Director and Officer Fiduciary Duties in the Context of Insolvency
As a corporation becomes insolvent or is on the brink of insolvency the fiduciary duties usually owed (directly or indirectly) to shareholders may shift, forcing officers and directors to consider the interests of creditors to prevent creditor claims for breach of fiduciary duty. The precise line at which this shift occurs is not always clear, however, and directors and officers can thus be placed in an untenable position where actions they take that inure to the benefit of creditors could give rise to claims by shareholders, and vice-versa. This dilemma has been brought to the fore in the wake of the recent economic collapse.
When a company becomes insolvent, creditor claims against directors and officers for breaches of fiduciary duty can be an important weapon in their effort to collect on the debt. It is sometimes the case that one of the biggest remaining assets of an insolvent corporation is the company’s D&O policy, which creditors will try to access with a breach of fiduciary duty claim. Because the success of a breach of fiduciary duty claim against directors and officers can often mean the difference between creditors receiving substantial re-payment and receiving a few cents on the dollar, creditors are incentivized to comb through past corporate decisions surrounding a company’s demise to find a colorable fiduciary duty claim. Thus, it is important for directors and officers to have a clear understanding of how to conduct the company’s affairs near or at insolvency in such a way to minimize the risk of creditors being able to assert fiduciary duty claims.
In this paper, we explain when and in what ways corporate fiduciary duties can shift to the benefit of creditors, focusing in particular on the law of Delaware and Texas. Next, we examine what types of fiduciary duty claims creditors may bring against corporate officers and directors, and the primary defenses available to such claims. Lastly, we identify some practical tips officers and directors should keep in mind in navigating a company through insolvency or the zone of insolvency to minimize the risk of fiduciary duty claims by creditors.
Presented at the State Bar of Texas 8th Annual Advanced In-House Counsel Course, Chapter 11, July 30-31, 2009. To read the full article, click on the PDF linked below.