under English law (s 170(5) of the CA 2006 providing that the director’s general duties, as set out in ss 171-177 of the CA 2006, apply to shadow directors), lenders potentially acting as shadow directors will, like the sponsor’s directors, run the risk of undertaking wrongful trading by the business. In an English law context, personal liability for wrongful trading carries risk under s 214 of the IA 1986 in circumstances where: (i) a company has gone into insolvent liquidation or insolvent administration; (ii) at some time before the commencement of the winding up or insolvent administration of the company, a director at the time (including a de facto director or shadow director) knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation/ administration; and (iii) that director (after satisfying the condition in (ii)) failed to take every step with a view to minimising the potential loss to the company’s creditors. Similar rights exist under many potentially relevant jurisdictions, for example, the Netherlands, Singapore, Brazil and Australia and others. This is a risk that has to be carefully considered especially where the prolonged trading has eroded the liquidity of the project company and it finds itself unable to fund any safety or other decommissioning costs. Although these risks are obviously by no means unique to a natural resources project, they may be increased by some of the unique operational aspects of a business of this kind. In addition to the usual essential operating costs to keep the project going (fuel and other input costs, salaries, local taxes and royalties and similar), others may at first appear more discretionary.

For example, some of the costs related to social and environmental initiatives noted above, and perhaps local security measures, may in reality be essential to maintain operations (perhaps by helping to keep the required licenses or concessions in good standing). Policy lenders are also likely to insist that expenses of this kind are met. Directors will therefore need to balance the need to meet crucial expenses as they fall due and their Corporate Rescue and Insolvency fiduciary duty to protect creditors’ interests. If the directors cannot satisfy themselves that there is no reasonable prospect of avoiding an insolvent winding up, on the basis that this is the stage where the directors’ duty to act in the best interests of the members of the company switches to a duty to act in the best interests of the creditors (s 170(3) of the CA 2006 provides that the duty to act in the best interests of the company is subject to any rules which require the directors to act in the interests of the creditors, such as s 214 of the IA 1986 wrongful trading provisions), then the implications for all stakeholders (creditors, shareholders and others) are likely to be particularly traumatic. It will not be straightforward for a new operator to take over the operations of a natural resources project, given IN PRACTICE In Practice Biog box Jamie Logie is head of Sullivan & Cromwell’s EMEA projects practice.

He has 30 years’ experience of international legal practice, all focused on project, asset and other finance and development work. Email: logiej@sullcrom.com. Chris Howard heads Sullivan & Cromwell’s European restructuring practice.

A leader in cross-border restructuring and finance, he advises across a multitude of jurisdictions in Europe, the Middle East and the Americas. Email: howardcj@sullcrom.com above assumes that the relevant commodity/ product prices are not in permanent decline, and there may therefore be significant upside value in the project in an improving commodity price environment. This may result in shareholders (institutional, specialist funds or others) subscribing for a rights issue, either to fully deliver the project, or at least to bring the debt structure to a sustainable level. Shorter term funding to bridge the period before a sale or market pick-up may be available through factoring/receivables discounting facilities, which are often permitted under suitably flexible debt incurrence covenants in project finance terms. Other potential short and longer term funding options may exist: specialist infrastructure funds, suppliers/ ‘...

lenders potentially acting as shadow directors will, like the sponsor’s directors, run the risk of undertaking wrongful trading by the business’ location, technical, market, environmental and other risks, at least without extensive diligence. POTENTIAL BUYERS, NEW EQUITY AND STRATEGIC INVESTORS If there is a prospect of sale of the project to a third party buyer, particularly one that may commit to repay project debt or ensure significant deleveraging, lenders are of course likely to put significant pressure on the sponsor to pursue this option. This will introduce one or more third parties to the restructuring process, with implications both for timing and deal terms (for example, introduction of conditions regarding deleveraging/debt repayment that are deemed to be acceptable to lenders). If the sponsor is a public company, this may require occasional consultation with the relevant takeover panel or other financial regulatory body, particularly if restructuring terms could impact the terms of the proposed offer. Of course, much of the process described buyers (perhaps by way of forward sale arrangements for products) and other strategic investors and offtakers may be considered. Ultimately, bearing in mind the somewhat illiquid nature of a businesses of this kind and the imperative to keep operations going to salvage value for investors and creditors and to avoid a total write-off of their indebtedness, certain existing project lenders may be willing to consider making new money funding available to the project, probably at ‘super senior’ level of priority compared to existing debt and almost certainly on more restrictive terms than applied to the original project financing. CONCLUSION Although the range of issues relevant to any restructuring may apply to a distressed natural resources project, our experience has repeatedly shown that the various features highlighted above make it a different proposition that presents certain unusual, and sometimes unique, challenges.  n April 2016 75 .