Cash pooling – Federal Supreme Court ruling
Corporate groups frequently entrust one group company with the cash management of the entire group. In practice, a distinction is made between two basic types of cash pooling: Zero balancing (physical cash pooling) involves a physical transfer of money from the accounts of individual group companies to the accounts of the group’s cash pooling company. In notional pooling, on the other hand, each group company’s balance remains in the company’s own bank account and the debit and credit balances of all group accounts are only virtually pooled.
As long as the group is financially sound, cash pooling is an efficient management instrument and guarantees that liquidity can be optimally steered and invested. However, if the group is ailing financially, the risks associated with zero balancing cash pooling are considerable. Healthy group companies can suddenly find that they have lost all the funds they put into the cash pool.
With its ruling 4A_138/2014 of 16 October 2014, the Federal Supreme Court took a stance on the main legal questions pertaining to a zero balancing cash pooling structure.
Urgent need to take action
Against the backdrop of the Federal Supreme Court’s ruling, it is recommended that the financing structures of Swiss groups / group companies undergo an in-depth legal review before the end of the year with a special focus on the following aspects:
- Up-stream and cross-stream loans should only be entered into at arm’s length terms; conformity with arm’s length terms must be documented.
- In the event that group loans were not entered into at arm’s length terms, reserves must be set aside in the amount of the loans and the total value of the loans must not exceed the freely distributable equity; if necessary, loans must be repaid permanently prior to 31 December 2014 (balance sheet date).
If companies that have granted non-arm’s length loans to group companies also distribute dividends at the same time, these reserves will not be available for the distribution of dividends. As a result, Swiss group companies might not be able to meet up to dividend payout expectations. This is something that must be communicated as quickly as possible within the group.
- Opportunities & Risiks article: Swiss Federal Supreme Court’s ruling on cash pooling (in German)
- Swiss Federal Supreme Court ruling of 16 October 2014 (in German)
- Overview of the current article of our publication “Chancen und Risiken rechtlicher Neuerungen 2014/15”
- Legal Services at KPMG