For a letter of assistance to be legally binding, all the usual contractual requirements must be met – namely offer and acceptance, consideration, security of deadlines and intention to establish legal relationships. Recipients will need to review behind the letter of support to determine whether the parent company is likely to continue to provide support, and they should likely also receive a qualified audit report to support it. In the three years prior to pre-packaging, the subsidiary`s parent company had sent three short letters to the subsidiary`s directors confirming that the parent company would provide the necessary financial and commercial support to ensure the continuation of its activities. The subsidiary`s financial statements during this period were prepared on a going concern basis and had indicated over the past two years that they were primarily based on the parent company`s letter of ongoing financial support. Each of the letters was addressed to the „Board of Directors, Simon Carves Limited“. On August 27, 2009, the parent company issued a letter of support entitled „Obligation to provide financial resources“. The relevant parts of the letter state: Other factors that should be considered when using a letter of support are: While this is not the focus of this article, it should be noted that letters of support may be relevant in the context of the Safe Harbor system – they are often a key consideration when planning and advising on Safe Harbor offerings. For the purposes of this paper, we focus instead on the liability of directors and parent companies for insolvent transactions and consider the following questions: These letters generally indicate a willingness to provide adequate financial support to ensure that the subsidiary can meet its obligations. The COVID-19 pandemic may have caused financial hardship to one or more subsidiaries and therefore led to an increased need for letters of support. Gate Gourmet Holding AG was the parent company of Gate Gourmet Australia Pty Ltd (i.e. the subsidiary). The subsidiary, an Australian trading company, offered Ansett Airlines exclusive catering services (over a period of 8 years). To maintain its operations, the subsidiary relied on substantial working capital and term credit facilities provided by its bank to fulfill its contract with Ansett Airlines (which meant that it had to rely on the support of its parent company and other group subsidiaries to maintain these facilities).
If the directors of a subsidiary take steps to ensure that the company is a permanent entity and to determine whether there are significant uncertainties related to going concern, they may request letters of support from their parent company (or another group company). A parent company may have issued letters of support to more than one of its subsidiaries. Later, the parent company decided to withdraw its financial support to the subsidiary. This withdrawal of support contributed to the fact that the subsidiary went into administration. Letters of support often lead to serious tension between the interests of parent companies, subsidiaries, subsidiary directors and auditors. In particular, a parent company is likely to draw a fine line between proposing that a letter be non-binding and seeking approval of the statutory audit and further negotiation by its subsidiary. Directors of the Company will be familiar with general due diligence (including proper oversight and management of the Company`s activities). Directors have a duties to ensure that the Corporation maintains true and accurate written financial records. In the case of public companies, large owner companies, registered systems and disclosure companies, these obligations extend to the engagement of external auditors to carry out an independent assessment of the company`s financial situation and performance. Directors often rely on letters of support from parent companies to determine whether their corporation is and will remain able to act as a continuing corporation. While these letters may include statements that the parent company will financially support the subsidiary, it is often unclear whether they can be treated as a legally binding obligation or vice versa as a desirable letter of intent, as they are issued in a variety of circumstances, take many forms, and are used for various purposes (e.g., for financial/insurance purposes and to create new works/tenders).
win). In September 2001, after Ansett Airlines entered the voluntary administration, the subsidiary came under pressure from its bank and other creditors. When the subsidiary requested confirmation that the letters of support were being complied with, the parent company stated that it would only cover the bank debt (for which the parent company had provided a guarantee). The parent company also said it would not cover payments to other creditors. Therefore, the subsidiary entered into voluntary administration, and later the liquidator of the subsidiary initiated a procedure to enforce the letter of support of the parent company. Administrative letters may also be issued to underwriters as part of the requirement to conduct an „appropriate investigation“ into offerings of securities. These administrative letters ensure that the reports comply with generally accepted accounting principles (GAAP). This helps the subscriber better understand aspects of financial data that might otherwise go unreported, such as changes to financial statements and unaudited financial statements. An administrative letter is usually formulated in vague terms to prevent the issuer from being burdened with a legally enforceable obligation. In many cases, an administrative letter establishes a moral obligation rather than a legal obligation for the issuer.
On April 14, 2010, volunteer directors of the subsidiary were appointed and, shortly thereafter, a request was made to the parent company to pay $5.5 million to the subsidiary under the letter of support. The parent company argued that the letter was not intended to establish a legal relationship between the parties, that it was not supported by consideration and that its terms were too uncertain and incomplete to establish a contract. At first instance, the trial judge found that the letter created a legally binding obligation for the parent company to provide the subsidiary with funds to meet its financial obligations. Therefore, if a letter of support is at the heart of a subsidiary`s subsequent negotiation, it is of course important to take into account the subjective and objective views of the parent company and all the directors concerned (for example, whether the letter was considered binding or enforceable and whether the intention was to provide or withdraw the financial support mentioned in the letter). At the beginning, the terms „holding company“ and „subsidiary“ are defined by the German Law on Joint Stock Companies, respectively, Articles 9 and 46. A corporation is a subsidiary of a holding company if and only if the holding company: (1) controls the composition of the subsidiary`s board of directors; 2. is able to vote or control the exercise of more than half of the maximum number of votes that may be cast at a general meeting of the subsidiary; or (2) holds more than half of the issued share capital of the Subsidiary. In most cases, these letters serve their purpose at first glance and are never considered. But Buffett said it best: „It`s only when the tide goes down that you find out who swam naked.“ In times of financial hardship or formal bankruptcy, the unintended consequences of a poor editorial interface and the extent to which such a letter contains enforceable obligations can make the difference between the survival of a subsidiary and a permanent bankruptcy.
Regarding the applicability of a letter of support in the contract, we note the following three main points: The letters written by the parent company Punj Lloyd Ltd indicated that the company would continue to financially support the subsidiary Simon Carves Ltd while it was in financial difficulty. Letters of support are often issued for the following reasons: Forest Enterprises Ltd was the parent company of FEA Plantation Ltd (i.e.