Directors in the twilight zone
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Transcript of Directors in the twilight zone
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
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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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Actions giving rise to liability
Breach of general & common law liabilities
Insolvency specific liabilities
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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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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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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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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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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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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
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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
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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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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