3.4 Management of Working Capital 73loans); the causing of insolvency by transferring funds to a shareholder;^178 and the payment
of capital increases (see below). Rules on equity-replacing loans (“eigenkapitalersetzes
Darlehen”) were applied before the entry into force of the MoFiG where the company was
in a financial crisis.^179
(d) How should the participating companies address counterparty credit risk?
There is a higher risk that company laws restrict the making of payments to a par-
ticipating company that is or may become insolvent. This risk can be mitigated by
excluding that company from the cash pool (keeping its accounts pool-free).
Where a participating company is not yet insolvent, legal risk can be mitigated by
agreeing on: effective disclosure duties (participating companies must receive in-
formation about the financial status of other participating companies); and early
termination rights in the event that there is an increased risk that a participating
company will not be able to meet its obligations or will become insolvent. A par-
ticipating company may require collateral. This would nevertheless make it more
difficult to reduce the capital needs of the group. Generally, the company may
have a business reason either to require a security or not to require it. A participat-
ing company can be asked to agree on the joint and several liability of all partici-
pating companies for deficits of the top account.^180 A participating company
should in any case ensure that there is a cap on its liability.^181
(e) How should a participating company take into account company law rules
that restrict the distribution of funds to shareholders? Where a participating com-
pany’s funds are paid in its parent’s account, the payment should comply with re-
strictions on the distribution of funds to shareholders. For example, the Second
Company Law Directive prohibits distributions where the net assets of the com-
pany are lower than the amount of its subscribed capital.^182 A breach of this rule
may result in a duty to return those funds to the company that paid them.^183 Par-
ticipating companies can mitigate this legal risk generally by agreeing on pool-
free accounts for funds that may not be distributed to shareholders. The amount of
the subscribed capital should remain pool-free.^184 In addition, this legal risk may
be mitigated by ensuring that: the cash pooling transaction is motivated by busi-
ness reasons; its terms are usual; interest is payable on credit extended by the firm
at the market rate; and that payments are not made to shareholders unless they are
able to repay their debts when due during the term of the cash pooling.^185
(^178) § 826 BGB.
(^179) § 32a GmbHG (now deleted). The company was in a crisis when: it was not able to bor-
row funds from third parties at market conditions; it was insolvent; or its debts exceeded
its funds (Überschuldung). See Blöse J, Cash-Management-Systeme als Problem des Ei-
genkapitalersatzes, GmbH-Rundschau 14/2002 pp 675–678; Cahn A, Kapitalaufbrin-
gung im Cash Pool, ZHR 166 (2002) p 281.
(^180) § 426 BGB.
(^181) See Cahn A, Kapitalaufbringung im Cash Pool, ZHR 166 (2002) pp 282–283.
(^182) Article 15 of Directive 77/91/EEC (Second Company Law Directive).
(^183) Article 16 of Directive 77/91/EEC (Second Company Law Directive).
(^184) BGHZ 157, 52 (II ZR 171/01).
(^185) RGZ 150, 28; BGHZ 157, 52.