PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.
It is quite common when a subsidiary of a group of companies wishes to undertake a substantial contract for the other side to seek assurances of support from the subsidiary’s holding company, or occasionally from another member of the group.
A recent case involved a subsidiary that undertook two building contracts with a subcontractor. The subsidiary’s board had been sent three letters of support from its parent company. These confirmed that the parent company would provide such financial support to its subsidiary as was necessary to ensure that the subsidiary remained a going concern.
The subsidiary went into administration having not paid the subcontractor’s invoices.
The subcontractor sought to obtain payment, relying on the letters of support from the parent company. It argued that the letters gave the subsidiary an enforceable right to receive the necessary support, and that by failing to enforce this the subsidiary had committed a fraud on the creditors.
The court would have none of it. The letters, which were addressed to the board of the subsidiary, meant that the board of the parent company was willing to confirm that the subsidiary’s accounts should be prepared on the ‘going concern’ basis and had been issued as part of the annual audit process. They reflected the board’s policy at the time the annual accounts were being prepared.
The outstanding liabilities of the subsidiary were such (at one stage exceeding £250 million) that it was inconceivable that the parent company was giving a blanket indemnity to the subsidiary.
If you are relying on letters of support to justify undertaking contracts in similar circumstances, contact us for advice.