The following is an example of relevant case law, being the 2013 case involving Carillion Construction Ltd v Zelf Hussain and Robert Jonathan Hunt (the Joint Liquidators of Simon Carves Ltd (in Liquidation)).
Background
Simon Carves Limited (‘SCL’), a contractor specialising in the design and build of major process engineering projects, and a subsidiary of Punj Lloyd Limited (‘PLL’), had entered into two contracts with a subcontractor, Carillion Construction Limited (‘CCL’).
CCL had carried out works under the subcontracts and invoiced SCL around £12m. SCL subsequently went into administration without paying the invoices. Unsecured creditors like CCL received only a nominal amount.
Over the three years preceding administration, PLL had provided three brief letters to the subsidiary’s directors confirming that the parent would provide the necessary financial and business support to the subsidiary to ensure that it continued as a going concern. The subsidiary’s accounts over that period had been prepared on a going concern basis, and for the last two years had stated that this was based principally on the letter of continuing financial support from the parent company. Each of the letters was addressed to “The Board of Directors, Simon Carves Limited”.
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.”
On 7 July 2011, PLL withdrew its support, citing prevailing market conditions and SCL’s financial condition.
CCL claimed that the three letters had created obligations that were enforceable by the subsidiary against the parent, and that the failure to enforce them was a transaction defrauding creditors.
Decision
The judge rejected CCL’s claim and found that:
- the fact that the letters were addressed to the board of directors, and not simply SCL, was deliberate.
- it was significant that the letters were provided in the course of the preparation of SCLs accounts. The obvious purpose of the letters was to enable the directors (and the auditors) to determine whether the financial statements could be prepared on a going concern basis.
- it would be extravagant and improbable to conclude that PLL had committed itself so casually in the letters to restore SCL to balance-sheet solvency. In one of the years this would have required PLL to discharge liabilities of the subsidiary amounting to £271.5 million.
On the question of whether there was a contract between the parent and the subsidiary - or even its directors - the judge could find no consideration passing from the subsidiary in return for the assurance of financial support. He said that the fact that the subsidiary may have relied on the letters to continue trading was not consideration.