Parent Company Guarantees - Is There An Alternative?

Parent company guarantees are a common feature of construction and engineering projects. Their purpose is simple: to provide one party with security in the event the other party fails to comply with its contractual obligations. Sometimes, instead of providing a parent company guarantee, parent companies might alternatively provide a generally worded letter of support confirming that it is the group's policy to ensure its subsidiaries are able to meet their liabilities. But how good is this alternative?

This twenty-seventh issue of Insight considers the decision of the Chancery Division in Carillion Construction Ltd v Zelf Hussain and Robert Jonathan Hunt (the Joint Liquidators of Simon Carves Ltd (in Liquidation) 2013 EWHC 685 (Ch), an important recent judgment on parent company letters of support, and provides practical advice for those who might issue and receive them.

Carillion

The facts

Simon Carves Limited ("SCL"), a contractor specialising in the design and build of major process engineering projects, entered into two subcontracts with Carillion Construction Limited ("Carillion"). Carillion duly carried out the works under the subcontracts and issued invoices to SCL in the combined sum of around £12 million. SCL subsequently experienced financial difficulties and incurred significant pre-tax losses. By way of response, SCL's Indian parent company, Punj Lloyd Limited ("PLL"), provided three letters of business and financial support to SCL's directors ("letters of support") in the following (extracted) terms:

12 May 2008 letter

"...we, Punj Lloyd Limited, confirm that we shall provide the necessary financial and business support to Simon Carves Limited to ensure that the Company continues as a going concern."

14 May 2009 letter

"We are aware of the financial position of your Company, its state of affairs and the results of its operations, and we hereby agree to provide sufficient funds to the company for these purposes, to enable it to continue operating and to meet its liabilities as and when they fall due for the period until 31 May 2010, to ensure that the Company continues as a going concern."

31 March 2010 letter

"...we, Punj Lloyd Limited, confirm that we shall provide the necessary financial and business support to Simon Carves Limited for a period of not less than 12 months from the date of approval of the accounts, to ensure that the Company continues as a going concern."

Each letter was addressed to SCL's board of directors...