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
- An Austrian subsidiary of a Dutch parent (ultimately owned by
an Australian group) participated in that notional cash
- 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
- 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
- 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 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
- Each participant must have the right
to terminate its participation in the
cash pool by giving notice (also not to be limited
- 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.
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.