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Parent Company Letters of Support Do Not Allow Creditor to Bring Proceedings

The issue before the High Court here was whether a creditor of a subsidiary company ought to be granted permission to bring proceedings against the parent company, under s. 423 of the Insolvency Act 1986. It was alleged that the parent company withdrew its support for the subsidiary (thereby significantly reducing the monies available to the creditor) having previously set out ‘assurances’ of financial support in three separate letters to the directors of the subsidiary company.

Constructions SiteCarillion Construction Ltd (‘the Creditor’) made the application against Simon Carves Ltd (‘the Subsidiary’), and the Subsidiary’s parent company, based in India, Punj Lloyd Ltd (‘the Parent Company’). The Creditor was a subcontractor under two engineering contracts made with the Subsidiary, relating to the design and installation of a bio-ethanol processing plant in Teeside. The Creditor valued the claim under the potential insolvency proceedings in the region of £12 million.

The Creditor sought the Court’s leave to bring proceedings to compel the Parent Company to honour what the Creditor contended was a series of binding obligations which the Parent Company had entered into by three separate ‘letters of support’. (It was on the basis (or partly on the basis) of those letters that the Subsidiary had continued to trade after March 2008 and until an administration order was made, in July 2011.)

The letters of support from the Parent Company included phrases such as: ‘We are aware of the financial position of your Company…we confirm that we shall provide necessary financial and business support…to ensure the Company continues as a going concern’ (May 2008); ‘We are aware of the financial position of your Company…and we hereby agree to provide sufficient funds to the company…to enable it to continue operating and to meet its liabilities…to ensure that the Company continues as a going concern’ (May 2009); and, ‘We confirm we shall provide the necessary financial and business support…to ensure that the Company continues as a going concern’ (March 2010).

In July 2011, the Parent Company stated that it was withdrawing support to the Subsidiary, attributing this to prevailing market conditions and the Subsidiary’s financial condition. Thereafter, a subsidiary of the India-based Parent Company acquired the Subsidiary’s assets.

As a result of the administration process, the Creditor would only be able to realise approximately four pence in the pound from the Subsidiary.

Were the letters of support from the Parent Company legally enforceable?

The Court noted that that whether letters of support are legally enforceable turns on the facts of each case.

In this case, the Court’s view was that ‘the letters of support did not subject [the Parent Company] to any enforceable obligation and [the Creditor] demonstrates no realistic prospect of establishing that they did. Instead, the letters were intended to do no more than provide the directors of [the Subsidiary], and not [the Subsidiary] itself, with evidence from which they could properly conclude, as they evidently did, that it was proper for [the Subsidiary’s] accounts to be prepared on an ongoing concern basis, and no more.’