Germany: Pooling Permitted: MoMIG Facilitates Cash-Pooling Agreements For German GmbHs

Last Updated: 13 October 2008
Article by Stefanie Stöhr

Cash-pooling agreements, e.g., agreements regarding liquidity reconciliation between companies within a corporate group, have numerous advantages for the participating companies: they make it possible to optimize borrowings in the entire corporate group, ensure that all members of the corporate group are continually supplied with liquidity, provide for more transparency, and allow for increased control by the corporate group's management. From a legal perspective, the cash pool constitutes a current account relationship between the individual subsidiaries on the one hand and the corporate parent as central financing entity on the other—any cash surplus at the subsidiaries is deducted from the company's account on a daily basis and flows to the corporate parent in the form of a loan.

The compatibility of cash-pooling agreements involving German GmbHs with Section 30, paragraph 1, of the German Limited Liability Company Law, e.g., the prohibition on repayment of the funds required to maintain the company's paid-in capital to the company's shareholders, was questioned by the "November Decision" of Germany's Federal Supreme Civil Court on November 24, 2003. In this decision, the court deviated from the prevailing "balance-sheet view": according to this view, capital maintenance restrictions are violated only if the payment of the loan amount by the German GmbH is not offset by an adequate claim to repayment vis-à-vis the shareholder (e.g. , there is not merely a neutral accounting change on the asset side on the balance sheet). In the November Decision, in contrast, the Federal Supreme Civil Court held that lending to the shareholder diminishes the GmbH's net assets and can therefore violate the maintenance of capital rules, irrespective of the value of the loan repayment claim. The exchange of liquid assets for deferred contractual repayment claims worsens the creditor's prospects of having its claims satisfied, according to the Federal Court of Justice. The creation of cash-pooling systems in which German GmbHs participated therefore became possible only with significant limitations.

The MoMiG now signals a return to the balance-sheet view. The future version of Section 30, paragraph 1, sentence 2, of the German Limited Liability Company Law provides that the maintenance of capital rules does not apply "in the case of goods or services that are covered by full value repayment or consideration vis-à-vis the shareholder."

It is unclear, however, whether this rule applies in the case of repayment claims that are initially of value but later lose this status, e.g., if the shareholder later becomes insolvent. According to the legislative background of the MoMiG, later unforeseen negative effects on the repayment claim against the shareholder as well as balance-sheet devaluation should not retrospectively lead to qualification as a prohibited payment. However, under such circumstances, the managing director's duty of care may have been breached if he permitted the claim to remain outstanding even though demand for payment could have been made. As a result, a significant liability risk remains for the managing director if he misjudges the liquidity situation of the parent company or if the cash-pooling agreement of the GmbH does not permit termination under these circumstances.

The MoMiG also clarifies the issue of cash-pooling arrangements and concurrent contributions due to increases of share capital. If the capital of a GmbH participating in a cash pool is increased, the company typically has liabilities to its parent that arose in connection with the cash pool. If a cash capital increase is agreed upon, the parent pays the capital contribution into a newly established account of its subsidiary. The potential issue arises when, directly after the registration of the capital increase, the contribution is transferred to the subsidiary's account that is involved in the cash pool and then booked to the main account of the parent on that same day in connection with the cash pool. These types of "back and forth" payments had previously been regarded as a disguised contribution in kind by the Federal Court of Justice (and in consequence are void), since the subsidiary did not receive the cash amount, only a proportionate release from its long-standing loan obligations to the parent. In a landmark decision in 2006, the Federal Supreme Civil Court affirmed that these principles also apply to a company that participates in a cash pool without recognizing a "privilege" for this type of group company financing arrangements.

According to the MoMiG, a disguised contribution in kind, to the extent it has value, is sufficient to fulfill the obligation to contribute to the capital of a company. The shareholder has to (re-)contribute only that portion of the contribution that was not of full value (liability for the difference only).

Further, if the transfer takes place after registration of the capital increase based on the subsidiary's participation in the cash pool for the first time (and thus there are no existing loan liabilities vis-à-vis the parent company), contrary to past practice, this is now interpreted as a permissible return of the contribution. According to the MoMiG, an agreement regarding payment to the shareholder reached before the contribution is made that constitutes the economic equivalent of the return of the contribution does not require the shareholder to make the contribution once again if it is covered by a corresponding claim to return such funds that is of full value.

As a consequence, in the area of raising and maintaining capital, a balance-sheet approach is being reinstated by the MoMiG. Cash-pooling systems will therefore be easier to implement in the future, although a prerequisite remains that any claims for repayment vis-à-vis the parent company are of full value.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions