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Legal Considerations in Cross-Border Cash Pooling

How the structure of a cash pool affects legal liability if one or more participants in the pool experiences financial distress.

By Creighton R. Meland & Natalie L. Regoli | Updated on September 28, 2017
For treasurers of multinational corporations, cross-border cash pooling can be a vital tool for managing cash on a daily basis. And it makes a great deal of sense to have some members of a corporate group offer up their excess cash in order to meet the needs of the enterprise, from repayment of corporate debt to support of business units that need an influx of capital, to investment of aggregated cash balances for optimal returns. However, waters in the cash pool can turn murky when the enterprise is in distress.

Because legal structures and documentation differ between physical cash pools and notional cash pools, the effects of financial distress on an organization’s cash flows depends on which of these structures defines the cash pool. The differences between a physical and a notional cash pool are significant.

In a physical cash pool, participants agree to move their excess cash on a periodic basis to an entity within the corporate group called the cash pool leader. The cash pool leader concentrates excess cash from participating business units and uses those funds for the benefit of the participants. Cash pool participants with a cash deficit can receive an intercompany loan from the cash pool leader and pay interest to the cash pool leader. Participants that contribute excess cash to the pool receive interest on the funds they make available. This structure enables a company to deploy cash to the best possible effect across the enterprise. Funds advanced to the cash pool leader appear as an asset on the balance sheet in the form of intercompany loans. Similarly, funds borrowed from the cash pool leader appear as a liability, classified as intercompany loans incurred.

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