Parent company letters of support – are they binding?

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Posted in:Corporate and Commercial|June 3, 2013 | Join the mailing list

In the recent case of Re Simon Carves Ltd sub nom Carillion Construction Ltd v Hussain and others the High Court decided that letters of support provided by a parent company were not legally binding in the sense of a contract.  The High Court
confirmed that such letters did no more than provide evidence from which the subsidiary can use as part of their on-going management rather than providing a separate agreement with additional rights and obligations between the subsidiary and parent company.

In this case the letters of support merely provided the directors of the subsidiary with evidence from which they could confirm that the subsidiary’s accounts should be prepared on a going concern basis.

The facts

The subsidiary had entered into two contracts with a subcontractor, the work was completed and the subsidiary subsequently went into administration before paying the invoices to the subcontractors.  The Subsidiary was later sold in a pre-pack
leaving all unsecured creditors with a nominal payment.

Prior to the pre-pack the subsidiary’s parent company had provided three letters to the subsidiary’s directors confirming that the parent company would provide the necessary financial and business support to ensure that the subsidiary continued
as a going concern.  During the three years prior the subsidiary’s accounts had been prepared on a going concern basis.  In the last two years the accounts had stated that this was based primarily on the letter of continuing financial support from the parent
company.  The letters were always was addressed to "The Board of Directors, Simon Carves Limited".

The foundation for the claim brought by the subcontractor was that the three letters had created enforceable obligations between the subsidiary and parent company and the subsidiary’s failure to act on this was a transaction defrauding creditors.

The judge rejected the subcontractor’s claim on the grounds that it was deliberate to address the letters to the board of directors and not simply the subsidiary.  Further, it was found that the timing of the letters was significant, they
were provided in the course of preparing the subsidiary’s accounts showing evidence that the purpose of the letters was to enable directors to determine whether or not accounts could be prepared on a going concern basis.

Finally it was found that it would be illogical to suggest that a commercial entity would oblige itself to keep a balance sheet of a subsidiary solvent merely by a letter of support.

One final contractual discrepancy with the sub-contractors claim was that there was no consideration passed from the subsidiary to the parent company.  It was decided that the fact that the subsidiary may have relied on the letters to continue
trading was not consideration and accordingly no additional contractual relationship had been formed.

Conclusion

For a letter of support to create a binding legal obligation normal contractual requirements must be satisfied.  This becomes a factual question and so whether or not a contractually-binding promise exists will be decided on a case by case
basis.  Interestingly, in this case expert evidence showed that some auditors would have found the letters binding.  What the High Court decision has illustrated is that although traditional contract principals will apply, each case will need to be decided
on its own facts and this can remain unclear.

Should you have any concerns regarding your company structure and the provision of letters of support, or seek guidance and advice in relation to existing group company commitments please contact Stephen Foster, Head of Corporate
at
stephenf@berg.co.uk or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice.  No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees. 
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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