Letter of comfort: does it offer any comfort?
PhD student: Mrs L. Leber
Promotor: Mrs Dr S.A. Kruisinga
Duration: 1/11/2008 - 30/9/2012
PhD defence: Utrecht, 24/3/2017
In financing relations between a group of companies and a bank, the companies may try to raise the loans they have, or get new loans, within their financial arrangements with such bank. The bank may be willing to issue an additional loan, if it receives security interests in return. In order to be of assistance to the bank, or another finance company, a parent company may offer to issue a letter of comfort for a loan offered to a subsidiary if the parent company is not willing to issue a guarantee. A letter of comfort is issued to a lending institution by the parent company. In this letter, the parent company acknowledges the approval of a subsidiary company's attempt for financing. It gives reassurance to the lending institution that the parent company is aware of the financing and approves it. Although initially intended as a reassuring instrument, it depends on the circumstances of the case and the wording of such letter what rights and obligations stem from such document. Very often, a parent company will state in the letter of comfort that it is in its interest that its subsidiaries meet their financial obligations at all times and that it is its policy to provide the subsidiary company with such support and assistance as may be required to ensure that it maintains capital and liquidity levels to enable it at all times to meet its obligations in conformity with standards of prudence generally accepted for its field of business. Though not explicitly intended, such statement may give rise to a tortious or contractual liability of the parent company. This raises the question as to the possibilities of enforcement of a letter of comfort. A fundamental principle of company law is that a company is in principle only liable for its own debts. A letter of comfort may change this, because it may imply a liability of the parent company, because the bank requests so. This, however, will depend on the interpretation of the document. A distinction may be made between different kinds of letters of comfort. In such letter a parent company can, for example, only acknowledge that a loan is awarded to its subsidiary. In such cases, the parent company will usually not be bound contractually. It may, however, in certain circumstances be held liable in tort by the bank or the lending company. On the other hand, a letter of comfort in which a parent company promises not to change its participation in its subsidiary will generally bind the parent company contractually as against the bank. There are many other variants of a letter of comfort. One other example is a letter of comfort in which the parent company promises that its subsidiary can and will be able to pay its debts. In such cases the parent company will usually have assumed its own, separate, obligation towards the bank. Decisions in which a letter of comfort was issued: HR 13 september 1985 (Albada Jelgersma Holding BV vs. Melitta Nederland en de noodlijdende dochtenvennootschap Wijnanda Kuntz BV), HR 18 november 1994, NJ 1995, 170, nt. Ma. The letter of comfort has an Anglo-American origin, but is nowadays widely used internationally. It is mostly referred to as a letter of comfort, for example in the Netherlands, but also as patronaatsverklaring (in Dutch) or a lettre de patronage in France and a Patronatserklrung in Germany. A parent company may, for example, be willing to assist a foreign subsidiary during negotiations with its local bank. Because of the different approaches that are being taken in the different legal systems, a comparative research in this respect is an essential part of the research. Because of these different approaches, issues of private international law are also of importance. Research questions The question this research poses is: to what legal rights and obligations does a letter of comfort give rise? Does a letter of comfort give rise to only moral obligations, or does it also entail any legal obligations? Which standards are used when a letter of comfort is to be interpreted? What should be the position of a letter comfort in company law? These fundamental questions will be examined by focussing on, first, company law, and, second, commercial law. First of all the position of a letter of comfort within company law needs to be ascertained. In principle, a company and thus also a parent company is only liable for its own debts. The instrument of a comfort letter thwarts this fundamental principle, because it can involve a liability - either contractually or in tort - for the parent company for (some of) the debts of its subsidiary. It depends on the interpretation of the wording of such letter and the circumstances of the case whether such letter gives rise to any liability of the parent company. In addition, some more technical questions will be raised, as for example who may represent the company when issuing a letter of comfort. Does the issuance of such letter always fall within the aim of the company? What are the consequences in case of unauthorized representation, or if such act is outside the aim of the company? Does the company have an obligation to publish the issuance of such letter in its yearly financial report? The consequences of a violation of the promises in the letter of comfort will also be taken into account. If the letter of comfort was offered for a financing arrangement for a group of companies, what can the bank claim on the basis of such letter? Will this imply a liability in contract or in tort? If the bank has a right to claim, for example, compensation which company will have the duty to pay? Is there a possibility that shareholders of the parent company may be held liable for such occurrences? Secondly, the letter of comfort will be regarded from the perspective of commercial law. What is the standard for interpretation of such letter? Is a letter of comfort to be regarded as a contract in order to answer such question? Or is it more comparable to a standby letter of credit, or an independent bank guarantee? If so, what are the standards for the interpretation of the instrument? Finally, the aforementioned questions will be analyzed together. Why is the position of the letter of comfort as it is? Is there a need for more clarity in this field of company and commercial law? If so, what approach is needed? Comparative research will be very relevant in this regard, because of the different approaches with regard to the bindingness of a letter of comfort.