Advice for directors and officers of distressed corporations: Fiduciary duties

June 26, 2015

BY MARC CARMEL, G. ALEXANDER BONGARTZ & MARK POERIO

The most recent decisions (by judges in Delaware and several other relevant jurisdictions) hold that fiduciary duties are owed to the corporation that the director and officer is serving and do not change whether the corporation is solvent, approaching insolvency (described as the “zone of insolvency”), or insolvent. Based on these decisions, directors and officers should continue to exercise their duty of care and duty of loyalty to act in a manner that is best for the corporation.

While duties may not change whether their corporation is solvent or insolvent, exercising those duties becomes significantly more important when the corporation is confronting distress. With distress, directors and officers will be facing many more issues operationally and financially. Additionally, if the corporation is insolvent, creditors will not be repaid in full. When that happens, creditors often look for other ways to recover what they are owed and lawsuits for breaches of fiduciary duties is one avenue they may pursue.

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*This article was originally published in InsideCounsel, www.insidecounsel.com.