Cash-pooling agreements, e.g. , agreements regarding liquidity reconciliation between companies within a corporate group, have numerous advantages for the participating companies: they make it possible to optimize borrowings in the entire corporate group, ensure that all members of the corporate group are continually supplied with liquidity, provide for more transparency, and allow for increased control by the corporate group’s management. From a legal perspective, the cash pool constitutes a current account relationship between the individual subsidiaries on the one hand and the corporate parent as central financing entity on the other—any cash surplus at the subsidiaries is deducted from the company’s account on a daily basis and flows to the corporate parent in the form of a loan.
The compatibility of cash-pooling agreements involving German GmbHs with Section 30, paragraph 1, of the German Limited Liability Company Law, e.g., the prohibition on repayment of the funds required to maintain the company’s paid-in capital to the company’s shareholders, was questioned by the “November Decision” of Germany’s Federal Supreme Civil Court on November 24, 2003. In this decision, the court deviated from the prevailing “balancesheet view”: according to this view, capital maintenance restrictions are violated only if the payment of the loan amount by the German GmbH is not offset by an adequate claim to repayment vis-à-vis the shareholder (e.g. , there is not merely a neutral accounting change on the asset side on the balance sheet). In the November Decision, in contrast, the Federal Supreme Civil Court held that lending to the shareholder diminishes the GmbH’s net assets and can therefore violate the maintenance of capital rules, irrespective of the value of the loan repayment claim. The exchange of liquid assets for deferred contractual repayment claims worsens the creditor’s prospects of having its claims satisfied, according to the Federal Court of Justice. The creation of cash-pooling systems in which German GmbHs participated therefore became possible only with significant limitations.
The MoMiG now signals a return to the balance-sheet view. The future version of Section 30, paragraph 1, sentence 2, of the German Limited Liability Company Law provides that the maintenance of capital rules does not apply “in the case of goods or services that are covered by full value repayment or consideration vis-à-vis the shareholder.” It is unclear, however, whether this rule applies in the case of repayment claims that are initially of value but later lose this status, e.g., if the shareholder later becomes insolvent. According to the legislative background of the MoMiG, later unforeseen negative effects on the repayment claim against the shareholder as well as balance-sheet devaluation should not retrospectively lead to qualification as a prohibited payment. However, under such circumstances, the managing director’s duty of care may have been breached if he permitted the claim to remain outstanding even though demand for payment could have been made. As a result, a significant liability risk remains for the managing director if he misjudges the liquidity situation of the parent company or if the cash-pooling agreement of the GmbH does not permit termination under these circumstances.
The MoMiG also clarifies the issue of cash-pooling arrangements and concurrent contributions due to increases of share capital. If the capital of a GmbH participating in a cash pool is increased, the company typically has liabilities to its parent that arose in connection with the cash pool. If a cash capital increase is agreed upon, the parent pays the capital contribution into a newly established account of its subsidiary. The potential issue arises when, directly after the registration of the capital increase, the contribution is transferred to the subsidiary’s account that is involved in the cash pool and then booked to the main account of the parent on that same day in connection with the cash pool. These types of “back and forth” payments had previously been regarded as a disguised contribution in kind by the Federal Court of Justice (and in consequence are void), since the subsidiary did not receive the cash amount, only a proportionate release from its long-standing loan obligations to the parent. In a landmark decision in 2006, the Federal Supreme Civil Court affirmed that these principles also apply to a company that participates in a cash pool without recognizing a “privilege” for this type of group company financing arrangements.
According to the MoMiG, a disguised contribution in kind, to the extent it has value, is sufficient to fulfill the obligation to contribute to the capital of a company. The shareholder has to (re-)contribute only that portion of the contribution that was not of full value (liability for the difference only).
Further, if the transfer takes place after registration of the capital increase based on the subsidiary’s participation in the cash pool for the first time (and thus there are no existing loan liabilities vis-à-vis the parent company), contrary to past practice, this is now interpreted as a permissible return of the contribution. According to the MoMiG, an agreement regarding payment to the shareholder reached before the contribution is made that constitutes the economic equivalent of the return of the contribution does not require the shareholder to make the contribution once again if it is covered by a corresponding claim to return such funds that is of full value.
As a consequence, in the area of raising and maintaining capital, a balance-sheet approach is being reinstated by the MoMiG. Cash-pooling systems will therefore be easier to implement in the future, although a prerequisite remains that any claims for repayment vis-à-vis the parent company are of full value.