial situation deteriorated, the bank terminated the cash pool arrangement and enforced its security over the Participant’s bank account. The Participant filed for insolvency and the insolvency administrator filed a claim against the bank for repayment of the funds obtained by the enforcement. The administrator argued that the cash pooling arrangement, including the pro-vision on security over bank accounts, violated Austrian capital maintenance rules and therefore was also null and void towards the Bank.
The Supreme Court concluded that: (i) although cash pooling arrangements can never meet the arm’s length test (as no company would enter into such an arrangement with a non-group com-pany), they may be commercially justified; (ii) notional cash pooling is less controversial than ac-tual cash pooling but may still violate capital maintenance rules; (iii) providing security for obliga-tions of group companies is critical under capital maintenance rules, but can be commercially justi-fied; (iv) the fact that the Participant was, at least vis-à-vis the bank, allowed to transfer funds to accounts held with other banks was an argument for the legality of the cash pool; (v) it is vital for a member of a cash pool to have information rights to be able to evaluate the financial situation of other cash pool members and the right to unilaterally terminate the cash pool; and (vi) the fact that the Participant initially received financing from the cash pool suggested that there was a commercial justification to join the cash pool.
In the end, the Supreme Court did not decide on the admissibility of the specific cash pool ar-rangement but only on the standard of care applicable to the bank as a “third party.” According to its decision, the bank did not have to suspect a breach of Austrian capital maintenance law and did not act with gross negligence when accepting the security. The bank was allowed to assume that there was a commercial justification for granting the security.
The Supreme Court’s decision reiterates that third parties – in particular banks – must be grossly negligent in order to face consequences under capital maintenance law. Alas, the decision gives hardly any guidance on the legality of cash pooling arrangements.
Miriam Simsa, Partner, Schoenherr
This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
