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Letter of Comfort cannot be Construed as Letter of Guarantee

By - Naksha G Sappe on September 20, 2022

A letter of comfort is a letter issued to a lending institution by a stakeholder of a company acknowledging support or assurance given for financing sought by that company. The same cannot be construed to be a letter of guarantee.

A letter of comfort is an assurance provided to the lending institution that the principal debtor will be prompt in their payment of dues to the lending institutions. The letter does not imply any obligation or responsibility on the entity issuing it.

A letter of comfort will not draw any obligation on the issuer as in the case of a letter of guarantee. A letter of guarantee is a guarantee given by the issuer to take the liability of the principal borrower when the same cannot be met by the principal borrower. The issuer of the letter of guarantee is bound by the obligation and liability to take up the liability of the borrower to pay the dues owed to the lending institution.

The Hon’ble National Company Law Tribunal, Delhi Bench, in the matter M/s. Shapoorji Pallonji and Company Pvt. Ltd. v M/s. ASF Insignia SEZ Pvt. Ltd[1]has affirmed the above notion and has held that there was no assumption of any obligation as a guarantor in the terms of the letter of comfort. It was further held that the terms of the letter of comfort have to be taken into consideration. In the said case, it is evident from the terms of the letter of comfort that if the borrower does not clear the dues concerning the work completed under the contract (the issuer) the respondent therein will assure prompt payments of the dues owed to the lending institution, the petitioner therein. Pertinently, the issuer did not take up any obligation to pay the lending institution and there were no provisions to take up the liability.

The Hon’ble NCLT further went on to differentiate between a letter of comfort and a letter of guarantee. In the letter of guarantee, the concurrence of the three parties is essential. Pertinently, in a letter of guarantee, there is a surety wherein the issuer deliberately accepts the obligation to repay. Furthermore, the NCLT stated that such obligations/liabilities cannot be imposed concerning the terms of the letter of comfort. 

The NCLT also drew reference to Section 126 of the Indian Contract Act, 1872 wherein the letter of guarantee is a contract to perform the promise or discharge the liability of a third person in case of default. Hence, the same inference cannot be drawn in the letter of comfort.

In light of the above, the Hon’ble NCLT has held that an entity issuing a letter of comfort is not a corporate debtor or guarantor within the framework of the law. Further, a letter of comfort cannot be construed as a letter of guarantee to repay on behalf of the borrower. A letter of comfort is an independent contract from that of a letter of guarantee.

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