TFG | Addressing the fundamental lack of available risk capital that can be applied quickly in a financially distressed business

Mitigating the Legal Risks

There are very significant additional legal risks of providing turnaround finance. This is because in a turnaround situation the company is insolvent or potentially insolvent at the time of introducing new finance.

Simply put, the legislation attempts to protect existing creditors from having their interests prejudiced.

The law is extremely complex and it is outside the scope of this chapter to address the detail of the legislation. However, there are broad areas where turnaround financiers should be extremely cautious.

Voidability

It is possible that the transaction or security may be voidable, causing monies to be repaid to an insolvent state.

Personal Liability

It is possible for the turnaround financier as a director (or being deemed to be a shadow director) to become jointly and severally liable for the company’s debts.

Misconduct

A turnaround financier could, as a director or shadow director, be disqualified from acting as a director.

Litigation

It is possible to act in such a way so as to attract litigation from the directors, the company and/or the company’s creditors and shareholders.

It is stressed that all the above concerns can be minimised by the appropriate structuring of the deal. Nevertheless, this is an extremely complex and potentially very risky area and specialist professional advice should be taken.