The Letter of Comfort

We’ve talked before about the importance of managing your finances but sometimes, particularly when your Board of Management is inexperienced, you can run into difficulties. In fact, sometimes even major organisations need their support. Recently, Forestry Tasmania was issued with a Letter of Comfort from the Tasmanian Treasurer guaranteeing its ability to repay a loan. We’ve also seen a couple of smaller organisations require one recently.

The Letter of Comfort had almost disappeared but lately seems to have been making a comeback. Given the economic climate, that probably should not be a surprise. In this post we discuss letters of comfort, what they are and what impact they might have on your organisation. It might be something you come across shortly.

In financial terms a letter of comfort is a letter from a parent organisation to or on behalf of a subsidiary, offering support to the subsidiary’s assurance that they can and will honour their debts and loans.

Creditors and or Lenders may request a letter of comfort from a subsidiary before they will put a hold on legal proceedings that may be started against them to recover outstanding monies and it is usually issued as a form of back up from the parent organisation to assist them to cover their debts or loans.

Many companies and money lenders will accept a letter of comfort as a reassurance that they will get their money, even if no clear terms of action or promise of financial assistance are outlined.

If your organisation is struggling financially, a letter of comfort from your parent organisation will give you room to breathe.

If you have organisations under you, you may one day be advised to write a letter of comfort as an alternative to a legally binding contract that outlines your intentions to undersign financial responsibility for a subsidiary, but you should be aware that under certain circumstances a letter of comfort can be deemed to be as legally binding as any contract.

If your letter is found to promise financial support in a court of law, you may become liable for all or some of the subsidiary’s debts and loans.

Be very careful in how you word your letter, leave nothing open to interpretation and consider using dot points to clarify what you are or are not willing to assume financial responsibility for.

A carefully worded letter of comfort may ease the minds of creditors without placing you under any legal obligation to provide financial assistance. However, in the case that any form of financial assistance is offered by the parent organisation, you would be well advised to seek professional advice about creating a legally binding contract, so that your intentions cannot be misinterpreted and your good will taken advantage of in the event that the child or subsidiary cannot actually honour their debt.