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Why is a letter of comfort / letter of support not used by a seller to claim payment for goods sold to a subsidiary which became insolvent and failed to pay for the goods?
Because it’s a letter of comfort – it has no legal clout!
I recently had some extensive work done on my newly acquired home and a man approached me as he was talking with my new neighbour.
The man said that he would take care of and supervise the construction and remedial work. My neighbour interjected and affirmed what a wonderful person the man was.
It has been a disaster and very nearly led to the house being burned down as a result of the faulty electrical work of the man.
What rights do I have? None! It was an oral assurance of the man’s competence – a bit like a letter of comfort!
OK?
Dear Mike,
Well understood with your scenario.
But kindly assist me to understand this.
As an auditor i was thinking in these lines. When a company (esp a subsidiary) is incurring a loss and it has a net liability position then it means it has issues with going concern. So practically as auditors we are supposed to obtain a letter of support from the parent company which states that they will ensure that debts will be cleared in case of liquidation.
Kindly highlight more on the above.
Furthermore, your scenario is like an oral comfort given but a letter of support is a written document used so cant it be used as an evidence for purposes of recovery?
Thanks in advance.
Nital, dealing with your last paragraph first … NO! It’s a comfort letter. It states that it is, currently, the parent company’s intention to support its subsidiary.
But intentions change. So, no, it may be shown in evidence, but they have no legal bite.
Now to your first question – I think I’ve probably just answered that! Yes, probably the subsidiary is loss-making and probably not a going concern if left to stand on its own. As an auditor I suggest that you would need to assess the importance to the parent of the subsidiary’s continuing existence. If the loss-making activities are as a result of artificially low prices charged to the parent and it maybe also clear that the subsidiary’s products are an integral element of the parent’s future, then you may be justified in ‘softening’ your opinion.
But, either way, it would be appropriate to mention that the going concern ability is dependent upon the continuing support of the parent.
OK?
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