Directors in the twilight zone Neil Cooper Partner, Kroll Corporate Advisory & Restructuring Past President, INSOL International 12/11/2018

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? 12/11/2018

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 12/11/2018

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 12/11/2018

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? 12/11/2018

Actions giving rise to liability Breach of general & common law liabilities Insolvency specific liabilities 12/11/2018

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 12/11/2018

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 12/11/2018

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) 12/11/2018

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 12/11/2018

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 12/11/2018

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 12/11/2018

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 12/11/2018

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 12/11/2018

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 12/11/2018

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 12/11/2018