On Thursday 9 November, Macfarlanes hosted a webinar which focused on the role of directors and in particular navigating those stresses and strains placed upon them in the uncertainties of the current markets.
The webinar was given by an expert panel comprising of finance partner and head of Macfarlanes' restructuring and insolvency group, Jat Bains, finance partner and qualified insolvency practitioner, Paul Keddie, and litigation partner, Lois Horne.
The panel discussed the following three principal themes.
- Managing shadow directorship risks when a PortCo gets
into financial difficulty.
On complex deals with multiple tiers of debt there are often different motivations between creditor stakeholders. Indeed in the case of a restructuring, stakeholders may have competing views, particularly if (a) some of that debt has been traded to a special opportunities investor at a discount and such investor is looking to make a return, and (b) there is a debate around where in the capital stack the value breaks, and in such a case stakeholders may attempt to persuade or threaten directors (or both) to encourage them to adopt their preferred restructuring strategy.
Stakeholders seeking influence in this way may play upon doubts that might exist as to who bears director duties, to whom they are owed and the related risk of personal liability. Indeed, there is often room for doubt to be cast where there are investor-nominated directors on a board, or where a creditor has previously done a debt-for-equity swap and by virtue thereof is closer to the management of a business.
It is not always necessarily clear how an investor nominee acting as a director might manage conflicts and stay on the right side of his duties. In the ordinary course conflicts can be authorised by a board resolution. However, in a distress scenario where sponsor financial support is needed, it is important to note the duty of disclosure owed by any director, which could potentially conflict with confidentiality desired at sponsor level.
An investor nominee may be required to step down as a director, either in favour of an independent chief restructuring officer or another member of the sponsor team with experience of distress situations. Alternatively, such investor nominee might ensure that they are not part of the decision-making process at sponsor level.
Ultimately, the key to managing conflict and mitigating any director conflict risk is to ensure a clear delineation of role, in short to avoid playing on both sides of the fence.
- Practical steps for directors when dealing with lenders
and other third parties when at risk of insolvency.
Before making key decisions in the shadow of potential insolvency, directors should ensure that their consideration of the possibility of insolvency and analysis of the wrongful trading test is well documented and demonstrates that careful consideration of events has been given, essentially that the directors have not been "asleep at the wheel".
However, balance sheet insolvency in particular is not always easy to detect, particularly in the absence of regular management accounts containing reasonably accurate trial balance sheets. Directors should therefore ensure that (a) trial balance sheets are available for consideration and analysis and that relevant teams in the organisation have sufficient resource to provide the directors with the information that they need for proper decision making, and (b) there is a reasonable and credible basis for any decisions made, and that related debate is reflected in board minutes.
Where insolvency is becoming a higher risk, directors ought to give less weight to matters which go to the longer-term creation of value if such matters would have an impact on short term cashflows, particularly given that cash can be tight and vital in order to have time to effect a restructuring.
Notwithstanding the above, the key for directors when a company is at risk of insolvency is to take advice from legal and other relevant professionals.
- Other risk management tips for non-executive directors (NEDs).
- Monitoring: NEDs are not expected to possess
the knowledge and skill of an executive director, still less to
give their continuous time and attention to a company's
affairs. Rather the Corporate Governance Code states that it is the
role of NEDs to scrutinise the performance of management in meeting
agreed goals. As such NEDs should satisfy themselves on the
integrity of financial information and that financial controls and
systems of risk management are robust and defensible.
Whilst in theory one of a NED's duties is to monitor the performance of directors, they are not expected to overrule them in their specialist field. It is necessary however that NEDs consider how a particular company's business is organised and that the part which a particular director could reasonably have been expected to play, has been.
- Delegation: Several cases refer to the
necessity of delegation and division of responsibility by NEDs, for
example relying on the figures presented by a finance director
etc., so long as it does not amount to blind acceptance and a total
abdication of responsibility. The line however is not definitively
clear.
- Resignation: Should a NED resign when a
company is faced by financial difficulties so as to hand over the
helm to a new captain who might steer the company to safer waters?
Whilst a seemingly easy fix in some circumstances, such an approach
should not be adopted lightly. NEDs and other directors are largely
appointed for the expertise that they bring, the removal of which
may cause harm to a company and thereby create personal
liability.
That is not to say that resignation is never an option, for example if the position of a director were to become untenable, such as where a director lacked proper access to information to perform their role, then that could be a reason to resign but it is important that directors at least try to rectify a situation before jumping ship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
