Are Letters of Comfort Legally Binding? Lessons from a NSW Court of Appeal Decision

A recent decision of the New South Wales Court of Appeal has provided important guidance on the limits of letters of comfort. In Forex Capital Trading Pty Ltd (in liq) v Invesus Group Ltd [2025] NSWCA 64, the Court declined to enforce a letter of comfort issued by a parent company, finding it did not create a binding obligation to meet the debts of its subsidiary following liquidation. The case is a timely reminder for businesses, advisors and insolvency practitioners to carefully consider the language and legal effect of informal assurances between related parties.

What are letters of comfort?

Letters of comfort are written statements, usually from a parent or related entity, that express support for another company’s financial obligations. They are often used to provide reassurance to lenders, suppliers, customers or business partners that the supported company is financially sound or will be backed if difficulties arise. Unlike formal guarantees, letters of comfort are typically worded to avoid creating legally binding commitments. The enforceability of a letter of comfort depends entirely on its wording and the context in which it is provided.

When are letters of comfort used?

Letters of comfort may be used to support loan applications, enter into supply agreements or to provide assurance to customers, creditors or business partners in general commercial transactions. Directors may seek to rely on letters of comfort if questions regarding insolvent trading are raised and they may also become relevant if companies are looking to enter safe harbour. Their appeal lies in the flexibility they offer. They are seen as a way to offer support without the formality or liability that comes with a guarantee. However, that informality can become problematic when financial distress sets in. If a company collapses, insolvency practitioners will often examine past assurances to identify potential avenues for recovery against parent companies and related entities.

The facts of the case

Forex Capital Trading (FXCT) operated as a forex trading platform until the company was wound up in insolvency in 2021 following regulatory action by ASIC. Before its collapse, FXCT’s parent company, Invesus Group Ltd (IGL), had issued a letter of comfort stating it would provide or procure “financial support to meet any debts, including judgment debts, incurred by FXCT or its director(s) prior to or after the date of this letter in respect of FXCT’s customers ”. 

In the course of the liquidation, FXCT’s liquidators admitted over $43 million in customer claims as provable debts. They then sought to enforce the letter of comfort against IGL on the basis that the words “any debts, including judgment debts, incurred by FXCT”, should be taken to reasonably include any liability accepted by the liquidators.

The legal issue

The key legal issue was whether the letter of comfort created a legally binding obligation for IGL to pay the debts arising from the admitted customer claims. Central to this was the interpretation of the phrase “any debts… incurred by FXCT”. The liquidators argued that once they had admitted claims through the proof of debt process, those liabilities became enforceable debts falling within the terms of the letter. IGL resisted the claim, arguing that there was nothing in the text of the letter of comfort to suggest that IGL was undertaking to be bound by a liquidator’s opinion about FXCT’s liabilities.

The Court’s decision

The Court of Appeal agreed with IGL and dismissed the liquidators’ appeal. It held that the phrase “any debts incurred” referred to debts properly established under ordinary legal principles, not simply claims admitted by a liquidator during the adjudication process. The Court further clarified that the liquidators’ admission of customer claims for distribution purposes did not convert those claims into enforceable debts for the purpose of the letter of comfort.

Key takeaways

• Letters of comfort must be carefully drafted if there is any intention for them to be enforceable.

• Parties relying on letters of comfort should seek legal advice and consider using a formal guarantee or indemnity where certainty is required.

• Businesses should avoid relying on informal assurances to manage risk. Before accepting a letter of comfort as support, careful attention should be paid to its wording and legal effect.

• Directors should not assume without legal advice that a letter of comfort will provide protection against claims of company insolvency and insolvent trading claims.

• Insolvency practitioners should not assume that a letter of comfort will translate into a source of recovery, even where liabilities have been admitted in a liquidation. Potential recovery action based on such documents should be approached with caution.

Final thoughts

Letters of comfort may serve a commercial purpose, but their enforceability is far from guaranteed. Whether you are entering into a credit arrangement, structuring group support or investigating recovery prospects after a company has collapsed, the message is clear. If you want enforceable protection, the letter of comfort must be expressed in clearly defined and legally binding terms.

If you would like advice on any letters of comfort or assistance in preparing legally enforceable guarantees or indemnities, please feel free to reach out to our team.

Authors: Gavin Stuart & Christina Cavallaro

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.