Directors in
the twilight zone
Neil Cooper
Partner, Kroll Corporate Advisory &
Restructuring
Past President, INSOL International
27/07/2016
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The “Twilight Zone”
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The period when the future of the
company is uncertain -
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Is it solvent or insolvent?
Is it profitable or loss-making?
In essence,
will it survive or fail?
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Introduction
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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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Main issues
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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?
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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
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Breach of general & common law
liabilities
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Insolvency specific liabilities
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Actions giving rise to liability – early stage
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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
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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?
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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?
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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
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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
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who is subject to a duty to co-operate with the
office holder
defence of privilege against selfincrimination?
court sanction to enforce duty by fine and/or
imprisonment
statutory presumptions reversing burden of
proof where connected parties concerned
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Sundry issues
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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 professionals
Cons
 Accelerates collapse
 Inhibits workouts
 Weakens enterprise initiative
 Increases risk to lenders & introduces
uncertainty
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In practice
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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
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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
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