Withdrawal of comfort letters by parent not attackable as a transaction to defraud creditors

Withdrawal of comfort letters by parent not attackable as a transaction to defraud creditors

Kathy Stones looks at  what happens if a parent company gives a comfort letter to its subsidiary and if it can be attacked by a third party creditor if it is later withdrawn? This issues was considered in the case of  Simon Carves Ltd; Carillon Construction Ltd v Hussain [2013] EWHC 685 (Ch), [2013] All ER (D) 304 (Mar).

In this case, the claimant sought the court’s leave to bring proceedings to compel the ultimate parent company of a company in liquidation to honour a series of binding obligations which it had entered into by way of three separate letters of support. The Chancery Division, in refusing permission, decided the letters of support had not subjected the parent company to any enforceable obligation.

What did the case decide?

In summary, it confirmed that:

  1. whether or not a comfort letter is binding is a question of construction
  2. the burden of proof for establishing a transaction defrauding creditors under the Insolvency Act 1986, s 423 (IA 1986) is high.

The High Court’s decision is unsurprising and reaffirms the position that determining whether a comfort letter is legally binding involves understanding what the letter means and establishing whether the parties to it intended it to give rise to obligations binding in law. Each case must turn on its particular facts. In this case, there was no real expectation the parent company would bail out the subsidiary and meet all of the liabilities then due for payment (or falling due shortly), which totalled around £271.5m. It was significant that the comfort letters were addressed to the board of directors of the UK subsidiary and not to the subsidiary itself because the court

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.