The parent company's letter of support

Date 1 nov. 2011

 

The case in brief

On 27 June 2011, The Supreme Court gave judgment in a case concerning a parent company’s (hereinafter the ”Parent Company”) letter of support to one of the subsidiary company’s (hereinafter the ”Subsidiary”) trading partners (hereinafter the ”Trading Partner”).


The case concerned whether the Parent Company, based on a letter of support for the Subsidiary made on 14 September 2000 (hereinafter “Letter of Support”), was liable for the Trading Partner’s claim against the Subsidiary in continuation of the Subsidiary’s bankruptcy.


The background for this was that the former parent company for the Subsidiary had made an identical letter of support to the Trading Partner. The former parent company’s letter of support was made as an alternative to credit insurance or a bank guarantee.


In connection with the Parent Company taking over the entire share capital of the Subsidiary, the Trading Partner had raised the claim that the Parent Company should make a letter of support corresponding to the one made by the former parent company.


In extract, the Letter of Support had the following wording:


”Based on the Trading Partner’s engagement as sub-supplier of our Subsidiary in Brøndby, Denmark, in which we own 100% of the shares, the undersigned (the Parent Company) hereby confirms that we keep our shareholding of 100% of the Subsidiary’s share capital, and that we will neither sell nor in any other way dispose of any part of the mentioned holding or limit our influence on the Subsidiary without compensating for the amounts agreed between the Trading Partner and the Subsidiary as regards further stock and debtors which is estimated at DKK 4m for the Trading Partner.

 

Furthermore, we confirm that we will continuously review the status of the Subsidiary, which it is our policy to support economically, and that we will use our influence with a view to secure that the Trading Partner does not suffer any loss which is limited to the abovementioned agreed amount in connection with the engagement as sub-supplier of the Subsidiary.

 

We accept that we are obligated to compensate the Trading Partner for the loss which he would suffer in case we do not fulfil our obligations pursuant to this Letter in Support.

 

We specifically confirm that the present Letter of Support stays fully in force as long as the Subsidiary owes the abovementioned amount to the Trading Partner as we will continuously supervise the Subsidiary’s engagement with the Trading Partner.”


The Letter of Support given by the Parent Company was identical with the letter of support given by the former parent company.


On 20 February 2003, the Subsidiary went bankrupt.


The Trading Partner maintained that the Parent Company had failed to fulfil its obligations pursuant to the Letter of Support by (i) not having supported the Subsidiary economically and (ii) not having used its influence in the Subsidiary to ensure that the Trading Partner did not suffer losses from its trading with the Subsidiary and (iii) accepting the Subsidiary’s bankruptcy, by which the Parent Company had disposed of the shares in the sense of the Letter of Support and, consequently, had reduced its influence in the Subsidiary.


The Eastern High Court’s decision of 21 October 2008

The Eastern High Court decided in the case on 21 October 2008. The High Court based its decision on the fact that no negotiations had been conducted between the Parent Company and the Trading Partner on the specific content of the Letter of Support and that, likewise, no discussions had been conducted on the legal effects of the Letter of Support.


Furthermore, the High Court based its decision on the fact that the Parent Company did not receive specific information from the Trading Partner or the former parent company on the basis for the former parent company giving its letter of support in March 2000 as an alternative to credit insurance or a bank guarantee, or information on how the Trading Partner and the former parent company understood the legal obligations which would be contained in the letter of support given by the former parent company.


The High Court thus only based its decision on the wording and the content of the Letter of Support given by the Parent Company and, based on this, the High Court gave judgment in favour of the Parent Company.

 

The Supreme Court’s decision of 27 June 2011

The Supreme Court pronounced that it was first and foremost the content of the Letter of Support which determined the extent to which the Parent Company was obligated towards the Trading Partner.


In the opinion of the Supreme Court, the Parent Company had not failed to fulfil its obligations pursuant to the Letter of Support by not preventing that the Subsidiary went bankrupt.


The Supreme Court stated that the content of the second paragraph of the Letter of Support on the Parent Company’s continuous review of the Subsidiary’s status could not be regarded as the Parent Company having assumed a legal obligation to ensure that the Trading Partner did not suffer a loss by trading with the Subsidiary, neither taken alone nor in comparison with the other content of the Letter of Support.


The Supreme Court did not find that the Letter of Support could serve as basis for enjoining the Parent Company to indemnify the Trading Partner for its loss as a consequence of the Subsidiary’s bankruptcy.


Just as was stated by the High Court, the Supreme Court did not find that the circumstances surrounding the Letter of Support could lead to a different result.

 

Future implications

The Supreme Court’s decision thus acquitted the Parent Company based on the specific wording of the Letter of Support and the other circumstances. The Supreme Court states that it is first and foremost the content of the specific letter of support which determines the extent to which the provider of a letter of support becomes obligated towards the receiver of the declaration.


This means that a parent company must continuously focus on how the letter of support is drafted in that the wording and the circumstances may entail that the parent company is bound to a larger extent than what was originally intended by the parent company at the conclusion of the declaration.

 

 

If you have any questions or require additional information on the judgment, please contact Partner Thomas Weitemeyer (twe@mwblaw.dk), Junior Associate Pinar Gökcen (pgo@mwblaw.dk) or Junior Associate Maria Thomsen (mth@mwblaw.dk).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.