In Carillion Construction Ltd v Hussain, the English High Court held that the withdrawal of letters of support given by a parent company to the directors of its subsidiary was not a transaction defrauding creditors under the Insolvency Act 1986 (UK).
Simon Carves Ltd (SCL) incurred significant losses between 2008 and 2011. However, SCL continued to trade on the basis of annual letters of support from its parent, Punj Lloyd Ltd (PLL). The letters provided that PLL would provide financial support to allow SCL to continue as a going concern. In July 2011, PLL withdrew the letters of support and SCL was placed into administration.
Carillion Construction Ltd (Carillion), a creditor of SCL, sought leave to commence proceedings against SCL and PLL. Carillion argued that SCL and PLL had an arrangement or understanding that SCL would not enforce its rights under the letters of support. Carillion submitted that this arrangement or understanding should be set aside as a transaction defrauding creditors.
The Court refused to grant leave. It held that the purpose of the letters was to enable SCL's directors to consider whether the company's financial statements could be prepared on a going concern basis. The letters did not legally bind PLL to any enforceable obligation.
The Court noted that even if this finding was wrong, the transaction relied upon by Carillion was purely speculative. There was no evidence of an arrangement or understanding between PLL and SCL to release PLL from any liability incurred under the letters.
See court decision here.