Letter Of Comfort Or A Whole Lot Of Pain

In the recent case of Forex Capital Trading Pty Ltd (In Liquidation) v Invesus Group Limited [2024] NSWSC 867 the Supreme Court of New South Wales was asked to consider whether a letter of comfort provided by Invesus Group Limited (IGL) to Forex Capital Trading Pty Ltd (In Liquidation) (Forex) could be called on by the Forex Liquidators to address creditors’ claims who had an admitted proof of debt in the liquidation of the company.

Background

Forex held an Australian Financial Services licence (AFSL) under which it provided retail customers with financial products.

In October 2018, ASIC started investigating Forex and its director principally in relation to misleading and deceptive conduct and unconscionable and dishonest conduct.

In March 2019, ASIC obtained freezing orders restraining Forex from transferring money overseas that had been paid to it by its customers. ASIC also sought an order appointing a receiver to Forex.

Five days after the freezing orders were made, IGL, a company registered in Gibraltar and the ultimate parent company of Forex, provided Forex with a letter of comfort (Letter of Comfort).

In the Letter of Comfort, IGL:

• acknowledged the existence of the freezing orders, the ASIC investigations, and the prospect of consumer redress if the ASIC allegations were made out.
• indicated its intention to provide financial support to Forex and its director(s) so that they were able to satisfy obligations arising from court proceedings or flowing from ASIC’s investigations, such as any settlement amount or judgment sum required to be paid to Forex customers.
• provided an irrevocable undertaking in favour of Forex and its director(s) that it would provide or procure financial support to the extent required to meet any debts, including judgment debts incurred by Forex or its director(s) prior to or after the date of the letter of comfort in respect of Forex’s customers.

The undertaking provided in the Letter of Comfort was stated to be for the benefit of Forex and its directors and would terminate on 30 June 2022.

ASIC commenced proceedings against Forex and its director alleging contravention of the Corporations Act and ASIC Act, and also seeking orders for payment of a civil penalty.

ASIC and the defendants ultimately agreed on the civil penalty amount of $20m and declarations and orders were made in 2021.

IGL entered into a convertible loan agreement with Forex under which it agreed to provide funds for Forex to meet its obligations in respect of the penalty, legal costs and other amounts in respect of the settlement.

On 27 June 2021 Forex’s immediate holding company resolved to voluntarily wind-up Forex.

In September 2021, the liquidators wrote to IGL seeking funding.

As IGL did not respond, the liquidators then applied and obtained orders to have Forex wound up in insolvency in December 2021.

In May 2022 the liquidators sought directions in the Federal Court to apply a tailored alternative adjudication process, allowing former customers to submit their claims and the liquidators would apply a 15% discount to the face value of the claims without any further adjudication required.  Any claims in respect of an AFCA determination or deed of release were not subject to this process.

The Liquidators obtained the orders sought in the proceedings and subsequently admitted 1729 proofs of debt for $43,645,127.26.

The Liquidators then sent a letter of demand in reliance on the Letter of Comfort demanding payment of $43,645,127.26 from IGL.

On the day before the undertaking in the Letter of Comfort terminated, IGL responded denying that the Letter of Comfort responded to the debt demanded by the Liquidators.

Forex then commenced proceedings against IGL for damages in the amount of $43,645,127.26.

After careful consideration of the Letter of Comfort the Court rejected Forex’s Liquidators’ claim for damages.

In construing the terms of the Letter of Comfort, the Court examined whether the $43,645,127.26 claimed by Forex fell within the description of ‘any debts, including judgment debts incurred by Forex prior to or after the date of the letter of comfort in respect of Forex’s customers’.

The Court found that the language used in the Letter of Comfort shed little light on its commercial purpose and turned to the surrounding circumstances for the provision of the Letter of Comfort, finding that:

• It was provided to ensure that Forex and its directors were able to satisfy any obligations arising from court proceedings or flowing from ASIC’s investigation.
• The undertaking given was intended to cover the settlement of claims arising from the ASIC investigation and that it was drafted in a way to cover debts other than judgment debts and obligations arising otherwise than as a result of court proceedings.
• The primary purpose of the Letter of Comfort was to enable Forex to resist the interlocutory orders sought by ASIC, which included an order for the appointment of a receiver.

Debts

The court found that provision of the Letter of Comfort was not provided to address unascertained claims and was intended to meet liabilities of Forex and the director(s) if they crystallised.

In giving the word ‘debt’ its ordinary meaning such that it involves a liability that is ascertained or ascertainable, the Court found that the proofs of debt submitted by creditors did not determine Forex’s liability to those creditors, but rather the creditor’s right to participate in the distribution of the company’s assets.

As such the admission of the proofs of debt by the Forex Liquidators did not create a liability which responds to the Letter of Comfort.

Comment

The consequences of this decision are significant and should be carefully considered by those who may provide and those who may seek to rely on letters of comfort.

Directors who seek to rely on letters of comfort should look to ensure that the letter covers contingent liabilities or unascertainable debts.

Directors may also need to carefully consider and seek legal advice as to whether any letter of comfort they hold can be relied upon for the purpose of forming a view as to the company’s solvency.

If you have any questions about letters of comfort, the Lavan team are here to help.