Crisis Management: Independent Directors at the Helm of Restructurings

In financial distress, an independent director with restructuring experience can play a crucial role in navigating a successful outcome for private credit funds. It is a restructuring tool often overlooked, but as we experience choppy credit markets, the value-add of a restructuring professional on the board should not be underestimated.

Why appoint an Independent Director?

There are several benefits to a lender or financial sponsor in appointing an independent director to the board of a borrower or portfolio company:

• Director Liability: an independent director with restructuring experience can provide comfort and valuable insight for a lender whilst avoiding the potential risks associated with board appointments, particularly in those jurisdictions where the risk of personal liability for directors in the 'zone of insolvency' is much higher.

• Early Warning: independent directors can identify issues early, often before boards who may not have encountered financial distress previously and so can take a proactive approach to restructuring a company’s liabilities. Getting ahead of the curve in a distress situation will ensure that a lender maximises the strategic options available to it.

• Expertise in Crisis: an independent director's restructuring experience can guide both the board and its lenders through unfamiliar territory.

• Enforcement: in certain circumstances, independent directors can help facilitate consensual enforcement actions, preserving value and maximizing recoveries for lenders.

• Lender Rights and Leverage: where lenders do not have a right to make an appointment and borrowers are seeking lender consent on any given matter, lenders should secure appointment rights and other protections in anticipation of financial distress to maximise leverage and control.

The Strategic Navigator

In the complex journey of a company's restructuring, an independent director acts as a strategic navigator, complementing existing directors and driving the restructuring process to preserve and enhance value:

• Preserving Value: by guiding the board and ensuring informed decision-making, independent directors help maintain the company's value.

• Educating the Board: they bring specialized restructuring knowledge, often outside the expertise of current board members.

• Credibility and Consensus: adding an independent director can enhance the board's credibility, promote confidence and is key to building consensus among stakeholders.

Fiduciary Duties and Independence

Independent directors owe the same fiduciary duties to the company as any other director, ensuring their actions are in the company’s best interest and not just in the interests of the appointing shareholder or private equity fund:

• Duties Alignment: their responsibilities align with the company's welfare, ensuring a balanced approach to restructurings.

• Investor Directors vs. Independent Directors: while sponsors may prefer their own investor directors, independent directors offer an unbiased perspective crucial in contested restructurings.

Communication and Conflict Management

Effective communication with shareholders and stakeholders is crucial, and independent directors can help successfully navigate these issues without causing panic or overpromising:

• Information Sharing: independent directors manage the balance of keeping stakeholders informed while maintaining confidentiality and adhering to public/private information barriers.

• Conflict Resolution: they assess and address conflicts between group entities, especially in decisions regarding dividends or other financial distributions.

Risk Assessment and Insurance

Before taking on an appointment, independent directors must assess associated risks, including D&O insurance coverage and indemnities:

• Insurance and Indemnities: understanding the scope of D&O insurance and any indemnities provided is crucial for risk management.

• Multiple Appointments: they must evaluate the appropriateness of serving on multiple boards within the same group, considering jurisdictional issues and potential conflicts.
   

Independent directors are invaluable in restructuring scenarios, offering expertise, unbiased guidance, and stability in turbulent times. For private credit funds, appointing an independent director can be an important strategic move to preserve value and ensure that any restructuring process is managed as efficiently and effectively as possible.