Executive Summary:
The Austrian Supreme Court has recently provided guidance on how to structure cash pooling arrangements so that the risk of violation of the strict Austrian capital maintenance rules is minimized. In essence, the decision indicates that if there is
the
cash pooling arrangement is likely to be deemed valid and lawful by the
Austrian courts, even if it entails the assumption of default risk for group entities
by the Austrian company. If the Austrian
company is able to obtain liquidity when required and receives consideration
where it provides liquidity to other group companies the argument for
commercial justification is supported.
Notional cash pooling generally raises fewer capital maintenance concerns than effective cash pooling (zero balancing).
Navigating the shoals in international cash pooling arrangements demands specific foresight if Austrian corporations are involved.
International
cash pooling arrangements allow multinational groups to optimise their
liquidity and debt management. Where Austrian GmbH’s or AG’s are implicated,
Austria’s notably stringent capital maintenance rules need to be heeded when
structuring the cash pooling arrangement. Failure to do so can result in the
liability of the managing directors and shareholders, individually, as well as
in rendering the transaction invalid.
STRINGENT
AUSTRIAN CAPITAL MAINTENANCE RULES
Under the – comparatively stringent – Austrian capital maintenance rules (Sec 82 of the Act on Companies with Limited Liability, Sec. 52 of the Act on Stock Corporations), the only funds that can be distributed to shareholders are distributable profit; any other provision of funds or benefits to the shareholders is deemed an impermissible repayment of the capital contribution and the underlying transactions are accordingly rendered null and void. In many instances, violations of capital maintenance rules also constitute a covert distribution of profits with resulting tax law implications. All benefits provided to any group companies other than its own (direct and indirect) subsidiaries are caught.
The list
of potential triggering violations is extensive and includes any service or
goods provided to shareholders on a basis other than arm’s length, e.g.
Transactions
with shareholders and group companies are “safe” If the shareholder or group
company pays an appropriate arms-length consideration or if the transaction is
commercially justified, particularly because it provides a commensurate benefit
to the company.
Third
parties may be required to repay any benefits obtained in the course of
transactions in violation of the capital maintenance rules if they colluded in
such transactions or if the violation of the capital maintenance rules was conspicuous
and the third party failed to make the indicated inquiries.
CASH
POOLING
Cash
pooling permits optimisation off the consolidated finances of a group and
facilitates liquidity planning and financial management. Effective cash pooling
or “zero balancing” entails the flow of funds to and from the master account
from the participating cash pooling accounts. Notional cash pooling, on the other hand, is
undertaken only on an arithmetical basis and does not involve the actual
transfer of funds.
Many
international groups that are active in Austria engage in either effective or
notional cash pooling. When entering into these – often multi-national –
arrangements, the parties involved are occasionally unaware of the specific legal risks lurking in
cases involving an Austrian corporate
entity, and they assume default risk for parent and/or group companies.
While Austrian legal literature has discussed – somewhat contentiously – to what extent cash pooling may violate capital maintenance rules, the Supreme Court has only recently been asked to rule on this issue (17 Ob 5/19p):
THE
FACTS: GROUP CASH POOLING WITH DUTCH PARENT COMPANY AND DUTCH BANK
In the
case at hand, a Dutch bank had entered into a notional cash pooling arrangement
with the Dutch parent of the European part of the (Australian-based) group. One
of the participating group entities was an Austrian GmbH. The cash pooling
arrangement with the Dutch bank provided that
Internally,
the participating group entities were instructed by the parent company that
excess cash flow was to be credited to the respective cash pooling account. If,
on the other hand, they wished to obtain funds from the cash pooling account,
they were required to obtain the parent company’s consent.
The
Austrian entity profited from the cash pooling arrangement in the first two
years, during which period its cash pooling account was generally negative. Its
finances subsequently improved to the extent that it transferred over 2 million
Euros to its cash pooling account. In
view of an outstanding tax liability of EUR 500,000 the company requested
access to the commensurate amount from the cash pooling account, which at that
point contained EUR 2.3 million. The parent company only gave approval for EUR
200,000. Shortly thereafter, insolvency proceedings were initiated over the
Austrian subsidiary and subsequently over the Dutch parent company. The bank
used the full balance on the Austrian cash pooling account in payment of the
outstanding group debt.
The
insolvency receiver of the Austrian GmbH demanded repayment of the EUR 2.3
million balance on the Austrian entity’s cash pooling account, claiming the
bank was aware of the violation of capital maintenance rules implicit in the
provision of security by the Austria company for the parent company/group, so
that the cash pooling arrangement with the Austrian company was null and void.
THE SUPREME COURT’S DECISION
No invalidity vis-à-vis third party who was unaware of
capital maintenance violation
The bank
argued that it was not aware of the violation of capital maintenance inherent
in the cash pooling arrangement. In particular, it was not privy to the parent
company’s instruction that all excess cash must be credited to the respective
cash pooling accounts. Based on the cash pooling agreement, it assumed that each
of the entities could not only decide if and when to credit/debit amounts to
the respective cash pooling account, it also assumed that each entity could
terminate the arrangement freely at any time.
The
Supreme Court found this argument persuasive and held that, since the potential
violation of capital maintenance rules was not evident to the bank and since there
were no grounds for the bank to undertake further investigations, the bank was
not liable for repayment. Thereupon, the receiver’s claim against the bank
failed.
Guidelines for structuring cash pooling transactions:
Additionally,
the Supreme Court took the opportunity to – implicitly – provide some
guidelines for cash pooling transactions:
The Supreme Court held the following factors to be relevant when reviewing the commercial justification of the arrangement:
Comment:
When
structuring a cash pool arrangement, any parent company’s management and the
Austrian company’s management would do well to consider – and document – the
commercial justification of the cash management arrangement as related to such
Austrian entity that assumes a default risk or otherwise provides benefits to
other group companies other than its own subsidiaries. Failure to do so may
result in personal liability of the Austrian management and of the shareholders
and in the invalidity of the transaction for the Austrian company.
For information on corporate and banking / finance issues and disputes, please contact Katrin Hanschitz or your customary relationship professional at KNOETZL.
