It is common for key shareholders of companies to provide
financial letters of support. These endorsements can be vital to
the ongoing financial position of companies at various times. But
how much consideration is actually given to the content and nature
of these letters?
Before key shareholders or stakeholders provide a letter of
support, they should seek professional advice as to the content and
form of the letter. In certain circumstances, letters of support
can be enforced by the company, as seen in a case earlier this year
in the Victorian Supreme Court.
In Newtronics Pty Ltd v Atco Controls Pty Ltd, Atco (the parent
company of Newtronics) had provided a range of letters of support
to the auditors of Newtronics, promising not to call on secured
debt owed by Newtronics to Atco, and to provide financial
assistance to Newtronics to enable the company to meet its
obligations and trading debts.
In 2001, Atco demanded immediate repayment of its secured debt.
Newtronics was unable to repay its debt to Atco and receivers and
managers were appointed, who sold Newtronics and its assets to a
third party. Following the sale, Newtronics was unable to satisfy
the judgment debt and was placed into liquidation.
Newtronics then sued Atco on the basis that the substantial
financial assistance provided by Atco, as well as the numerous
letters of support given by Atco, created contractual obligations
for Atco to support Newtronics and not call on its secured debt to
the detriment of unsecured creditors.
The Court held that the letters of support were created to
enable the accounts of Newtronics to be prepared on a "going
concern" basis each financial year and that the directors of
Atco were aware of the legal and commercial consequences of
providing these letters to Newtronics' auditors. The context in
which the letters were provided supported the finding that these
letters included the essential terms of an agreement by Atco to
provide financial support to Newtronics and to subordinate its debt
to that of Newtronics' other unsecured creditors. As a result,
the Court held that Atco breached its contractual obligations by
demanding repayment of its secured loans.
This decision has a commercial impact on those who provide
letters of support. This is because in certain circumstances the
terms of a letter of support may create, or evidence the creation
of, contractual obligations which may be enforceable against the
person providing the letter according to the terms of the
Consideration of this matter is timely, as the end of financial
year has just passed, and key shareholders or stakeholders often
provide letters of support to a company's auditor in preparing
and finalising the company's end of financial year accounts and
If, in the future, you are considering providing a letter of
support regarding the financial position of a company, we would
urge you to consider the terms of the letter carefully, and where
appropriate, seek professional advice to make sure that you are
fully aware of the implications of providing the letter.
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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