First decision by Austrian Supreme Court on cash pooling: No blank cheque for banks but some relief

Background and facts

Austrian (case) law on capital maintenance (Verbot der Einlagenrückgewähr) is stringent and in many of its decisions the Austrian Supreme Court has interpreted the principles of capital maintenance as laid out in Austrian corporate law very strictly. Now, for the first time, the Supreme Court has decided on the question of cash pooling.

These are the relevant facts:

• The cash pooling was a notional cash pooling (no zero balancing).
• An Austrian subsidiary of a Dutch parent (ultimately owned by an Australian group) participated in that notional cash pooling.
• The Austrian subsidiary pledged any credit balance on the participating account to the (Dutch) bank.
• The Austrian participating company did not have an obligation towards the bank to keep a minimum balance on its participating account and it was entitled to terminate the cash pooling agreement with the bank. Internally, however, the parent company instructed its subsidiary that any withdrawal would be possible only with its consent. Funding of the Austrian subsidiary from the cash pool was subject to the parent's consent. The bank was not aware of these internal arrangements.
• At the beginning, after joining the cash pool, the Austrian subsidiary received cash (and thus funding) out of the cash pool. Within two years the Austrian subsidiary was mostly in a credit position.
• When the parent group fell into financial difficulties, the bank terminated the cash pooling agreement (first with the subsidiaries, then with the parent). The bank enforced its account pledge and set off the credit balance on the subsidiary's participating account against the debit balance of the parent on the master account.
• Shortly thereafter, insolvency proceedings were opened over the Austrian subsidiary. The receiver challenged the enforcement of the account pledge by way of set-off, in particular relying on a violation of the rules on capital maintenance.

Supreme Court ruling

In its judgment of 2 May 2019 (17 Ob 5/19p), the Supreme Court dismissed the receiver's complaint and held in favour of the bank.

The Supreme Court argued as follows:

• The arm's length test should not be applied to cash pooling because cash pooling is typically entered into within a group of companies and not with an independent third party.
• Consequently, the test to be applied is primarily whether the cash pooling has a corporate benefit (betrieblich gerechtfertigt; see also Supreme Court 6 Ob 271/05d; 3 Ob 50/13y).
• Typically, a notional cash pooling is less critical from a capital maintenance point of view than a zero balancing; however, interest benefits may have to be shared (no explicit statement by the Supreme Court but may be inferred).
• Providing upstream security in a (notional) cash pool may run afoul of capital maintenance rules. Granting such security may be permissible if participation in the cash pool offers a corporate benefit to the subsidiary and if liability is not highly probable.
• Participating in a cash pool by an Austrian subsidiary which is likely to also receive funding out of the cash pool should offer a corporate benefit (betrieblich gerechtfertigt).
• In a notional pooling the subsidiary needs to be in the position to freely dispose of its credit balance on the participating account (and such discretion may also not be limited by group internal arrangements or instructions by the parent).
• The participants in a cash pool need to be granted information rights by the parent on the financial situation of the parent and the group (risk management).
• Each participant must have the right to terminate its participation in the cash pool by giving notice (also not to be limited internally).
• Due to the group internal limitations imposed on the subsidiary to dispose of its credit balance on the participating account (but to secure the entire debt under the cash pool), the cash pool in question is likely to have violated Austrian capital maintenance rules (the Supreme Court did not finally decide on the issue because the bank was not liable).
• However, the Supreme Court held that the bank does not have to return the amount recovered to the receiver, because the bank could not have been aware of the violation (standard of gross negligence). On the contrary, the bank was not aware of the internal restrictions imposed on the subsidiary to dispose of its credit balance on the participating account, so that the participant had discretion towards the bank regarding the amount with which it participates in the cash pool. The bank could reasonably assume that the cash pool is operationally justified.

Conclusion

The Supreme Court only deals with notional pooling. It does not give a blank cheque to a bank setting up a cash pool but sees a corporate benefit (betriebliche Rechtfertigung) for such cash pooling, at least if the relevant Austrian subsidiary is likely to also receive funding out of the cash pool. Still, banks are well advised to request adequate representations and undertakings from every participant in a cash pool (which is subject to restrictions under capital maintenance rules) following the above mentioned principles so that the bank may rely thereupon.