Directors in the twilight zone Neil Cooper Partner

Directors in the twilight zone Neil Cooper Partner, Kroll Corporate Advisory & Restructuring Past President, INSOL International 11/27/2020 1

The “Twilight Zone” n n 11/27/2020 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? 2

Introduction n n 11/27/2020 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 3

Main issues n n n n 11/27/2020 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 4

On what does the “twilight zone” depend? n n n whether formal proceedings commenced? actual or assumed knowledge of insolvency? nature of transaction? whether other party connected or associated? any other factors? 11/27/2020 5

Actions giving rise to liability n n 11/27/2020 Breach of general & common law liabilities Insolvency specific liabilities 6

Actions giving rise to liability – early stage n n n 11/27/2020 falsification of company's books transactions defrauding creditors extortionate credit transactions fraud in anticipation of winding-up false representations to company's creditors 7

Actions giving rise to liability -later stage n n n 11/27/2020 fraudulent (or dishonest) trading wrongful (or negligent) trading preferences transactions at undervalue incurring further credit during the twilight period 8

What defences are permitted? n n 11/27/2020 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) 9

Who may be liable? n n n 11/27/2020 Directors Shadow directors De facto directors Former directors Lenders/financiers Third parties dealing with directors with or without knowledge of insolvency 10

Orders available to the court n n n 11/27/2020 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 11

Duty to co-operate n n 11/27/2020 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 12

Sundry issues n n n 11/27/2020 Time limits for actions Appeal periods Foreign application as well as domestic? D & O insurance Ability to incur further credit in twilight period 13

Pros and cons Pros n Stop recklessness before too late n Encourages responsible management n Incentive to hire professionals Cons n Accelerates collapse n Inhibits workouts n Weakens enterprise initiative n Increases risk to lenders & introduces uncertainty 11/27/2020 14

In practice n n n n 11/27/2020 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 15

International best practice n n n 11/27/2020 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 16