Important points of attention for groups (in difficult times)
Group financing has many advantages. Large enterprises that are organised within a group of companies have the possibility to obtain more external financing. However, especially in uncertain times, it important to keep an overview of the mutual relationships between the various group companies in order to have a good picture of the liability position of the group. This will enable the parent company to keep control over the group, even in difficult times. Business-law lawyer Sjoerd Yntema discusses some points of attention for groups.
Security position based on forced-sale value
If contracts with the bank are concluded with the group as contracting party, this means that not every group company will have to do this for itself. Moreover, banks will be prepared to provide bigger loans, as they will take the forced-sale value of the
The assets of a Dutch company reflect the value of all that the company possesses
» Meer over assets assets of the group as a whole as their starting point for determining their security position. Generally, the parent company will act as some sort of internal bank that divides the capital among the group companies.
Usually, numerous financial links that have been entered into between the various group companies will therefore exist within the group itself as well. Often, these links take the form of current-account relationships (Book 6, article 140 of the Dutch Civil Code). Regardless of the form they take (central cash management by the parent, global credit line or a group surety), it is important for both the relationship with the bank and the internal relationships to map out the cash flows and to have a clear picture of the conditions (securities, maturity, interest, etc.) under which these loans were taken out.
Security for group debts
As a rule, the bank will have stipulated security for the group debts with regard to the financing provided. For the parent company, it is important to check to what extent the claims it has on the group companies are covered by rights of pledge or
A mortgage is a limited right given by a debtor on an asset intended as a security for the creditor that performances are fulfilled.
» Meer over mortgage mortgage (Book 3, article 227 et seq. of the Dutch Civil Code). If it is expected that the group will be confronted with financial difficulties, it is advisable for the group management to check to what extent additional security can be established and how this security relates to the security established by the bank.
Joint current account
Many internationally operating groups opt for a so-called ‘cash pool agreement’ to ensure better control over their liquid resources. By means of cash pooling, all free liquid funds are placed into one account, which is often managed by the parent company. In this way, problems with different currencies are prevented, financing costs and transaction costs are minimised, and there is a better insight into the liquidity position of the company.
However, under the current circumstances it is advisable to take a critical look at this cash pool agreement, which is entered into between the group companies, and to check what conditions are attached to it. As a result of changed circumstances, a daughter’s participation in the cash pool may no longer tally with the corporate interest of this daughter, and stakeholders may therefore try to affect the cash pool agreement by invoking the actio pauliana.
Liability of the parent for the daughter
In order to prepare and publish consolidated annual accounts as a group, the parent company is required to issue a letter of support (a so-called ‘403 statement’ in Dutch, after Book 2, article 403 of the Dutch Civil Code). A parent company that issues a letter of support on behalf of its daughter is jointly and severally liable for the debts arising from legal actions performed by this daughter. This means that in principle, a creditor of the daughter can choose to seek redress either from the daughter or from the parent company.
The parent company may choose to withdraw this letter of support. As a result, the parent company will no longer be liable for debts that arise after the statement of withdrawal was issued. However, the parent remains liable for debts attached to the parent after issuing the letter of support. To get rid of these debts, the group company must be removed from the group, which (to some extent) requires the cooperation of the creditors.
In addition to this ‘voluntary liability’ of the parent, the parent can, under certain circumstances (e.g. intensive policy involvement or creating incorrect expectations among creditors), also be held to account by creditors of its daughter companies by reason of a wrongful act. Especially in difficult times, the parent company therefore needs to be aware of the duty of care that the close group structure entails.
There are numerous advantages to group financing. However, such structure, which is often very complex, requires extra attention in difficult times and it is therefore advisable for the board of the parent company to take proper
The portion of registered capital of a private or public limited company
» Meer over share stock of where risks and opportunities lie.