DRAFTING A CASH POOLING AGREEMENT

DRAFTING A CASH POOLING AGREEMENT 

A. Different types of cash pooling 

Cash pooling allows to centralise liquidity, optimise interest costs, and simplify treasury management. There are different types of cash pooling:

• Physical cash pooling: Funds are physically transferred to a central master account. Balances of participating accounts are swept up (or replenished) daily to reach zero. 

• Notional cash pooling: Funds remain in individual accounts, but balances are notionally aggregated to calculate interest on a consolidated basis. No physical transfers occur. 

• Hybrid structure: Where banks combine elements of both models, depending on jurisdiction and regulatory requirements. 

In each case, cash pooling creates intra-group financial links which must be accurately documented.

B. Legal framework in Belgium 

Cash pooling must be evaluated in light of:

• Belgian Companies and Associations Code:  containing rules on corporate interest, director liability, and financial assistance. 

• Belgian insolvency law: with respect to the risk of requalification during insolvency. 

• Transfer pricing rules: interest rates and conditions must be at arm’s length. 

C. Key elements  

1. Corporate benefit: A key concern under Belgian law is whether the participating entities receive a corporate benefit from the arrangement. This is especially important in groups with financially weaker subsidiaries, because courts or insolvency practitioners may review whether participation exposed the entity to disproportionate risk. It is therefore recommended to document in the board minutes (i) the rationale for joining the pool, such as liquidity optimization purposes, reduced financing costs, or enhanced treasury control, (ii) whether cash pooling can be done based on the company’s object and (iii) a risk analysis, which can consider the concept of the ‘interest of the group’.

2. Financial assistance: Belgian law prohibits companies from granting financial assistance for the acquisition of their own shares, unless strict conditions are met. Although cash pooling is generally not intended to facilitate share acquisitions, the risk may arise in practice, especially where upstream or cross-stream flows end up helping finance acquisitions higher in the group. To avoid any appearance of unlawful financial assistance, it is advisable to document that: (i) the pooling arrangement does not have the effect of enabling a shareholder or group entity to acquire shares in the company, (ii) all transfers occur in the ordinary course of treasury management, and (iii) each participant receives adequate consideration and remains within its normal financial capacity.

3. Structure and mechanics: it must be detailed how (daily) sweeps occur, position allocation rules (debit/credit designations), reporting obligations, whether advances are treated as loans or deposits, how balances are restored at exit or termination.

4. Interest and pricing: Interest rates, margins, and calculation methods must comply with transfer pricing requirements. Benchmarking should support the arm’s-length nature of the arrangement.

5. Limits and overdraft rules: setting maximum debit positions, automatic blocking rules, parent guarantees (if any), collateral or security arrangements. These can help prevent companies taking on liabilities they cannot reasonably bear.

6. Insolvency and set-off: Define what happens in case of a participant’s distress. Belgian insolvency law limits set-off after the opening of insolvency proceedings unless strict conditions are met.

7. Events of default: List of events of default (failure to pay, ceasing to be a group member, insolvency procedures, etc.) and consequences thereof (amounts becoming immediately due and payable).

In practice, we observe that financial institutions, particularly in international cash pooling structures, will also require legal opinions to confirm the authority and validity of the commitments undertaken by each participant. At act legal Belgium, we can assist with both these opinions and the set-up, review, or alignment of cash pooling arrangements in line with Belgian corporate and regulatory requirements.