Directors%20in%20%20%20%20the%20twilight%20zone

1
Directors in the twilight zone

• Neil Cooper
• Partner, Kroll Corporate Advisory Restructuring
• Past President, INSOL International

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?

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

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

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?

6
Actions giving rise to liability

• Breach of general common law liabilities
• Insolvency specific liabilities

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

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

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)

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

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

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

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

14
Pros and cons

• Pros
• Stop recklessness before too late
• Encourages responsible management
• Incentive to hire professionals
• Cons
• Accelerates collapse
• Inhibits workouts
• Weakens enterprise initiative
• Increases risk to lenders introduces uncertainty

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 cant work out how it ended that way

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