Halvorsen & Reith

Insolvency-zone duties review for cross-border groups

An insolvency-zone duties review tests whether a board's decisions in the period before a company becomes insolvent were taken on the correct legal footing, and whether the file shows it. In most established systems of company law, the moment a company's ability to pay its debts becomes doubtful, the standard a board is held to shifts from serving shareholders to protecting the position of creditors, and that shift is capable of happening well before any formal insolvency filing is made. For a cross-border structure, an insolvency-zone duties review has to establish which entity's law governs that shift, when it began to apply to that entity, and what each director on that board should have been doing differently from that date. The output is not a solvency diagnosis; it is an assessment of whether the governance around that period will hold up once someone other than the board looks back at it.

A subsidiary has been trading on parent company support for the better part of a year. Invoices are settled later each quarter, a covenant has been waived twice already, and the board keeps approving budgets built on assumptions the finance director privately doubts. Nobody around the table has used the word insolvency, and the question a liquidator, a creditor or a regulator will ask later is not whether the company was technically insolvent on a specific date, but whether the board recognised the zone it had entered and changed how it behaved. This page sets out when that recognition is required, what an insolvency-zone duties review produces in sequence, and what it does not cover under an advisory-only mandate.

The situation this work addresses

The review is not commissioned because a company has failed. It is commissioned because someone on the board of directors, or someone advising it, has noticed a pattern that precedes failure: a parent withdrawing a comfort letter, an auditor signalling a going-concern qualification before signing off the accounts, a lender declining to renew a facility on the same terms, or an intercompany loan that has been rolled over so many times it no longer functions as a loan. None of these events is, by itself, insolvency. Each of them is capable of moving the entity into the period where the directors' duty is tested differently, and in a cross-border structure the entity that moves first is rarely the one the group is watching. The position in the Abu Dhabi Global Market illustrates one such route in detail, and is worth reading where that jurisdiction sits inside the structure being reviewed.

Once the board keeps authorising payments after the duty to creditors has displaced the duty to shareholders, personal liability can attach to the individual directors who approved them, for the loss the company goes on to incur from that point forward. The date that attaches is fixed by when the shift actually occurred, established afterward on the evidence, not by the date on which anyone in the room realised it. No board minute written after the fact can move it back.

Triggers, and why the timing matters

A cross-border group rarely enters the insolvency zone in every entity at once. One subsidiary's covenant breach can be contained without affecting a sister company in another jurisdiction, provided the group is honest about where the containment stops. The review is triggered by any event that puts that containment in doubt: a guarantee called, a credit rating action against the parent, a restructuring proposal circulated to lenders, a board pack that starts carrying a going-concern paragraph it did not carry the previous quarter, or a statutory filing that is now due sooner than the group anticipated. Timing matters because the shift in duty is not announced. It has usually already happened by the time anyone asks whether it has.

Where a subsidiary board defers to instructions from group finance without independently testing the group's own position, that deference does not transfer the exposure upward. It closes off the argument that the subsidiary board relied reasonably on group guidance, once the group's own solvency is later found to have been in question over the same period. A board that wants that defence available has to have tested the position itself, and recorded that it did so, before the deference took place, not after.

A board carrying this pattern across more than one entity is not deciding whether to test its position. It is deciding how much of the period in question is still open to correction, and that window narrows with each quarter the pattern continues unaddressed.

Assess your director exposure. Write to info@hreithlaw.com with the jurisdiction and the structure.

What an insolvency-zone duties review produces, in sequence

The review does not start with an opinion on solvency. It starts with the constitutional documents and the group structure chart, because the question of which board owed which duty, and from when, cannot be answered without first establishing which entity's law applies to that board and what its constitution actually permits it to do once the position changes. From there the work produces four things, in this order.

The sequence matters as much as the content. A group that starts with the exposure assessment before the entity-by-entity memorandum is settled ends up assessing the wrong period, because the trigger date has not yet been fixed. A separate note sets out which board resolution should exist at each stage of that sequence, and is worth reading alongside this page before the first board meeting is convened to discuss the position.

Where this differs by jurisdiction

The point at which a board's duty shifts from shareholders to creditors is recognised across most established systems of company law, but jurisdictions differ sharply on how that point is defined, who carries the burden of proving it, and whether the shift is treated as a change within the same duty or as a distinct regime aimed specifically at directors. Common-law jurisdictions typically frame it through a dedicated test aimed at the individual director, often described as wrongful trading or insolvent trading. Civil-law jurisdictions more often fold it into the general duty of a careful manager, testing conduct against a standard rather than against a single bright-line date. Offshore centres frequently import a version of the common-law model, with local variation in what counts as the triggering event and in how the register treats the company once the position becomes public.

None of these positions collapses into a single answer for a group with entities on both sides of that divide. A parent incorporated in one tradition and a subsidiary incorporated in another can reach the insolvency zone on different dates, under different tests, and with different consequences for the individuals on each board. A jurisdiction-by-jurisdiction comparison of the triggers that mark that boundary is the starting reference for a group working out which entity to look at first. Where a subsidiary's own constitutional documents restrict what its board can do without shareholder consent, that restriction can also determine how much room the board actually has to change course once the duty has shifted; the position on share transfer restrictions in one such constitution is set out separately and illustrates how constitutional limits interact with the timing question.

What this insolvency-zone duties review does not include

The review does not include acting as, supplying, sourcing or arranging a director, a company secretary, a nominee shareholder or a trustee for any entity in the structure, and it does not include any activity for which a trust or corporate service provider licence is required. That boundary is a licensing constraint, not a matter of preference: providing persons to hold office, or arranging for someone else to provide them, is a regulated activity in a majority of the jurisdictions a cross-border group is likely to touch, and an advisory firm without that licence cannot cross it without exposing the client to a defect in the appointment itself.

What the client receives instead is the analysis that makes the client's own decision defensible: the duty-shift point mapped for each entity, the criteria a replacement or continuing director needs to meet spelled out in full, the terms of any existing appointment reviewed against those criteria, and the regulatory exposure of each office holder assessed on the basis of what the record currently shows. Where the group's own conflicts protocol has not been tested against the same period, that gap is identified as part of the same exercise, because a conflict left unmanaged during the insolvency zone compounds the same exposure it is meant to control.

A board that has read this far already suspects which entity in its structure moved first. What it does not yet have is a record that shows the board understood that and acted on it, and that record is the part that cannot be reconstructed convincingly once a liquidator has asked for it.

Assess your director exposure. Write to info@hreithlaw.com with the jurisdiction and the structure.

Frequently asked questions

What does an insolvency-zone duties review require in practice?
It requires the constitutional documents and group structure for each entity involved, the board minutes and financial information relied on during the relevant period, and input from whoever prepared the cash flow assumptions the board approved. A review built only from the legal file, without that financial input, will miss the date the shift actually occurred.
Who inside the company is responsible for an insolvency-zone duties review?
Every director on the board carries the duty personally, not only the finance director or the executive closest to the numbers. A common misconception is that a non-executive or a director appointed at group level for governance purposes carries a lighter version of the same duty; the standard does not distinguish between them once the zone has been entered.
What evidence should the board keep during an insolvency-zone duties review?
Board minutes that record the financial information the board relied on, the basis for continuing to trade, and any dissent expressed by an individual director. A resolution passed without a record of what was put in front of the board is difficult to defend later, whatever decision it reflects.
What happens if an insolvency-zone duties review is not addressed?
The exposure does not disappear; it crystallises later, usually once a liquidator or an administrator is already in place and reconstructing the period from whatever record exists. By that stage the evidence a board would have wanted to create no longer can be created, only argued about.
How often should an insolvency-zone duties review be revisited?
It is triggered by events, not by a calendar: a covenant waiver, a withdrawn guarantee, or a going-concern qualification each restarts the question. A group already showing more than one of these signs should treat the review as a standing item at each board meeting until the position stabilises, not as a single exercise completed once.
By Amara Diallo