19/04/23 1

Directors in the twilight zone

Neil CooperPartner, Kroll Corporate Advisory &

Restructuring

Past President, INSOL International

19/04/23 2

The “Twilight Zone”

The period when the future of the company is uncertain -

Is it solvent or insolvent? Is it profitable or loss-making? In essence,

will it survive or fail?

19/04/23 3

Introduction

considerable advances in corporate governance generally

insufficient consideration of liability in the twilight zone

two publications by INSOL International In essence, it is the time when directors’

responsibilities change from protecting shareholders to protecting creditors

19/04/23 4

Main issues

On what does “twilight zone” depend Actions giving rise to liability Who may be liable Orders available to the court Impact on counterparties Enforcement Remedies Duty to cooperate

19/04/23 5

On what does the “twilight zone” depend?

whether formal proceedings commenced? actual or assumed knowledge of insolvency? nature of transaction? whether other party connected or associated? any other factors?

19/04/23 6

Actions giving rise to liability

Breach of general & common law liabilities

Insolvency specific liabilities

19/04/23 7

Actions giving rise to liability – early stage

falsification of company's books transactions defrauding creditors extortionate credit transactions fraud in anticipation of winding-up false representations to company's

creditors

19/04/23 8

Actions giving rise to liability -later stage

fraudulent (or dishonest) trading wrongful (or negligent) trading preferences transactions at undervalue incurring further credit during the

twilight period

19/04/23 9

What defences are permitted?

lack of actual knowledge of insolvency reasonable belief of solvency of company at

time of/after transaction benefit to company or group of related

companies from transaction other (e.g. technical defence no intention to

prefer)

19/04/23 10

Who may be liable?

Directors Shadow directors De facto directors Former directors Lenders/financiers Third parties dealing with directors

with or without knowledge of insolvency

19/04/23 11

Orders available to the court

pay compensation to company liability to creditors disqualified from acting as director imprisonment or fine setting aside "tainted" transaction postponing any debt owed by company to

director

19/04/23 12

Duty to co-operate

who is subject to a duty to co-operate with the office holder

defence of privilege against self-incrimination?

court sanction to enforce duty by fine and/or imprisonment

statutory presumptions reversing burden of proof where connected parties concerned

19/04/23 13

Sundry issues

Time limits for actions Appeal periods Foreign application as well as

domestic? D & O insurance Ability to incur further credit in

twilight period

19/04/23 14

Pros and cons

Pros Stop recklessness before too late Encourages responsible management Incentive to hire professionalsCons Accelerates collapse Inhibits workouts Weakens enterprise initiative Increases risk to lenders & introduces

uncertainty

19/04/23 15

In practice

Most directors start out honest Poor results encourage little lies which leads to bigger deception and need to falsify coupled with self-justification and eventually little left to lose

And they can’t work out how it ended that way

19/04/23 16

International best practice

Need for positive encouragement for improved corporate governance

Financing consequences Increased penalties for abuse Wrongful trading test is most

workable Improved rescue laws provide

viable alternatives to directors