The purpose of cash pooling arrangements, also called group account arrangements in Finland, is to either physically or notionally concentrate a group’s financial transactions onto one account. This allows a group to efficiently utilise the cash flows of all the group companies. The arrangement can, for example, be used to increase net interest, lessen the need for external funding and decrease the group balance sheet total.
Different Kinds of Cash Pooling Arrangements
The most conventional and simplest cash pooling arrangement is the use of a group account, which is common in Finland, i.e. single legal account pooling or cash concentration. In this kind of arrangement, the cash flows of group companies are concentrated onto a single physical account—the group account. The holder of the group account, usually the parent company, grants the other group companies the right to use the group account. The only physical bank account with the bank is the group account, with withdrawals or deposits to the group account being carried out through notional, subsidiary accounts. All transactions between the accounts take place in real-time.
The receivables and accounts payable of group companies can also be notionally balanced without physical transactions (notional pooling). All group companies have their own bank accounts, and the bank calculates the total interest for the separate accounts, and pays interest if the total balance is positive. The balances of the group companies’ accounts can also, at the end of the day, be transferred to one main account (zero balancing), or transactions of assets between main and subsidiary accounts can be triggered when pre-determined thresholds/sweeping parameters are met (top sweeping).
Intercompany Loans between Group Companies
Through cash pooling arrangements, group companies grant loans to other group companies in order to borrow assets from one another. Each company involved must assess the arrangement from the point of view of that group company’s own corporate benefit. Each company must benefit from the arrangement, for example, in the form of added return on interest, added funding or reduced bank service fees. In other words, each company must have a sound business reason for participating in the arrangement.
If one of the companies involved in the arrangement is faced with insolvency, it is of utmost importance to keep track of who owes whom. This can be difficult when assets are transferred automatically. In the event of a bankruptcy, whether the balance of an account is negative or positive determines the debtor-creditor relationships. For example, when the holder of a group account enters bankruptcy, the companies with subsidiary accounts have receivables from the group account holder if the balances of the subsidiary accounts are positive.
With respect to recovery claims, group companies are always considered related parties, which leads to longer recovery periods. It is worth keeping in mind that, though in principle the negative balance of a group account amounts to the group account holder’s debt to the bank, subsidiary companies can end up being liable for a parent company’s debt in the event the subsidiary companies have provided collateral to the bank for the parent company.