Cash & Liquidity Management

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Cash Pooling and a Business Practice Globalisation, calling for unification through necessity, is not a small task set before many companies unifying procedures in several countries and/or localities, which have not always been simple and unambiguious. The process of incorporating and standardising has often been hindered by local customs and disagreements. This article describes the legal and tax environment for companies working mostly in central and south east Europe in the energy sector, the possibility of real cash pooling, how it functions and mostly how it is introduced in EZ Group, the largest Czech holding company.

Cash Pooling and a Business Practice

by Dr Petr Polak, VŠB – Technical University of Ostrava, Czech Republic, and Swinburne University of Technology, Melbourne, Australia and Ondrej Simon, Head of the Group Financial Operations, âEZ, a. s., Praha, Czech Republic

Globalisation, calling for unification through necessity, is not a small task set before many companies – unifying procedures in several countries and/or localities, which have not always been simple and unambiguious. The process of incorporating and standardising has often been hindered by local customs and disagreements.

This article describes the legal and tax environment for companies working mostly in central and south east Europe in the energy sector, the possibility of real cash pooling, how it functions and mostly how it is introduced in âEZ Group, the largest Czech holding company.

With regard to the legal aspects of cash pooling, the Czech Republic differs from many other foreign legislations. The most remarkable difference in the case of pooling is in terms of the holding company, according to the Czech Commercial Law Code for trusts. In the case of one company the matter is simple. Pooling is only improving a two-sided contract for managing current accounts. In this way, some Czech banks have even a trust pooling set down in a contract (a type of notional pooling).

In the case of a trust, it is always necessary to fulfil some basic criteria in order for pooling to be carried out. The first condition is dealing with a company connected to the pooling structure. If the company were not wholly owned, a potential clash between the owners connected to the company and a bank might even end up in court as a final consequence. That is why banks limit trust pooling to groups where companies own more than 51% or where ownership has been proven.

Another problem is to show how pooling works in usual conditions for individual companies in order to not appear simply as tax relief and also as a problem for minority shareholders. That is why some banks want pooling introduced in and agreed by the general meeting, the board of directors or in print as stated in a managing contract, which allows for the connection of company subsidiaries. A fundamental question for banks in the case of providing a current account framework is how to provide a guarantee in terms of pooling. The guarantee of the owner of the main account is common to all parties, and he has the authority to redistribute overdraft limits for the individual accounts themselves. Only such a guarantee enables the use of pooling for really flexible management of financial requirements without negotiations with banks, which can be tricky.

Inter-group management contracts

Banks which set up trust pooling for clients also commonly recommend, with auditors and tax advisors, to work out an intra-group management contract, which will fulfil some basic aspects. The contract should define all those taking part for the purpose of pooling. It should define the basics of the pooling structure functions (account shifts, the periodicity of expressing interest in numbers, setting this amount, the principle of providing internal overdraft limits). It should define the pooled cash revenue and the principles of its distribution, the principles of sharing important information connected with pooling (limit changes, statements, interest calculations), as well as the right of the owner of the main account to connect to other accounts or other pooling participants and the rights and duties of the individual pooling members (primarily liabilities adjusted to expressing debit interest in numbers and taking into respect movements in accounts from the poling title, which can significantly influence the availability of the free cash flow of the individual pool members).

Cash pooling itself brings many advantages for companies within a group.

One problem with Czech legal regulations is the non-existence of the concept of cash pooling. The Commercial Law Code only knows credit or loan with a defined amount and a period of payability. In the case of some kinds of cash pooling it is not possible to determine this exactly. In cases where real transactions are carried out in the main account at the end of the day without a return transfer back, it is not possible to determine exactly any amount or the time of payability for such credit. It is possible to get round this by means of a set contract with a determined amount limit and a set date when there should be a settlement of mutual liabilities and receivables.

There is also the question of the necessity of closing managing contracts or obtaining the agreement of the general assembly. Everything is determined in our conditions by the setting-up company which commonly accepts and provides loans subject to agreement of the general assembly. Because cash pooling is fundamentally repeated with loans whose amounts are not clear, it is often difficult to introduce it without changing the regulations. Another problem in our Commercial Law Code is the limitations for putting companies economically together in dealing with mutual crediting, if it is used for special purposes (for example, the purchase of treasury stock).

The last issue is the possible problem of mutually netting receivables and liabilities coming out of the cash pool, because the Czech law does not automatically recognise netting without contracts about credits. This problem can also be addressed in a managing agreement, stating the entire mutual receivables and liabilities coming from cash pooling that can be the subject of credit.

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