Legal Issues for Turnaround Managers – Part 1

To successfully implement a turnaround, it is critical that the turnaround manager understands the legal framework within which a turnaround is implemented to minimise the risk to the turnaround and also their own personal liability.

Here are some of the more common legal issues a turnaround manager may encounter in the pre-appointment phase:

Terms of retainer and indemnity – The turnaround manager’s powers, responsibilities and scope of appointment should be agreed and recorded upfront. A failure to do so can lead to a misunderstanding of duties and responsibilities, which can expose the turnaround manager to personal liability for negligence and also jeopardise the turnaround project.

Turnaround managers will also typically seek an upfront indemnity from the company or a key stakeholder, however, a key consideration will be the scope of the indemnity and the extent to which it will be permitted by law.

Solvency assessment – The starting point of any turnaround is for the turnaround manager to undertake a detailed assessment of the company’s financial position to assess its solvency. The assessment of a company’s solvency (the ability to pay its debts as and when they fall due) is both a legal and accounting exercise, involving the application of legal tests and considerations to actual and forecast financials and having regard to existing facts and circumstances.

To minimise his or her own personal risk (including for insolvent trading as an officer or shadow director), the turnaround manager should obtain appropriate legal advice on the question of the company’s solvency and also on the risks of implementing the turnaround through either an informal and/or formal insolvency framework.

With any distressed situation, early intervention is critical.

The key to a successful turnaround is having the right team in place to properly assess all relevant information, circumstances and risks.

In part 2 we consider the common legal issues for turnaround managers once they are appointed.

Cameron Belyea is a Partner and Alistair Fleming Special Counsel for Clayton Utz, one of Australia’s leading independent law firms.

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