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Cash Pooling in Russia – To Loan or Not to Loan?

Cash Pooling in Russia – To Loan or Not to Loan?

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Cash pooling is a convenient tool for optimizing cash management within a group of companies, but its popularity in Russia is limited. One of the reasons for this is the lack of unified legislation on cash pooling. In fact, it is subject to a complex regulatory landscape of civil, tax, banking, currency control, and insolvency law. One resulting difficulty is qualifying the very nature of the cash pooling arrangements. At first glance this may appear a purely academic problem, but in practice it has far-reaching practical implications.

Market Practice

Cash pooling products offered by Russian banks are typically structured such that each group company enters into an intra-group loan agreement with the parent company, acting in the capacity of the pool leader. Under this set-up, the bank accounts of all group companies are maintained in the same bank, with the parent company managing the master account. Most importantly, loan agreements provide for the right of the subsidiary to borrow funds from the parent company with an obligation to repay the principal amount along with market rate interest, and vice versa.

Nevertheless, structuring cash pooling arrangements as a set of intra-group loan agreements is not the only option available. In many jurisdictions, cash pooling takes the form of a multilateral cash management agreement within the group based on the freedom of contract. The financing is not strictly regarded as lending from a legal perspective, as the main purpose of the agreement is to facilitate cash flow by balancing group accounts.

Therefore, the question arises whether it is possible to structure cash pooling in a similar manner under Russian law. If so, what risks might be related to such agreements? Certain clues may be found in recent case law.

Implications in Insolvency Cases

Cash pooling rarely occupies the center of interest for Russian courts. However, the question of its structuring was the subject of a decision of the 9th Commercial Court of Appeal in Moscow – which was upheld by the Supreme Court in May 2020 – related to the multilateral zero-balancing cash pooling agreement concluded between the bank and a Russian group.

Under the agreement, funds available in the accounts of each company were written off at the end of each business day and transferred to the master account managed by the parent company. Where there were insufficient funds in the accounts to proceed with all requests for payments submitted to the bank, payments were made from the funds collected in the master account. The agreement did not provide an explicit obligation to repay the funds transferred from the master account to the account of the relevant group company.

Almost a decade after the conclusion of the agreement, one of the subsidiaries was deemed insolvent. Consequently, the parent company demanded the repayment of interest-free loans of roughly RUB 1.4 billion (approximately USD 18 million), including its claim in the register of creditors. The sum was the difference between funds transferred to the account of the insolvent subsidiary and funds transferred back from it to the master account throughout the entire life of the Agreement. Initially the courts ordered that the claim of the parent company be included in the Register of Creditors but, following an appeal, the decisions of the lower courts were eventually overturned and the case referred for reconsideration.

With respect to the agreement, the Court of Appeal ruled that: (a) it did not provide a repayment obligation (nor terms of repayment), which is an obligatory element of a loan agreement; (b) the purpose of the agreement was to improve financial flows within the group and to reduce operational costs, and that purpose may not be in line with the nature of a loan agreement.

Consequently, although structuring cash pooling arrangements as a multilateral contract based on freedom of contract was not questioned in principle, claims for the repayment of surplus obtained by group companies under such agreements bear the risk of not being protected by law and cannot be included in the Register of Creditors.

Key Takeaway

Should you consider structuring cash pooling arrangements in Russia not as a set of intra-group loans providing for the repayment obligation, recovering surplus funds distributed to an insolvent group company may not be feasible.

By Svetlana Seregina, Partner, and Marcin Kryszko, Associate, Peterka & Partners

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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