Comfort Letters: Alternatives to giving Guarantees
There may be situations where you are unable to provide a financial guarantee, whether as a parent company to your subsidiary or to an unconnected third party whom you wish to support financially. You may however be willing to provide written assurances to a lender for a loan they have made in the form of a comfort letter in order to support the obligations of a third party.
As part of our range of template guarantee agreements, we have therefore added both a binding and non-binding comfort letter to provide you with a form of agreement which can be used to provide “comfort” to a lender but falls short of being a guarantee. This will be of particular interest for parent companies that may be restricted for constitutional reasons from giving guarantees, but are still looking to support their subsidiary companies. The decision to accept a comfort letter rather than a guarantee is a commercial one for the lending entity. Comfort letters can be made to be binding or non-binding and its status will very much depend upon the terminology used in the relevant letter.
Our new material added therefore includes:
• A binding comfort letter – a letter intended to be binding and drafted as such; and
• A non-binding comfort letter - intended to be non-binding and clearly stated as such. Neither a consideration nor a governing law clause has been included. Such a letter may still carry moral and reputational force against the parent should the borrower default.
In addition, to complement our popular Guarantee templates we have also updated our board meeting minutes where a company’s board agrees that the company will guarantee the indebtedness of a named third party, by including wording to guarantee the financial obligations of a parent company’s subsidiary.
We have also added a new shareholders’ written ordinary resolution. A company providing a guarantee must show the corporate benefit to it of providing the guarantee. This will be clear if for example, the guarantee relates to its subsidiary company. However where the corporate benefit for giving the guarantee is not immediately clear, shareholder approval should be sought by the guarantor company in order to give a guarantee.
The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.