Short & Sweet – group account systems
What is it?
A group account system (Nw: konsernkonto) («GAS«) is a technical solution a bank may offer its customers that simplifies the process for lending amounts within the customer’s group. It can be a useful tool for managing and controlling the liquidity in the group and ensuring flexibility for allocating liquidity within the various participating group members. It may also limit the need for other credits facilities, reduce commission and interest expenses and simplify group reporting for its subsidiaries. Usually, a GAS is combined with an overdraft facility granted from the account bank to the parent company, which also (indirectly) allows the participating group members access to such credit.
There are a number of related solutions offered by a bank, for example other types of cash pooling or zero balancing solutions.
How does it work?
The parent will establish a «group account», which will be the main/top account in the system. A positive balance on the group account is a deposit on the account, and a negative balance represents a loan from the bank to the parent.
To benefit from the GSA, the participating subsidiaries of the parent joins the group account system. The bank will set up a sub-account for each such subsidiary, usually referred to as a «participation account». The purpose of the participation accounts is to monitor transactions and outstanding balances between the participants in the GSA. A participation account does not (in itself) create a separate legal relationship or any loan/debt between the bank and the subsidiaries (and is therefore not an actual bank account which e.g. can be subject to security). A positive balance on a subsidiary’s participation account represents a loan from such subsidiary to the parent, and a negative balance on a subsidiary’s participation account represents a loan from the parent to such subsidiary. The group account will hold the overall net cash position of the GSA.
Relevant documentation and security
Prior to setting up a group account system for its customer, the bank requires the parent to enter into a group account system agreement (the «GSA Agreement«) and an overdraft facility agreement (if applicable). Furthermore, the bank will require each of the participating subsidiaries in the GSA to enter into a participation agreement. In the participation agreement, the subsidiary, inter alia, confirms its participation to the GSA Agreement, guarantees for all payment obligations under the GSA Agreement and the overdraft (if applicable) and subordinates or assigns any receivables owed from the parent created under the GSA to the bank as security thereunder.
Considerations for the parent and its subsidiaries
The parent and the participating subsidiaries should ensure all corporate requirements for entering into the GSA and the relevant agreements are met, including all mandatory requirements under the Norwegian companies acts.
If the parent or a participating subsidiary is financially strained, the board of such company should monitor the situation closely. The board may be required to take action to prevent the relevant company from «draining» liquidity to other group members at the expense of its creditors, or to stop drawing on available liquidity in the GSA. Failure to take such actions may result in liability for the directors.
It is important to note that certain funds, which are not freely available for use, cannot be included in the GSA. For example, an account pledged to a third party, a blocked account, client funds, funds reserved for tax deduction and pension funds.
A group member may also be restricted from participating in the GSA due to negative covenants under its existing financial agreements. The parent and the relevant participating subsidiary should, prior to entering into a GSA, consider any effects on existing arrangements, and, prior to entering into new financial agreements, ensure they include appropriate exclusions to ensure necessary flexibility.
Considerations for the bank
A bank seeks to minimize risk related to a GSA, and protecting its position as a creditor under the overdraft, at the outset, by establishing and documenting the structure and obtaining adequate security. As a part of this, it is important for the bank to ensure the parent and its participating subsidiaries take appropriate corporate actions. Otherwise, it risk agreements being void and invalid.
The inclusion of participants from certain jurisdiction outside Norway may constitute an enhanced risk for the bank. Hence, the banks need to closely consider such risk and ensure they meet the legal requirements applicable to their respective jurisdictions. Typically, the bank will have a «white—list» of approved jurisdictions.
An insolvency or liquidation situation for the parent or a participating subsidiary may trigger a number of potential issues for the account bank as a creditor. A prudent bank will involve its cash management and internal/external legal advisors at an early stage to find good solutions to challenging issues.
Please contact us should you have any questions regarding group account systems.