Parent company comfort letter: moral undertaking or enforceable obligation of result

A lender finances an operating subsidiary whose balance sheet cannot carry the debt alone. The parent company refuses a joint and several surety guarantee (caution solidaire), cites its own bank covenants and offers a comfort letter. The credit committee accepts it, the file is closed, the subsidiary defaults eighteen months later, and the litigation department discovers that the undertaking was limited to "using its best efforts". A comfort letter is not a courtesy document: it is the third named personal security (sûreté personnelle) in the French Civil Code, and its scope depends almost entirely on its drafting. This analysis sets out what Article 2322 of the Civil Code covers, the dividing line between an obligation of means and an obligation of result, the sanctions actually available in the event of non-performance, the checks on authority to be carried out before any drawdown, and the clauses to be imposed on the parent at the negotiation stage.

The letter of intent is a named personal security, not a point of honour

Article 2287-1 of the Civil Code states that the personal securities governed by this title are the suretyship, the independent guarantee and the letter of intent. The comfort letter (lettre d'intention) therefore belongs to the same family as the suretyship (cautionnement), which rules out treating it as a mere moral undertaking. Article 2322 defines it as an undertaking to do or not to do something, the purpose of which is to support a debtor in the performance of its obligation towards its creditor.

This wording, which dates from the Ordonnance of 23 March 2006, has not changed. The reform of the law of security interests carried out by Ordonnance No. 2021-1192 of 15 September 2021 renumbered and rewrote the suretyship, now governed by Articles 2288 et seq. since 1 January 2022, but it left the letter of intent at Article 2322 and changed neither its wording nor its regime. For a lender that reuses templates drafted before 2022, this is a point of comfort: comfort letter templates were not made obsolete by the reform, unlike suretyship deeds.

Three degrees of undertaking, three different objects

Comparing the three definitions shows exactly what the creditor is buying.

• The suretyship is, in its wording resulting from the 2021 Ordonnance, the contract by which a surety undertakes towards the creditor to pay the debtor's debt if the debtor defaults (Art. 2288). Object: paying another's debt.
• The independent guarantee (garantie autonome) is the undertaking by which the guarantor, in consideration of an obligation entered into by a third party, undertakes to pay a sum either on first demand or on agreed terms, the guarantor being unable to raise any defence relating to the guaranteed obligation (Art. 2321). Object: paying a sum, detached from the underlying obligation.
• The letter of intent obliges only to do or not to do something (Art. 2322). Object: a course of conduct, support.

The practical consequence is decisive and too often overlooked by credit committees: even when drafted in the most binding terms, a comfort letter does not give the beneficiary an action for payment of the debt against the parent comparable to the one available against a surety. It gives rise to an action in contractual liability for non-performance of an obligation to do something. The procedural route, the burden of proof and the amount recovered are not the same. The differences between the first-demand independent guarantee and the suretyship are dealt with separately in our article on these two personal securities.

Means or result: a dividing line drawn by case law, not by the text

Article 2322 does not distinguish between an obligation of means and an obligation of result. The text contains neither expression, and imposes no form, no handwritten mention, no duration and no amount. The gradation between a weak comfort letter and a genuinely binding parent company guarantee is entirely the work of the Cour de cassation, which reads the intensity of the undertaking in the terms used and in the economics of the transaction.

Practitioners know the working scale that results. At the bottom of the scale, purely informative letters: the parent states that it is aware of the financing, confirms that it holds its shareholding, approves the transaction. There is no undertaking to do anything there, and therefore no security within the meaning of Article 2322. In the middle, the wording of effort: "use its best efforts", "implement the means at its disposal", "consider favourably". The creditor will have to show a culpable failure in the parent's conduct, which is difficult and lengthy litigation. At the top of the scale, the wording of result: "ensure that the subsidiary has at all times the cash necessary to service the debt", "see to it that the subsidiary's net assets remain at least equal to", "do whatever is necessary so that the lender does not bear any loss under the loan". The creditor then has only to establish the missing result.

This typology remains a judge-made construction: it can be relied on only because the court agrees to read the text of the letter in that sense. It therefore never dispenses with drafting work, it requires it.

In case of doubt, interpretation favours the parent

Two ordinary-law rules of interpretation govern this litigation, and they structurally work against the lender.

Article 1188 of the Civil Code requires a contract to be interpreted according to the common intention of the parties rather than stopping at the literal meaning of its terms and, where that intention cannot be identified, according to the meaning that a reasonable person placed in the same situation would give it. In other words, the court does not stop at the apparent force of a verb: it reconstructs what the parties intended, from the negotiation exchanges, the minutes, the term sheets and the parent's subsequent conduct. A lender that agreed, during negotiation, to delete the word "guarantee" weakens its own case well before any litigation.

Article 1190 adds that, in case of doubt, a negotiated contract (contrat de gré à gré) is interpreted against the creditor and in favour of the debtor, and a standard-form contract (contrat d'adhésion) against the party who proposed it. A comfort letter negotiated line by line between a group finance department and a bank is typically a negotiated contract. The doubt therefore benefits the parent company. This is the central argument for demanding explicit drafting: silence and ambiguity do not turn against the issuer, they protect it.

In case of doubt, a negotiated contract is interpreted against the creditor and in favour of the debtor, and a standard-form contract against the party who proposed it. (Article 1190 of the Civil Code)

What the beneficiary actually obtains in the event of non-performance

Non-performance of a letter of intent is subject to the ordinary-law sanctions for contractual non-performance. Three texts make up the arsenal.

Article 1231-1 provides for the debtor to be ordered to pay damages either for non-performance of the obligation or for delay in performance, if it does not show that performance was prevented by force majeure. This is the main route. The creditor must establish non-performance, loss and a causal link. Where the undertaking is one of result, non-performance is proved by the mere finding that the promised result has not been achieved, which considerably shortens the debate. Where it is only one of means, the discussion turns on the parent's diligence, a ground on which a group has a large body of defensive material.

Article 1221 opens up specific performance: the creditor of an obligation may, after formal notice (mise en demeure), seek its specific performance unless such performance is impossible or there is a manifest disproportion between its cost to the debtor acting in good faith and its benefit to the creditor. In its wording resulting from Law No. 2018-287 of 20 April 2018, which is interpretative in nature, this text makes it possible to envisage an order to actually inject the promised funds or to maintain the shareholding. Two reservations must be anticipated: the prior formal notice, to be formalised with care, and the exception of manifest disproportion, which the parent will not fail to raise if the support demanded exceeds its own capacity.

Article 1217 lists the full range of sanctions and states that sanctions that are not incompatible may be combined and that damages may always be added to them. The beneficiary may therefore combine a claim for specific performance with a claim for compensation for the loss caused by delay.

An operational consequence follows that banking documentation templates rarely reflect: the amount recovered from a parent under a comfort letter is not mechanically equal to the balance of the loan. It is equal to the recoverable loss. Where the undertaking is drafted as an obligation of result relating to the absence of loss for the lender, the two amounts converge. Where it relates to maintaining a ratio or a level of cash, the court may find a loss of a chance. The gap between the two can be quantified, and it is negotiated upstream.

Checking the authority to bind the parent before drawdown

A comfort letter signed by the wrong person or without corporate authorisation is a pure litigation risk, which comes to light at the worst moment. The check must be made before drawdown, not at the recovery stage.

Parent company incorporated as a public limited company

Article L. 225-35 of the Commercial Code, in the version in force since 15 June 2024 resulting from Law No. 2024-537 of 13 June 2024, provides that sureties, endorsements and guarantees given by companies other than those operating banking or financial institutions are subject to authorisation by the board, which limits their amount, on the terms determined by decree of the Conseil d'Etat. The same text provides that the board may give this authorisation globally and annually without limit of amount to guarantee the commitments entered into by controlled companies within the meaning of II of Article L. 233-16, and that it may authorise the chief executive officer (directeur général) to do so, also globally and without limit of amount, provided that the latter reports to the board at least once a year. Article L. 225-68 transposes the same requirement to public limited companies with a management board and supervisory board.

The point of vigilance is that Article L. 225-35 refers to sureties, endorsements and guarantees, without naming the letter of intent. Treating a comfort letter that carries an obligation of result as a guarantee subject to board authorisation is a judge-made construction, to be verified case by case. The prudent position, and the one we systematically recommend on the lender's side, is to require board authorisation whenever the letter contains an undertaking of result, without waiting for the question to be decided in defence.

Article R. 225-28 details the terms of this authorisation and deserves to be read word for word by the credit lawyer. The authorisation given to the chief executive officer is valid within a total amount set by the board; it may also set, per undertaking, an amount above which the guarantee may not be given; where an undertaking exceeds either of those amounts, board authorisation is required in each case. Above all, the duration of such authorisations may not exceed one year, whatever the duration of the undertakings secured by surety, endorsement or guarantee. Finally, an excess over the total amount may not be set up against third parties who were unaware of it, unless the amount of the undertaking relied on exceeds, on its own, one of the limits set by the decision of the board of directors.

Three steps follow: obtain a copy of the board resolution, check that it is dated less than a year before the date the letter is signed, and check that the amount of the undertaking taken in isolation exceeds none of the limits set. A lender that is aware of the excess loses the benefit of the protection.

Parent company incorporated as a simplified joint stock company

Article L. 227-1, in the version in force since 1 January 2025 resulting from Ordonnance No. 2023-1142 of 6 December 2023, makes the rules on public limited companies applicable to the SAS (simplified joint stock company) with the exception of Article L. 224-2, the second paragraph of Article L. 225-14, Articles L. 225-17 to L. 225-102, L. 225-103 to L. 225-126, L. 225-243, I of Article L. 233-8 and Article L. 236-17. Article L. 225-35 falls within the excluded range. The board authorisation regime therefore does not apply as of right to a parent incorporated as an SAS. It should be noted that the current wording refers to the range "L. 225-17 to L. 225-102" and no longer "L. 225-17 to L. 225-102-2" as in the earlier version.

For a parent that is an SAS, the source of authority is the articles of association. The step changes in nature: the articles must be read, the body competent to grant guarantees and any threshold clauses identified, and the decision of the designated body demanded. Mechanically applying to an SAS a condition precedent template drafted for a public limited company is a frequent and costly mistake.

Corporate interest and criminal risk

Article 1833, paragraph 2, of the Civil Code, in its wording resulting from the Law of 22 May 2019, provides that the company is managed in its corporate interest (intérêt social), taking into consideration the social and environmental issues arising from its activity. A massive support undertaking granted by a parent in favour of a subsidiary in difficulty may be challenged on this ground. The texts read do not provide for the nullity of a letter of intent for being contrary to the corporate interest, and it would be imprudent to assert it, but the discussion exists and feeds the defence.

The criminal risk, by contrast, is textual. Article L. 242-6 3° of the Commercial Code punishes with five years' imprisonment and a fine of €375,000 the act of the managers of a public limited company of making, in bad faith, a use of the company's assets or credit that they know to be contrary to its interest, for personal purposes or to favour another company or undertaking in which they are directly or indirectly interested. The penalties are increased to seven years and €500,000 in the aggravated cases referred to in the last paragraph. This is a further reason for the lender to require a formalised corporate decision: it documents the consideration received by the parent and the group interest.

The clauses to require before granting the financing

Negotiating a comfort letter comes down to about ten points. Each moves the dial between an undertaking of means and an undertaking of result.

• The verb. Prohibit "best efforts", "endeavour", "consider", "contemplate". Require "shall ensure that", "undertakes that", "guarantees that the subsidiary will have". The verb is the first thing the court reads.
• The quantified object of the result. An undertaking of result without a measurable standard is an undertaking of means in disguise. Tie the support to a verifiable indicator: minimum net assets, available cash at least equal to the next debt service instalment, a capped leverage ratio.
• The triggering event. Define the event that triggers the obligation to inject funds: breach of a financial covenant, default on an instalment, a finding by the statutory auditor. An objective trigger removes the debate on diligence.
• The terms of the support. Specify the form required: capital increase, shareholder current account advance, waiver of debt. Above all specify that advances made by the parent will be subordinated and blocked until the lender has been repaid in full. Without this clause, the parent can perform its undertaking and then be repaid in competition with the lender.
• Maintaining the shareholding. Prohibit the sale, pledge and dilution of the shareholding held in the subsidiary without the beneficiary's prior consent, and provide that a sale does not release the parent from undertakings arising earlier.
• The duration. Failing a term, the undertaking is of indefinite duration and Article 1211 allows each party to terminate it at any time, subject to observing the contractually agreed notice period or, failing that, a reasonable period. Leaving the question of duration unaddressed amounts to giving the parent a right of withdrawal. Stipulate a firm duration covering the whole maturity of the financing, and in the alternative a notice period quantified in months.
• Information. A right to periodic information on the subsidiary's position, an obligation to notify any event affecting the parent's ability to perform its undertaking, an annual compliance certificate.
• The quantum. Provide for a contractual assessment of loss in the event of non-performance, tied to the outstanding principal, interest and costs. This neutralises part of the debate on loss of a chance.
• Representations on authority. A statement by the parent on the regularity of corporate authorisations, production of the board resolution dated less than a year before for a public limited company, production of the articles of association and of the decision of the competent body for an SAS.
• Governing law and jurisdiction. Essential where the parent is foreign, a situation that French texts do not directly address.

Finally, Article 1104 reminds us that contracts must be negotiated, formed and performed in good faith and that this provision is a matter of public policy. This is the basis of the litigation over the abrupt withdrawal of announced support or the organised stripping of the subsidiary after the letter is signed. The lender has an interest in documenting precisely the statements made by the parent during negotiation: they will serve to establish the common intention within the meaning of Article 1188.

The subsidiary's default: the parent does not benefit from the favourable treatment given to individual guarantors

This is the structural advantage of the parent company guarantee, and it is too little exploited by institutional creditors.

Article L. 622-28 of the Commercial Code provides that the judgment opening proceedings stops the running of interest and that individuals who are co-obligors or who have granted a personal security or who have charged or assigned an asset as security may rely on the provisions of this paragraph. The same text provides that the judgment opening proceedings suspends, until the judgment adopting the plan or ordering liquidation, any action against those individuals. A parent company, being a legal entity, is outside the scope: neither the stopping of interest nor the suspension of proceedings applies in its favour.

Article L. 626-11 confirms the logic: the judgment adopting the plan makes its provisions enforceable against all. With the exception of legal entities, co-obligors and persons who have granted a personal security or who have charged or assigned an asset as security may rely on them. The parent therefore cannot set up against the beneficiary the time and reductions granted in its subsidiary's plan. For the recovery plan, it is indeed this text that applies, by the cross-reference made by I of Article L. 631-19 to the provisions of Chapter VI of Title II. On the other hand, Article L. 631-20 should no longer be cited for this rule: since Ordonnance No. 2021-1193 of 15 September 2021, which came into force on 1 October 2021 and does not apply to proceedings pending on that date, that article deals with termination of the plan and the opening of compulsory liquidation where cessation of payments is found during performance.

That leaves the filing of claims. Article L. 622-26, in its wording resulting from the same Ordonnance, provides that claims and security interests not properly declared within those time limits cannot be enforced against the debtor during performance of the plan and after that performance where the undertakings set out in the plan or decided by the court have been honoured and that, on the same terms, they also cannot be enforced against individuals who are co-obligors or who have granted a personal security. The sanction for failure to declare therefore does not extend to a parent that is a legal entity. The text also specifies that an application for relief from the time bar may be made only within six months. Declaring remains of course essential in order to share in distributions. On the time limits and pitfalls of filing a claim in insolvency proceedings, including relief from the time bar, see our article on that subject.

A methodological reservation is needed: these articles refer to "persons who have granted a personal security" without naming the letter of intent. The link follows from Article 2287-1, which classes the letter of intent among personal securities, but it deserves checking against case law case by case.

The lender's symmetrical risk

Article L. 650-1 lays down the principle that a creditor is not liable for losses suffered as a result of the financing granted, except in cases of fraud, of marked interference in the management of the debtor or where the security taken in return for that financing is disproportionate to it, and provides that, if the creditor's liability is established, the security taken in return for its financing may be annulled or reduced by the court. The current wording, in force since 15 February 2009, does not strike the security down with nullity as of right, unlike the version prior to Ordonnance No. 2008-1345. Two lessons for structuring: calibrate the security package to the financing actually granted, and do not turn the information right stipulated in the comfort letter into de facto management power over the subsidiary. The regime of the liability of the credit provider under Article L. 650-1, between abusive support and withdrawal of financing, is set out in our dedicated analysis.

Conclusion: require the result or give up the letter

Our position is clear. A comfort letter drafted in terms of effort has no measurable economic value for a lender: it produces long evidentiary litigation, with an uncertain outcome, on the ground of diligence, with a rule of interpretation that works against the creditor as soon as any doubt remains. In a high-stakes file, it should not be counted as a guarantee, but as a signal of conduct. Conversely, a letter of intent drafted as an obligation of result, with a quantified indicator, an objective triggering event, a firm duration and subordination of intragroup advances, places the creditor in a position that is often more comfortable than that of a surety, since a parent that is a legal entity benefits neither from the suspension of proceedings under Article L. 622-28 nor from the reductions and time granted in its subsidiary's plan by virtue of Article L. 626-11.

The choice is therefore binary. Either the parent accepts the result, and the letter becomes a legal asset in its own right. Or it refuses, and the financing must be repriced or backed by security over assets (sûreté réelle). Before any drawdown, require three items on the file: the letter containing a verb of result and a quantified standard, the board of directors' resolution dated less than a year before for a parent that is a public limited company or the decision of the body competent under the articles for a parent that is an SAS, and a duration clause aligned with the maturity of the loan. Without these three items, assume that you are lending without a personal security.

Frequently asked questions

Is a comfort letter a genuine security under French law? Yes. Article 2287-1 of the Civil Code places the letter of intent among the three named personal securities, alongside the suretyship and the independent guarantee. Article 2322 defines it as an undertaking to do or not to do something, the purpose of which is to support a debtor in the performance of its obligation towards its creditor. Its classification as a security does not, however, prejudge its intensity: a purely informative letter, with no undertaking to do anything, confers no right on the beneficiary.

What is the practical difference between a comfort letter and a surety from the parent company? The object of the obligation differs. The suretyship obliges the surety to pay the debtor's debt if the debtor defaults (Article 2288 of the Civil Code, wording resulting from Ordonnance No. 2021-1192 of 15 September 2021). The letter of intent obliges only to do or not to do something. The beneficiary of a comfort letter therefore has no action for payment of the debt, but an action in contractual liability based on Articles 1231-1 and 1221 of the Civil Code, in which it must establish non-performance and loss.

Which words tip a letter of intent into an undertaking of result? The distinction between an obligation of means and an obligation of result is not in Article 2322, which uses neither expression: it is entirely a creation of case law. In practice, wording of effort ("use its best efforts", "endeavour to") is read as obligations of means, whereas affirmative wording of result ("ensure that the subsidiary has the necessary cash", "see to it that net assets remain equal to or greater than") is read as obligations of result. Article 1190 adds that, in case of doubt, a negotiated contract is interpreted against the creditor: ambiguity benefits the parent.

Must the parent company's board of directors authorise the comfort letter? Article L. 225-35 of the Commercial Code, in the version in force since 15 June 2024, subjects sureties, endorsements and guarantees given by a non-banking public limited company to board authorisation that limits their amount. The text does not name the letter of intent, and treating it as a guarantee is a matter for case law. The prudent position is to require authorisation whenever the letter carries an undertaking of result, and to check under Article R. 225-28 that the resolution is less than a year old, its duration being limited to one year whatever the duration of the guaranteed undertakings.

Is the rule the same if the parent company is an SAS? No. Article L. 227-1, in the version in force since 1 January 2025 resulting from Ordonnance No. 2023-1142 of 6 December 2023, disapplies for the SAS Articles L. 225-17 to L. 225-102, which include L. 225-35. The board of directors authorisation regime therefore does not apply as of right to a parent incorporated as an SAS. The authority to bind the company is then of statutory origin: the articles of association must be read and the decision of the body they designate obtained.

Can the parent company rely on its subsidiary's safeguard or recovery plan? No, if it is a legal entity. Article L. 626-11 of the Commercial Code makes the judgment adopting the plan enforceable against all, but expressly reserves the benefit of its provisions for co-obligors and guarantors with the exception of legal entities. Likewise, the stopping of interest and the suspension of proceedings provided for in Article L. 622-28 are reserved for individuals who are co-obligors or guarantors. For the recovery plan, it is Article L. 626-11 that applies by the cross-reference in I of Article L. 631-19, and not Article L. 631-20, which since Ordonnance No. 2021-1193 of 15 September 2021 deals with termination of the plan.

What does a lender risk if it has required an overly onerous comfort letter? Article L. 650-1 of the Commercial Code lays down the principle that a creditor is not liable for losses suffered as a result of the financing granted, except in cases of fraud, of marked interference in the management of the debtor or where the security taken in return for that financing is disproportionate to it. Where liability is established, the security may be annulled or reduced by the court, and is not automatically void since Ordonnance No. 2008-1345. The risk is concentrated on two points: a security package out of proportion to the financing, and a right of oversight turned into de facto management of the subsidiary.