Basic introduction Chinese name: LetterofComfort MBTH: LetterofComfort German: PatronatserKlarung Nature: As a means to obtain funds Concept, content, legal effect, shortcomings, application and precautions The concept of comfort letter is the Chinese translation of "comfort letter". The corresponding word in German is "PatronatserKlarung", so some people call it "sponsorship statement". Comfort letter is widely used in the field of international financing. Usually, it refers to the letter sent by the * * * organ or the parent company of the enterprise group to the lender about the loan of the * * * subsidiary or the loan of the subsidiary (which may only be a shell company), indicating that it is willing to help the borrower repay the loan, so that the lender can get "comfort" and believe that the debtor has the ability to repay the debt on time. At present, as a means of obtaining funds, letters of condolence are widely used in a certain range. However, in order to avoid accepting explicit guarantee obligations in some cases, international financing guarantors use comfort letter as a guarantee. For example, providing guarantee will violate some restrictive provisions on guarantee in the guarantor's articles of association or loan file, or you don't want contingent liabilities to appear on the balance sheet, thus affecting its credit status, and so on. Consolation letter can replace the guarantee form of guarantee, give moral support to creditors' promises of fulfilling debts or vague legal responsibilities, and avoid all kinds of inconvenience caused by direct guarantee. Contents (1) Consolation letter contents: 1. Know and allow to raise funds. In comfort letter, the parent company generally expresses its understanding and recognition of the loans of its subsidiaries. The purpose of this statement is to prevent the parent company from morally refusing the loan on the grounds that the subsidiary will act without authorization and will be indulged by the lender in the future, thus trying to excuse the parent company's operating responsibility. Such a statement has no legal effect. 2. Guarantee the rights and interests of the owners. As long as the loan has not been paid off, the parent company may agree to maintain a certain proportion of the borrower's share capital or keep the controlling stake of the parent company unchanged. The usual ownership statement is only a commercial comfort to the lender, hoping that the parent company will not allow its subsidiary to go bankrupt. 3. Express support. The financial support clauses in comfort letters often express a will. For example, our policy is to express the hope that subsidiaries will assume financial responsibilities: "This is our wish" or "Our subsidiaries will assume responsibilities". Expressing this will now will not produce any guarantee for the future, because the will can be changed. The stronger wording is: strive to make subsidiaries have enough reserves to fulfill their repayment obligations. The financial support clauses in the comfort letter generally include the following contents: (1) assisting enterprises to operate. The parent company declares that it will "make every effort within its power to ensure the normal operation of its subsidiaries in accordance with prudent financial policies" or "once the loan expires, the parent company will exercise its shareholding to ensure that its subsidiaries repay their debts to creditors". (2) Do not deprive assets. The parent company said, "If the subsidiary finally fails to fulfill its debt service obligations, we will not withdraw the company's share capital." (3) provide funds. The parent company agrees that "it will provide its subsidiaries with all necessary means to fulfill their economic responsibilities". Legal effect (2) The legal effect of the condolence letter depends on the content of the condolence letter and the environment when it was sent, including whether the party who sent the condolence letter refused to make a guarantee during the negotiation of the main contract. According to the different legal effects of letters of condolence, legal scholars divide them into three categories: the first category of letters of condolence, which is almost equivalent to the guarantee and has the same substantive terms as the guarantee, is the most legally effective one; The second kind of comfort letter is almost equivalent to a letter of introduction. There is no substantive guarantee clause in the letter, only stating that the lender is ready to lend to its subsidiary. This kind of comfort letter is not legally binding, and its only function is to prevent the parent company from denying the fact that it knows the loans of its subsidiaries in the future. Therefore, its legal effect is the weakest; The most striking feature of the third kind of condolence letter is that its terms are generally not legally binding. Even if its legal effect is clearly defined, because of its excessive flexibility, it will generally not produce substantive rights and obligations, and may only cause moral responsibility for the parent company. Because this kind of comfort letter will spread in the business and banking circles, if comfort letter's parent company is not trustworthy, it will inevitably affect its image in the business and financial circles and create obstacles for future business transactions and fund raising. Disadvantages As a guarantee tool, comfort letters have obvious defects, as follows: 1 The content is vague, so it is difficult to implement in law. For example, although there are provisions in comfort letter that provide financial support for enterprise management, if the borrower defaults or goes bankrupt, it is difficult for the lender to mainly prove that the bankruptcy or default stems from poor enterprise management. 2. Because comfort letter is not a guarantee agreement, the lender may not bring a lawsuit when the guarantor violates his promise. 3. The comfort letter does not have such a complete protective clause as the guarantee agreement, so the effectiveness of its promise is weakened. The letter of condolence only expresses the intention of the guarantor, which can be changed frequently. Because comfort letter may mislead the lender, the American case adopts the principle of "inconsistent promises" in equity to punish comfort letter. According to this principle, the promisor should reasonably expect that his promise will induce the promisee or the third party to do or not do something. If the promise does produce induced results, the promisor should be bound by his promise to avoid unfair consequences. In the case of Kleinworth Benson v. Malaysia Mining Corp, the letter of condolence stated that "the policy of this institution (the parent company) is to ensure that the business of the subsidiary can pay off the debts of the subsidiary at any time", and the British protest court ruled that the letter of condolence had no legal effect. This case established the principle that in commercial transactions, if there is no intention to make comfort letter a contract, both parties should not have enforcement. Take Banquebrussels Lambertsav as an example. Chief Justice Rogers, Australian National Industries Limited, High Court of Australia. J strongly criticized the means of trying to evade the guarantee responsibility after issuing the comfort letter. He pointed out that after repeated bargaining in business, one party should not be only "morally" responsible for the trading behavior of the other party. In this case, the court ruled that the content of the condolence letter has legal effect. Especially in this case, because the parent company is unwilling to sign the guarantee agreement, it will issue the comfort letter instead. Applying for comfort letter as a means to obtain funds has been widely adopted by some domestic institutions or companies. The performance is as follows: 1. In order to borrow money from abroad or develop the economy of the region or industry, some domestic institutions issue letters of guarantee for domestic financial institutions or enterprises to finance enterprises or projects in the region or industry, and at the same time issue comfort letter at the request of foreign lenders. The comfort letter issued by foreign lenders is sometimes full of contents and stipulates some specific terms, so that * * * institutions will assume the responsibility of ensuring the repayment of loans when they are due; However, more and more comfort letter requires * * * institutions to confirm and supervise loans, so as to urge or coordinate borrowers and guarantors to repay loans when they are due. 2. Overseas subsidiaries of some large domestic trading companies often need the support of domestic parent companies in their business activities, mainly in short-term financing, which requires the parent company to provide letters of guarantee or comfort letter. 3. Some domestic enterprises often issue comfort letter when supporting the external financing of their directly affiliated subsidiaries, but they are unwilling to undertake guarantee or joint liability. As for the nature and status of condolence letters, our laws, like those of other countries in the world, have not made clear provisions. In fact, the contents of some letters of condolence are almost the same as those of the guarantee. At this time, the effect of comfort letter should be equal to the legal effect of the letter of guarantee. Another scholar believes that no matter whether its terms are substantive or not, letters of condolence should be regarded as letters of guarantee and should be managed by the state. First of all, China is a country with foreign exchange control, and the comfort letter issued by it is the guarantee of the supremacy of credibility. No matter what its content is, it is based on its reputation as a means to obtain foreign exchange funds, so this method should be controlled by the state foreign exchange administration department like a letter of guarantee. Secondly, the * * * department shall not issue comfort letter to foreign countries, so as to avoid foreign creditors obtaining unlimited recourse to our * * * institution, especially comfort letter with the same contents as the letter of guarantee; Even if it does not bear legal responsibility, if the debtor fails to repay the loan on time, * * * institutions will also bear moral responsibility, which will also damage the image and reputation of * * * departments and even the country, resulting in financing difficulties or increased financing costs in the future. Therefore, it is advocated that state agencies cannot send letters of condolences. In the bankruptcy liquidation of Guangdong Trust and Investment Company (GITIC), foreign banks and creditors claimed that the subordinate organs of Guangdong Province sent letters to support Guangxin, which was similar to the letters of condolences from the financial sector. Foreign banks and consortia borrow from Guangxin on the basis of or considering the support attitude and letter of support from the * * * department, so they demand priority compensation. But in fact, the letter of support issued by the * * * organ has no legal effect and does not constitute a guarantee contract. Article 8 of the Guarantee Law clearly stipulates that state organs shall not act as guarantors. The requirement of priority payment also does not meet the provisions of article 37 of the bankruptcy law on the order of repayment. Under the condition that our country attaches importance to and improves the legal system, the parties concerned must be more alert to the risks they bear when facing acts or civil relations that do not conform to laws and regulations. Precautions Whether the letter of condolence has legal effect depends entirely on the specific provisions of the letter of condolence, which has become an internationally recognized practice. According to the common law, it can be assumed that the actor has the intention to establish a legal relationship in business activities, unless it is clearly proved that the contrary intention is shown. Therefore, the letter of condolence may have the responsibility of guarantee because of its interpretation of meaning and content. A letter of comfort issued by an enterprise may constitute a guarantee responsibility in terms of expression, wording, semantics and overall situation, so it may be ruled by the court to constitute a guarantee responsibility. Whether intentionally or negligently, if the content of the condolence letter is false or the statement is wrong, which leads to misleading to the creditor, or even constitutes fraud, the creditor may file a lawsuit against the enterprise that sent the condolence letter and recover compensation in tort law (see hedley Bourne &; Co., Ltd. v. Heller Partners Co., Ltd.). Secondly, according to the provisions of Article 2 of the Regulations on the Administration of External Guarantees of Domestic Institutions and its legislative intent, it can be seen that all commercial activities with external contingent liabilities should be subject to foreign exchange control. Comfort letter, the entity's external liabilities, will be regarded as violating the State Foreign Exchange Control Law and declared invalid. If comfort letter is invalid without the approval of SAFE, the lender will also suffer losses. In my opinion, whether a letter of condolence can constitute a binding guarantee contract in Chinese mainland or Hong Kong depends on a detailed analysis of the content and wording of the letter of condolence, as well as the bargaining situation and background of both parties when issuing the letter of condolence. In the actual business communication, violating moral responsibility will make the unit issuing comfort letter face the risk of financing difficulties or increased financing costs in the future. In particular, * * * institutions that violate the commitments made in comfort letter are likely to be downgraded, or regarded as having a bad investment environment, which will deter investors and adversely affect China's economic development. As Article 8 of the Guarantee Law clearly stipulates that state organs shall not act as guarantors, letters of condolence issued by state organs do not have the legal effect of compulsory guarantee, which will lead to unrealistic expectations and illusions of the recipients on the support of state organs and the evaluation of commercial and political risks, or lead to losses. Based on the principle that state organs should not participate in commercial activities, I think state organs should try their best to avoid or even stop sending letters of condolences. In order to make it clear that the comfort letter does not constitute a binding guarantee commitment, and to avoid misunderstanding or misleading, I suggest adding warning words to all comfort letters: the contents of this letter will not cause any legal liability or guarantee commitment to the sender, and the recipient had better sign the receipt to confirm that the recipient understands and agrees that this letter will not cause any mandatory legal liability. Even if the condolence letter only expresses the sender's meaning, and the meaning can be changed frequently, based on the principle of fairness, when the meaning changes, the recipient should be informed of the changed meaning by letter, otherwise, the recipient has the right to assume or rely on the meaning stated in the condolence letter to continue without changing, and legal acts unfavorable to the recipient will occur and be implemented. Especially when the parent company claimed to be willing to support the financial affairs of the subsidiary soon, the subsidiary closed down, and the parent company did not make financial support or other rescue actions. In this case, the court may decide that the intention stated in the condolence letter is untrue. If an enterprise can make any statement without legal responsibility and confirm its willingness to "support" in the form of comfort letter, it will induce creditors to have a relationship of creditor's rights and debts, and indirectly condone or even advocate the business ethics of breaking promises and violating good faith.