‘Letters of support’ not legally enforceable
Posted: 28th May 2013
The central issue before the High Court in a recent case was whether a number of letters of support written by a parent company and sent to the directors of a daughter/subsidiary company were legally enforceable.
The letters, written by the parent company, Punj Lloyd Ltd, indicated that the company would continue to financially support the subsidiary company, Simon Carves Ltd, whilst it was experiencing financial difficulties.
Later, the parent company decided to withdraw its financial support from the subsidiary company. This withdrawal of support contributed to the subsidiary going into administration.
The subsidiary owed payments to one of its contractors, Carillion Construction Ltd (the construction firm put the outstanding amount in the region of £12 million). An issue arose in that as the subsidiary was now in administration it could only pay four pence in the pound of this debt.
Carillion claimed that the parent company should have honoured the commitments to continue to support the subsidiary set out in the letters of support (thereby enabling the subsidiary to pay Carillion’s invoices). The withdrawal of the support was, Carillion claimed, a breach of s. 423 of the Insolvency Act 1986.
In this instance, the court’s view was that the letters from the parent company were not actually legally binding commitments to continue to financially support the subsidiary, and accordingly, the parent company was not obliged to honour the commitments.
The court considered a number of factors, including the following: the letters ‘did not even purport’ to be a contract; the letters were addressed to the ‘Board of Directors’ of the subsidiary, i.e. the board could then decide whether their company should continue to operate; and, it would be ‘extravagant’ to consider that the letters committed the parent company to meet all the debts of the subsidiary company (which for one particular year stood at over £270 million).
As a result, the letters did not, in the court’s view, commit the parent company to any ‘enforceable obligation’.