Some businesses operate in a naturally risky environment where a major crisis event is a real possible consequence of everyday operations. What do you do when something literally blows up?
In the context of the scenario posed for the first day of the conference, this panel considered some of the obligations of the board and the officers of a near insolvent company in managing financial, regulatory, and environmental risks.
The panel consisted of chair Julie Hertzberg (Alvarez & Marsai), and Sue Cato (Cato Counsel), Abuthahir Abdul Gafoor (RSM), Dr Detlief Haas (Hogan Lovells), and Paul Leake (Skadden, Arps, Slate, Meagher & Flom LLP).
Being aware of your duties to the company as a director or officer was the primary obligation which framed the answers for each of the different jurisdictions represented on the panel.
The company should carefully analyse the various consequences of the event, and not try to hide from them in the hope they will just go away. As Sue Cato put it, you need to, “Hug the bomb”, so that you see the consequences of the incident from various angles. Appointing appropriately qualified external lawyers, financial advisers and industry experts who identify the various risks posed by an incident is critical. Having that plan in place before the event is also important, so that, by way of example, the environmental, supplier/contractual, and financing consequences of such an event are known and mapped.
Having a communications strategy in place in advance is an equally important part of the incident response. Social media can generate a lot of apparent noise in the aftermath of a public incident. Companies may be best advised to ignore this criticism. The exception to this may be where there is a pattern of co-ordinated attacks which emerges in the social media feed, in which case a response may be appropriate. Choosing to defend the company in the face of such criticism, whilst not dealing with the issues flowing from the incident, is when the media is highly likely to turn on the company.
When dealing with secured creditors, being aware of all rights, obligations, and potential defaults under the facilities of the company is important. Knowing what collateral is held by which secured creditor and its value, and considering the liquidity of the company is important in ascertaining solvency.
In various jurisdictions there is a fundamental conflict between the goals of insolvency law (to clean up the financial position of the company) and environmental law (to clean up the harm caused by the company). It was observed that in the US generally, if a company is solvent regulators expect the polluter will undertake the clean up process. If the company however is insolvent, consideration might be given to using a formal appointment process to discharge the claims against the company. The chapter 11 process can discharge liabilities where there is an obligation to make a payment only. The obligations of the company though are not dischargeable under a chapter 11 appointment, if there is ongoing contamination which needs to be stopped, or a continuing obligation to clean up the damage caused.
Engaging with the regulator was recommended, not just to manage the regulator but also to establish credibility with financiers that the incident is being properly managed,
Overall preparation in advance of any potential crisis event emerged as a key theme of all panel participants. Understanding the risks from all angles places the company in a better position to weather the storm such an incident brings.