If you are in the process of negotiating a loan agreement with a bank, the bank may ask you to provide a comfort letter. A comfort letter is a statement that a company’s owner signs when its company borrows money from a bank. Consequently, a comfort letter makes it harder for the owners to say they were unaware of the borrowing company\u2019s actions. This article will explain the purpose of comfort letters, the legal and commercial implications for you and your business, and some practical considerations. <\/p>\n\n\n\n
For banks, lending is a risky endeavour since there is always the chance that the borrower will not be able to repay the loan. However, one way lenders can minimise risk is through comfort letters. <\/p>\n\n\n\n
Comfort letters are a statement that a company’s owner signs when its company borrows money from a bank. They can also go as far as to say that the borrowing company\u2019s owner intends to support the borrowing company and help it meet its obligations. <\/p>\n\n\n\n
The word \u201ccomfort\u201d in the phrase \u201ccomfort letter\u201d describes the comfort you give the bank. It demonstrates to the bank that you are aware that your company is taking out a loan.<\/p>\n<\/div>\n\n\n\n
By design, comfort letters make it harder for the company\u2019s owners to say they were unaware of the borrowing company\u2019s actions. Consequently, lawyers sometimes refer to this effect as having \u201cmoral force\u201d because most comfort letters are not drafted to create legal obligations. <\/p>\n\n\n\n
However, banks can draft comfort letters in specific ways that create legal obligations similar to a guarantee or indemnity<\/a>. Therefore, you should always have a lawyer review any comfort letter. Furthermore, even if it is a comfort letter, a court may interpret it as having a legal effect. You may therefore be personally liable for the debts of your company.<\/p>\n\n\n\n As you may know, the law considers companies to be legal entities separate from their owners. This means they own their assets and are separately responsible for their liabilities. Consequently, the owners can only ever be liable for the value of their shareholding in the company. If the value of the company\u2019s debts exceeds the value of the shares, the owners are under no obligation to provide the company with additional funds to meet any obligations. <\/p>\n\n\n\n From the owner’s perspective, this is a good thing since it encourages innovation and rewards risk. However, from the bank\u2019s perspective, this limits its ability to recover the loan amount if the company defaults and does not have enough money to repay it. Furthermore, because a company enjoys legal personhood<\/a>, the bank has no right to chase the owners for payment. This is because, as a general principle of law, contracts only bind the parties to it and not third parties, including the company\u2019s owners.<\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nWhy Are Comfort Letters Necessary?<\/h2>\n\n\n\n