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

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?
12/11/2018

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