Parent companies and shareholders sometimes provide support short of a guaranty. Whether such an instrument creates a legal obligation depends entirely on its wording.
Statements of present fact — that the parent owns the subsidiary, is aware of the facility, and has a policy of supporting it — are representations and may support a misrepresentation claim if untrue, without creating an obligation to pay.
Statements of intention — that the parent intends to maintain its ownership and to ensure the subsidiary meets its obligations — are the contested middle ground. Some courts have found them binding where the context and consideration indicate an intent to create legal relations; others treat them as morally binding only.
Undertakings — that the parent will maintain net worth at a level, will not dispose of its shareholding, and will provide funds sufficient to meet obligations — are enforceable obligations, and lenders should insist on this formulation if they want protection.
Keepwell agreements obliging a parent to maintain the subsidiary’s solvency or net worth are enforceable and are treated as contracts rather than guaranties, which affects notice, defences and in some cases accounting.
Practical guidance for lenders. If it matters, take a guaranty. If a comfort letter is the most that is available, price the credit accordingly.