I. Introduction to Physical Cash Pooling
The concept of "physical cash pooling" can be defined simply as a sort of cash balancing transaction that is conducted amongst group companies, through transfer of surplus cash by relevant affiliates that hold a strong financial position to a "leader account" (or master account/header account), which is specifically designated for physical cash pooling purposes, and utilization of the monies accumulated in the leader account to meet the cash needs of other affiliates1. This concept mainly originates from the Anglo-American legal system, and is directly related to effective cash management and cash centralization strategies of group companies. From this aspect, physical cash pooling is a financing method applicable for group companies, which can be classified as "intragroup external financial resources"2 and which enables group companies to get loans (intercompany loans) from the pool (i.e., from the leader account).
II. Applicable Legislation Under Turkish Law Regarding Physical Cash Pooling
In terms of Turkish law, there is no specific legislation regarding the cash pooling concept.
On the other hand, considering that the Decree No. 32 on the Protection of the Value of Turkish Currency ("Decree No. 32") and the Circular of the Central Bank of the Republic of Turkey on Capital Movements ("Circular") allow legal entities operating in Turkey to obtain and provide intercompany loans under certain conditions, it could be inferred that, in certain cases, physical cash pooling or the participation of any Turkish entity in that system, may be allowed in Turkey.
It should also be noted that, as per Article 386 of the Turkish Code of Obligations ("TCO"), borrowing agreements for money or consumable items are described as "an agreement in which the lender undertakes to transfer some money or any consumable item to the borrower and the borrower undertakes to give the object back in the same quality and amount to the lender." Intercompany loans will also be subject to the supplementary provisions of the TCO, unless otherwise stipulated under the Circular and the Decree No. 32. For instance, per Article 387 of the TCO, in the case of a commercial borrowing agreement for consumable items, the lender may levy interest on the loan even if it was not contractually determined by the parties.
In addition to the above, the "control" relationship between the lender and the borrower should also be evaluated from a corporate law perspective. Pursuant to Article 195 of the Turkish Commercial Code No. 6102 ("TCC"), a company is deemed to control another company directly or indirectly in case of (i) possession of the majority of its voting rights, (ii) holding the majority of votes on the board of directors, (iii) ability to use the majority of voting rights based on an agreement, alone or with the other shareholders, (iv) ability to manage the company on the basis of an agreement or by other means, in which case the first company is considered as the "controlling company" and the other is known as the "controlled company."
Furthermore, pursuant to Article 202 of the TCC, a controlling company shall not exercise its control in a way that would make the controlled company incur a loss. In particular, the controlling company cannot direct the controlled company to carry out legal transactions, such as transfer of its business, assets, funds, staff, receivables or debts; to decrease or transfer its profit; to encumber its assets with in rem or personal rights; to undertake liabilities, such as providing surety, guarantee and aval (i.e., a guarantee that a third party adds to a debt obligation); or to make payments, etc. Such steps might be allowed only if any loss incurred due to such acts is offset within that financial year, or a right to claim the "equivalent value" is granted to the controlled company, no later than the end of that financial year, with a specific explanation as to how and when this loss will be recovered. If the loss is not offset within the activity year, or if a "right of equivalent claim" has not been granted within the due period, each shareholder of the controlled company can request the controlling company, and the board members of the controlling company who caused the loss, to compensate the controlled company for its loss. If it is deemed just and equitable, rather than ruling for compensation, the judge may decide that the controlling company shall purchase the shares of the plaintiff shareholders, or decide on another solution that may be acceptable and appropriate to the particular situation at hand.
In accordance with Article 203 of the TCC, if a company directly or indirectly holds 100% of the shares and voting rights of another company, the board of directors of the parent (i.e., controlling) company may give instructions on the management of the subsidiary (i.e., controlled) company, even if this may cause losses to the latter, provided that such instructions are given in accordance with existing and specific policies of the group. In such cases, the bodies of the controlled company must follow such instructions. However, a specific exception is set out in Article 204 of the TCC, which provides that the parent company may not give instructions that would clearly exceed the subsidiary's payment ability, jeopardize its existence or give rise to the loss of significant assets.
In addition, Article 358 of the TCC states that shareholders may not borrow money from the company unless: (i) they have fulfilled their capital subscriptions that have become due and payable, and (ii) the company's profit, together with its free legal reserves, are sufficient to cover any previous-year losses.
Lastly, if the company becomes bankrupt as a result of the intercompany loan, as per Article 161 of the Turkish Criminal Code No. 5237, a charge of fraudulent or negligent bankruptcy may also be brought.
There is no legislation that specifically aims to regulate the concept or practice of "physical cash pooling" in Turkey. On the other hand, considering that there are no concrete restrictions on this matter, it could be reasonably concluded that the "physical cash pooling" concept can indeed be integrated into the Turkish legal system. However, it is important to point out that there is already a number of existing laws and regulations in Turkey which are indirectly linked to the cash pooling concept (e.g., transfer pricing regulations, arms-length transaction requirements); therefore, those laws and regulations should also be carefully evaluated by the practitioners. Furthermore, the tax consequences of this concept/practice should be also evaluated and explained by knowledgeable tax experts.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2019. A link to the full Legal Insight Quarterly may be found here
1. Özdin, Funda, "Cash Pooling (Nakit Havuzu) ve Alman Hukukunda Sermayenin Korunmasına İlişkin Maddelerde Cash Pooling Lehine Yapılan Değişiklik (§ 57/1/c.3 AktG, § 307I/c. 2 GmbHG)", Arslanlı Bilim Arşivi, accessible from: www.arslanlibilimarsivi.com, at 1 (last accessed on October 10, 2019).
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