German legislation is being changed in recognition of the importance of cash pooling. Karl Maria Walter and Andreas Lindner explain

Cash-management systems and financing models that include central liquidity equalisation (cash pooling) are essential tools of modern cash management for multinational businesses.

However, while those multinational cash pool arrangements are generally accepted in most jurisdictions, Germany is different. While current German corporate law does not explicitly prohibit cash pooling agreements, legal conflicts with most cash pooling systems are common.

Recent decisions by Germany’s Federal Court of Justice (Bundesgerichtshof (BGH)) have created two types of problems for German companies participating in cash pooling agreements: those relating to capital contributions (Kapitalaufbringung) and those relating to capital maintenance (Kapitalerhaltung).

Capital contributions

Problems with capital contributions may occur in the context of forming a GmbH (limited liability company) or AG (stock corporation), or in situations where the shareholder intends to increase the registered share capital of such companies. Such capital contributions may be made either in cash or as a contribution in kind (Sacheinlage).

In this regard, contributions in kind are usually more time consuming and expensive than cash contributions, as contributions in kind need to be valued precisely. However, all cash contributions adding to the registered share capital must be made to a bank account controlled by the company’s managing director(s).

The requirement to pay the contributions to the company’s bank account controlled by the managing directors obviously conflicts with the aims of common cash pooling systems, which, to optimise liquidity and reduce financing costs, require a centralised bank account that usually is administered in the name of a finance company acting for a multinational group of companies.

Accordingly, the group entity that was supposed to benefit from the capital increase (or its initial formation) is required by the cash pool agreements to pay this capital contribution directly to the cash pool account. As a result, the contribution will not be controlled by the managing directors, as it is subject to the provisions of the cash pool agreements.

In 2006, the BGH issued a decision in a case in which the shareholders attempted a cash contribution to a company that was part of a cash pool. The BGH held that the payment, which was initially made to the company’s bank account and later transferred to the group’s cash pool account, did not raise the company’s share capital, although the company’s liabilities were reduced by exactly the amount of the payment.

Moreover, the shareholders were required to pay in the amount again, to an account controlled by the company’s managing directors, to meet the share capital requirements.

As a side note, the BGH noted that a company (here a GmbH) cannot be released from its statutory obligations just because it is part of a cash pooling system.

Capital maintenance

According to German law, the capital needed to maintain a company’s share capital must not be paid out to its shareholders. In addition, this rule also applies in situations of overindebtedness of the company, such as where the liabilities are higher than the assets and the equity is negative. In a cash pooling environment, company accounts are usually swept at the end of the business day in favour of the group-wide cash pool account, and, therefore, also in favour of the shareholder.

Even though a company would receive a repayment claim against the shareholder or cash pool once the company account is swept in favour of the cash pool, the BGH ruled that this sort of repayment claim is to be disregarded and that the payment to the cash pool would violate statutory capital maintenance rules.

The consequences of a violation of these capital maintenance rules are: immediate repayment by the shareholder; and the managing directors of the company facing personal liability to the shareholder.

At first glance, this does not sound very dramatic, but personal liability becomes a true burden for a managing director when the company becomes insolvent and the shareholders are neither able to repay the necessary funds to the insolvency administrator nor able to hold the managing director harmless from and against the claims of the insolvency administrator.

To avoid the dilemma and to give German entities the opportunity to participate in multinational cash pooling systems, a number of approaches have been discussed in the past. However, all known approaches do not seem to offer an adequate compromise between the economic interests of the group companies and the mandatory capital maintenance rules of German corporate law.

Even though none of these approaches have actually been tested by the courts, the content of the recent BGH rulings suggests that the current wording of the law does prevent an economically effective cash pool for German entities.

New legislation?

The capital maintenance rules are a part of the traditional creditor protection measures found in German corporate law. The extent of these creditor protection measures seems to be quite unique in the business world and clearly puts German corporate entities at a competitive disadvantage. The above-mentioned BGH rulings have caused numerous complaints and highlighted the need for legal reform.

The German government has responded and the legislature is expected to enact new cash pooling rules as part of a larger reform of German corporate law – the so-called ‘Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Mißbrauch’ (Statute for the modernisation of the limited-liability company law and for the combat of misuse). The statute is intended to provide a more attractive environment for investors in Germany.

Besides addressing the issue of cash pooling, the reform law will also reduce the minimum share capital for a GmbH from e25,000 (£17,000) to e10,000 (£7,000).

As expected, the new law explicitly addresses the cash pool issues and states that the former prohibitions on payments to shareholders, which would undermine share capital, are no longer applicable in situations where such payments are covered by “a claim for an equivalent or return in full value”.

Under this new legal scheme, payments to a cash pool account become admissible on the condition that the paying company receives a full claim for a repayment in return. This new rule would be applicable for capital contributions as well as capital maintenance. The new law would establish a legal foundation for cash pooling agreements and the risk of violating capital contribution and maintenance rules by cash pooling agreements in Germany would be minimised.

However, the explanatory notes to the current draft of the legislation state that it will remain the managing director’s personal obligation to review the recoverability of the company’s claims towards the cash pool. Should the recoverability of a payment be in question, the managing director would have to immediately exercise the company’s claim for repayment to avoid personal liability.


The new law, which is currently moving through the legislative process, shows clearly the intention of the legislature in Germany to address the current problems with cash pooling under German corporate law. After further deliberation and amendment, the new law is expected to come into effect in the first half of 2008.

Even with the new law, however, the drafting of cash pool agreements requires careful attention as a managing director may still be held personally liable.

Cash pool agreements, which involve German entities, will need carefully-drafted provisions that provide for the managing director’s right to exercise the company’s repayment claims to protect its share capital. Most existing cash pool agreements do not yet contain such clauses and will have to be adjusted accordingly.

Karl Maria Walter is head of the corporate group and Andreas Lindner is an associate at Faegre & Benson