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Cash Pooling and Insolvency
A Practical Global Handbook, Second Edition
By Marcel Willems Globe Law and Business Ltd
Copyright © 2016 Globe Law and Business Ltd
All rights reserved.
ISBN: 978-1-78742-003-8
CHAPTER 1
Cash pooling and the EU Insolvency Regulation
Bart de Man Jeroen Postma Kennedy Van der Laan NV
1. Introduction
A cash pooling arrangement is often used in an international context, where the companies making up the group included in the arrangement are situated in different jurisdictions. This chapter expands on general cross-border issues to consider specifically cases when one or more participants to the cash pooling arrangement are located in the European Union and become subject to insolvency proceedings.
2. EU Insolvency Regulation
On May 31 2002 the EU Insolvency Regulation came into force. The regulation is applicable in the jurisdictions of all EU member states, except Denmark. The regulation applies to insolvency proceedings only when the centre of main interests of the debtor is located in the European Union. The centre of main interests of a company is presumed to be located in the jurisdiction where that company has its registered office. The regulation provides a set of rules for the competence of the courts, the recognition and execution of decisions and for applicable law – all in the context of insolvency proceedings and actions that directly derive from insolvency proceedings and are closely linked to them.
3. Relevance of the regulation for cash pooling arrangements
If one or more of the companies participating in the cash pooling arrangement have their centre of main interests in the European Union and become subject to insolvency proceedings opened in an EU member state, the insolvency proceedings will be recognised by all the other EU member states from the time that it becomes effective in the state of the opening of proceedings.
The law of the state of the opening of proceedings (lex concursus) shall determine the conditions for the opening of those proceedings, their conduct and their closure. It is important to find out which laws govern the rights and obligations of the parties to the cash pooling arrangement, the transactions performed under the arrangement and when and how to affect those rights, obligations and transactions.
Hereafter we describe the legal issues arising from the application of the EU Insolvency Regulation in relation to:
• agreements in general;
• setting-off;
• security rights;
• joint and several liability, as well as (parent) guarantees;
• fraudulent conveyance;
• directors' and officers' liability;
• corporate matters such as ultra vires, financial assistance (maintenance of capital) and conflict of interests; and
• what will happen if the bank becomes subject to insolvency proceedings.
3.1 Agreements in general
A cash pooling arrangement is a multi-party agreement, between a bank and two or more companies belonging to the same group of companies. Article 4(2)(e) of the EU Insolvency Regulation provides that the law of the state of the opening of proceedings determines the effects of insolvency proceedings on current contracts to which the debtor is a party. The regulation does not define the term 'current contracts'.
The law of the state of the opening of proceedings therefore also determines whether and to what extent the bank (or any other party to the cash pooling agreement) has a right to terminate that agreement, even if such a right would be granted under the agreement when insolvency proceedings are opened.
How much the law of the state of the opening of proceedings will determine in relation to current contracts can differ substantially from jurisdiction to jurisdiction. Insofar as the law of the state of the opening of proceedings does not determine what the effects of the insolvency proceedings are, these will still be determined by the law applicable to the agreement (lex contractus).
If one or more participating companies enter into insolvency proceedings, the consequence thereof could be that the cash pooling agreement is terminated by law (as a result of the law of the state of the opening of proceedings) or by the bank (or one of the remaining participating companies) using its contractual termination right. This could be a partial termination – that is, it is terminated only with regard to the participant in insolvency proceedings – or a full termination with regard to all parties to the agreement. The parties to the cash pooling agreement will have to take these possible consequences into account when concluding it, and may want to include an arrangement for the remaining participants that are not subject to insolvency proceedings.
3.2 Setting-off
The basis of a cash pooling agreement is that claims and obligations of the participants towards the bank are set off. Article 4(2)(d) of the EU Insolvency Regulation provides that the law of the state of the opening of proceedings determines the conditions under which a right of set-off may be invoked. It also determines the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings through a set-off. The opening of the insolvency proceedings does not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor's claim under Article 6 of the regulation.
Article 6 is only applicable to the set-off of mutual obligations which have been entered into prior to the opening of insolvency proceedings. After the opening of insolvency proceedings, Article 4 is applicable. A set-off can still be void, voidable or unenforceable as referred to in Article 4(2)(m).
One might think that Article 9 is also applicable to cash pooling agreements, as it speaks of "payment or settlement systems". A cash pooling agreement can be considered to qualify as some kind of a settlement system. Nevertheless, Article 9 is not intended to apply to cash pooling agreements. Paragraph 27 of the Preamble to the regulation explains the rationale for Article 9, which is to be found in transactions as governed in particular by the EU Directive on settlement finality in payment and securities settlement systems. The payment systems referred to therein should be designated by the member states and notified to the European Commission.
3.3 Security rights
Security rights in favour of the bank usually form part of a cash pooling agreement, in particular – but not necessarily limited to – a security right over the credit balances of all accounts that are part of the arrangement.
Security rights of creditors over assets that, at the time of the opening of proceedings, are located in other EU member states are unaffected by the opening of insolvency proceedings according to Article 5 of the EU Insolvency Regulation. More specifically, Article 5 provides that the opening of insolvency proceedings shall not affect rights in rem of creditors in respect of assets belonging to the debtor which are situated within the territory of another member state at the time of the opening of proceedings.
The regulation does not define 'rights in rem'. These will be determined by the law applicable to the assets where they are located at the relevant time. Where an asset is located will be determined by the private international law rules of each member state jurisdiction, including applicable EU rules.
Under Article 5(2), the rights in rem referred to, in particular:
(a) the right to dispose of assets or have them disposed of and to obtain satisfaction from the proceeds of or income from those assets, in particular by virtue of a lien or a mortgage;
(b) the exclusive right to have a claim met, in particular a right guaranteed by a lien in respect of the claim or by assignment of the claim by way of a guarantee;
(c) the right to demand the assets from, and/or to require restitution by, anyone having possession or use of them contrary to the wishes of the party so entitled;
(d) a right in rem to the beneficial use of assets.
Article 5 applies only to rights in rem created before the opening of proceedings. If the assets are situated in a non-EU member state, Article 5 is not applicable.
Article 5(1) does not preclude actions for voidance, voidability or unenforceability as referred to in Article 4(2)(m).
3.4 Joint and several liability, as well as (parent) guarantees
Most cash pooling agreements contain provisions to the effect that all participating companies are jointly and severally liable to the bank. Moreover, the agreement will usually contain a guarantee from the parent company and master account holder.
What the validity of these provisions will be after insolvency proceedings are opened against one or more of the participating companies is primarily a matter of the rule applicable to current contracts. This is discussed above at paragraph 3.1.
If one of the participants makes a payment under the joint and several liability obligations, or as a guarantor, it will have a claim for compensation against the non-paying debtor and group company that is involved in the insolvency proceedings. The law of the state of the opening of proceedings will determine what rights this paying creditor has against the debtor/group company accordingly. Under Article 4(2)(g) and (i) of the EU Insolvency Regulation, the law of the state of the opening of proceedings determines:
• the claims which are to be lodged and the treatment of claims; and
• the rules governing the distribution of proceeds and the ranking of creditors.
3.5 Fraudulent conveyance
It may be argued that under certain circumstances a cash pooling agreement can be detrimental to the rights of other creditors of a participating company, in particular when this company becomes subject to insolvency proceedings. All EU jurisdictions have provisions of some sort regarding the voidance, voidability or unenforceability of legal acts if they are or could be detrimental to the rights of other creditors ('fraudulent conveyance'). Reference is made to several chapters in this book in which this risk is recognised.
The EU Insolvency Regulation contains specific provisions regarding fraudulent conveyance.
The general rule is given in Article 4(2)(m), which says that the law of the state of the opening of proceedings determines rules relating to the voidance, voidability or unenforceability of legal acts detrimental to all creditors.
Article 4(2)(m) does not apply, however, according to Article 13 of the regulation, if the person who benefited from such detrimental act provides proof that:
• that act is subject to the law of a member state other than the state where the insolvency proceedings were opened; and
• that law does not allow any means of challenging that act in the relevant case.
This is an important rule, providing a way out for the benefiting creditor if he succeeds in passing this double test.
3.6 Directors' and officers' liability
The EU Insolvency Regulation contains no specific rules regarding jurisdiction or applicable law in relation to directors' and officers' liability.
However, the courts of the member state within the territory of which insolvency proceedings have been opened have jurisdiction under Article 3(1) to decide on actions that directly derive from insolvency proceedings and are closely linked to them, even if the defendant has its registered office in another member state. This includes actions to set aside transactions by virtue of insolvency. It also includes claims that an administrator or liquidator in insolvency proceedings has against (former) directors and officers of a company subject to insolvency proceedings. This jurisdiction seems to be exclusive.
Under Article 25, the courts of other member states have to recognise such decisions of the courts of other member states.
The regulation contains no rules regarding the applicable law in relation to directors' and officers' liability. This will be determined by the private international law of each member state.
3.7 Corporate matters such as ultra vires, financial assistance (maintenance of capital) and conflict of interests
The EU Insolvency Regulation contains no specific rules regarding jurisdiction or applicable law in relation to ultra vires, financial assistance (capitalisation requirements) and conflict of interests.
It could be argued that claims of an administrator or liquidator to set aside transactions, based on ultra vires, capitalisation requirements or conflict of interests are to be brought before the courts of the member state within the territory of which the insolvency proceedings have been opened. Such claims are directed at the same assets as, or assets additional to, those pursued by the claim arising from the right to seek to have a transaction set aside by virtue of insolvency (see paragraph 3.6 above). An argument against what is proposed above could be that these actions do not derive from the insolvency proceedings and are not closely linked to them, since they derive from the corporate legal system in a country and do not have a direct link to the insolvency proceedings. Rather, these actions have only an indirect link with the insolvency proceedings, from the administrator or liquidator starting an action based thereon for the purpose of increasing the estate in the insolvency proceedings.
3.8 Bank becomes subject to insolvency proceedings
The EU Insolvency Regulation contains no rules regarding jurisdiction or applicable law in relation to insolvency proceedings of banks or other financial institutions.
The rules regarding the reorganisation and winding-up of credit institutions have been incorporated in national legislation by the EU member states as a result of the Directive of the European Parliament and of the Council dated April 4 2001.
3.9 The revised EU Insolvency Regulation
On June 26 2017 the revised EU Insolvency Regulation will enter into force. In general, the revised regulation contains no material changes regarding the rules set out above. In particular, the amended regulation does not clarify the existing uncertainties regarding Article 5 (rights in rem), Article 6 (set-off) and Article 13 (detrimental acts).
The current regulation is limited to collective insolvency proceedings. However, the amended regulation has a broader scope and also includes pre-insolvency proceedings, in order to promote the restructuring and rescue of possibly viable entities which would otherwise become subject to collective insolvency proceedings. Confidential proceedings remain out of scope, as confidentiality would make it practically impossible for a foreign creditor or court to be aware of such proceedings in another member state. As with the current regulation, Annex A to the amended regulation provides a list of the proceedings that are in scope. Most notable exceptions to the list are the UK 'schemes of arrangement' and the French 'conciliation' proceedings, which remain out of scope.
The amended regulation also provides a new, optional regime for the winding-up of a cross-border group of companies that becomes subject to cross-border insolvency proceedings.
The amended regulation contemplates the appointment of an independent coordinator for the insolvent group of companies. This group coordinator has the power to propose a group-coordination plan. The coordinator also has the power to mediate between insolvency representatives of the group companies, and to request a stay on the insolvency proceedings concerning a group member for up to six months.
Although this regime might seem to be of significance for cross-border cash pooling arrangements, the appointment of a group coordinator may in practice become the exception rather than the rule. This is due to the fact that:
• under the amended regulation, no court may appoint a group coordinator if creditors of group members expected to participate in the proceedings are likely to be financially disadvantaged by the inclusion of that group member in the proceedings;
• the insolvency of a group of companies does not necessarily result in insolvency proceedings for each of those companies in their respective jurisdictions; and
• the insolvency representatives of any group company may opt out of the process. Moreover, local insolvency representatives are not obliged to adhere to the coordinator's recommendations or the group coordination plan.
As a result, a local insolvency representative will most likely very often opt out, unless the group strategy proposed by the group coordinator offers a better recovery than a company-specific, local strategy. The costs relating to the group coordination may be significant, which also might cause the local insolvency representatives to opt out of group coordination.
3.10 Cash pooling arrangements and capital requirements
The Basel III requirements regarding capital requirements – implemented in the European Union through the Capital Requirements Directive and Capital Requirements Regulation (together referred to as 'CRD IV') – may have a significant impact on cash pooling arrangements in the European Union. Notional cash pooling arrangements may be affected in particular.
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Excerpted from Cash Pooling and Insolvency by Marcel Willems. Copyright © 2016 Globe Law and Business Ltd. Excerpted by permission of Globe Law and Business Ltd.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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