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Hayabusa Asuka

Tokyo, Japan

1. Cash Pooling Arrangement

Effective management of business funds is a very important goal for a company with several foreign branches or affiliate companies. One strategy for achieving effective funds management is to implement a cash pooling arrangement (including a cash management system). There are two types of cash pooling arrangements: actual cash pooling; and notional cash pooling.

2. Actual Cash Pooling

What is actual cash pooling?

This arrangement focuses on actual transfers of excess funds between the accounts of various group companies. For instance, a cash pooling arrangement may be useful in cases where a certain company of a group of companies has excess funds and just deposits them in a bank account while the other companies which are short on funds (“Shortage Companies”) borrow money from an outside financial institution and pay interest. In such cases, if the excess funds are applied to the shortages of the Shortage Companies, such excess funds can be used effectively within the group without the need to borrow from an outside financial institution.

Under an actual cash pooling arrangement, funds which are deposited in several accounts and held by several group companies are “actually” transferred to a specific account and pooled in such account. Then, the Shortage Companies borrow money from the pool of concentrated funds.

Legal Issues

There are some legal issues to consider with respect to an actual cash pooling arrangement, especially the implications of the Money Lending Business Act (Act No. 32 of 1983, “MLBA”).

First and foremost, a license is necessary for conducting a Money Lending Business under the MLBA. If lending money to the Shortage Companies falls under a Money Lending Business, the intra-group lender will likely be required to obtain a license under the MLBA. According to the case law precedents,  a Money Lending Business just means the business of making loans “repeatedly and continuously”. The intention to obtain profit or the result of obtaining profit is not a requirement of a Money Lending Business (the loaning of money to the general public is also not a requirement).

However, a key question related to the MLBA issue is whether loans between a parent company and an affiliate company/sister company fall within the above-noted definition. On this question, three answers have been given by the FSA to No-Action Letters (i.e., preliminary inquiries to the FSA) on the matter (“NAL Answers”). In short, the NAL Answers indicate that the loaning of money between a parent company and a direct/indirect affiliate company (i.e., cases where the parent company has no less than 51% of the voting rights of the affiliate company) would not be considered a Money Lending Business by the FSA. On the other hand, according to the FSA, the lending of money between sister companies could be considered a Money Lending Business. While the FSA does not explain in the NAL Answers the reason for the difference between the case of lending to a subsidiary and lending between sister companies (and some scholars argue that there is no difference between these two types of lending), other than the NAL Answers, no policy has been published by any authority regarding the necessity of an MLBA license in the case of a group company. Therefore, adopting an appropriate actual cash pooling arrangement is critical if the intra-group lender does not have a license under the MLBA.

In addition to the MLBA issue, legal issues regarding the Act Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates (Act No. 195 of 1954), the Banking Act (Act No. 59 of 1981), and the Payment Service Act (Act No. 59 of 2009) should be taken into account depending on the scheme or a role of the intra-group lender. Furthermore, in cases where the funds are transferred to a foreign bank account (i.e., the account holder is located in a foreign country and such foreign company plays the role of intra-group lender), the Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949) likely applies to such fund transfer. However, we believe that these non-MLBA issues probably should not prevent companies from being able to adopt an actual cash pooling arrangement, so please consult us if you are considering an actual cash pooling scheme and we will assist you with overcoming such issues.

3. Notional Cash Pooling

What is notional cash pooling?

This arrangement mainly focuses on the application of an advantageous interest rate on deposits or borrowed money. Notional cash pooling is a mechanism for calculating, at an advantageous interest rate, interest on the combined credit and debit balances of accounts that a company chooses to group together, without actually transferring any funds. It is ideal for companies with decentralized organizations that want to allow some autonomy to their subsidiaries, including allowing such subsidiaries to have control over their own bank accounts.

Several Schemes

For the calculation of the advantageous interest rate, there are mainly two types of the notional cash pooling schemes: (i) the advantageous interest rate applies to the total amount of the deposit and/or debts; and (ii) such rate applies to the smaller amount of either the deposits or the debts, while a normal interest rate applies to the excess amount over the amount to which the advantageous interest rate applies.

In addition to the above, if the deposits/debts are denominated in several different currencies, the subject amounts have to be converted to a certain principal currency designated by the company or the bank at which the company has a bank account only for the purpose of calculating the advantageous interest (in other words, this conversion is conducted notionally and the company does not actually obtain the principal currency).

Furthermore, variations such as the following exist: (x) the company has multiple bank accounts to which the funds are notionally transferred; (y) the company designates multiple currencies as the principal currency; and (z) the company breaks down its group companies by regions and adopts a notional cash pooling scheme on a regional basis.

Legal Issues

As the funds are not actually transferred under a notional cash pooling and the purpose of this arrangement is different from that of actual cash pooling, the legal issues which arise from an actual cash pooling are not triggered.

As to operational issues, if several foreign group companies are involved in a notional cash pooling arrangement, the company has to take into account time zone differences to calculate the total amount of the deposits/debts. In such case,the scheme mentioned in “Several Schemes”(z) above will minimize the effect of the time zone difference.

4. Combined Cash Pooling Arrangements

Depending on the purpose, a combination of an actual and notional cash pooling arrangement might be helpful:

(i ) the companies transfer funds to a certain bank account under an actual cash

pooling arrangement;

(ii) the advantageous interest rate applies to the transferred funds; and

(iii) the Shortage Companies borrow money from a bank against the security of the actually transferred and deposited funds, and the advantageous interest rate applies to such overdraft.

Under this scheme, the advantageous interest rate will apply and the company does not need to be concerned about legal issues which arise from an actual cash pooling scheme because the bank is involved in this arrangement. However, the regulations under the Foreign Exchange and Foreign Trade Act should be considered even if the bank is involved.

5. Comments

We believe that cash pooling arrangements can be useful for a company to manage its

business funds effectively because such arrangements may be designed on a tailor-made basis depending on the goals of the company regardless of the size of the company.

However, in order to implement this arrangement appropriately, legal issues have to be considered and clearly dealt with prior to the launch of the scheme, and all the relevant documentation has to be prepared very carefully. If a scheme is adapted without taking into account the legal consequences, the business might fail due to violations of the relevant laws or insufficient documentation. Accordingly, please consult us prior to the adaptation if you are interested in a cash pooling arrangement.

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