Comfort Letters in the Mozambican Legal System

The development of trade has brought a new atypical way of security which lately has been widely used within the Mozambican legal system.

Vasco Soares da Veiga, 1997 “Direito Bancário” (2ª edição revista e actualizada), Coimbra, Livraria Almedina. Vasco Soares da Veiga defines the Comfort Letter as “simple solemn affirmation, undertaken by a certain company before a Bank, in which the subscriber of that letter introduces a certain client, normally an affiliate company or a company in which the subscriber of the letter hold significant or even dominant shares or quotas, aiming at granting a credit to that subsidiary company“. Vasco Soares da Veiga, 1997 “Direito Bancário” (2ª edição revista e actualizada), Coimbra, Livraria Almedina.

These are regarded as atypical security, because the Mozambican legal system does not establish that as security, along with mortgage, pledge, assignment of receivables, guarantee and suretyship nevertheless it is allowed that in the scope of autonomy of will of the parties set out by article 405 of the Civil Code, to conclude other contracts not provided for by law. In addition these are also classified as personal security, as opposed to the real guarantees/collateral, together with guarantee and bond, since other person (s) in addition to the debtor responds with their assets (s) for fulfilment of the obligation.

The Comfort Letters have been preferred by the parent companies as a means of providing security of the obligations undertaken by their affiliates because its provision does not imply that such engagement is included in the company’s balance sheet, and also for tax purposes (in some countries the issuance of comfort letters unlike the granting of other securities is tax free).

According to the commitment undertaken in the letter, the doctrine divides the comfort letters in three types:

a)      Weak  Comfort Letters = are letters that contain statements regarding the knowledge of the credit by the parent company, the company’s shareholding in the affiliated company, the solvency of the affiliated company, the explanation of the policy of the economic group in which the guaranteed/secured company is. These letters do not include any promises from the parent company.

b)     Medium Comfort Letters = these letters contain a commitment from the parent company, qualified as an obligation of means (not of results). It undertakes to closely monitor the business of the secured company, to ensure that its affiliate continues to carry on its normal business and to endeavor to ensure that its affiliate complies with its obligations under the facility agreement. These letters can also include an obligation of the parent company to keep its shareholding in the affiliate company.

c)      Strong Comfort Letters = these letters contain a real obligation to pay, with the parent company to comply with the payment obligation, in case the debtor fails to do so. Since this establishes a payment obligation, it is also seen as a suretyship.

The weak and medium comfort letters are not true personal guarantees of the obligations, as whenever the parent company has provided accurate information and complied with the obligations which undertook in the letter (obligation of means for the medium comfort letter as aforementioned), the insolvency of the debtor is a risk that the Bank runs, and cannot require from that company more than what was promised in said letter. In the event of carelessness or negligence by the parent company in the statements made in the letter, there would be room for the existence of liability attributable to the subscriber company, to be examined case by case. In the case of strong comfort letters, since their content contains an obligation to pay, these are regarded as real guarantees of the obligations, as in case of default by the debtor the parent company will be liable for such payment.

Celia Francisco

Lawyer