Directors & Officers' Duty to Creditors

In normal situations, a corporation's directors and officers owe a fiduciary duty to the corporation and its shareholders.  But when a corporation becomes insolvent, that duty shifts to the corporation's creditors.  In these challenging economic times, this duty by corporate directors and officers to the corporation's creditors could lead to lawsuits from creditors against the directors and officers personally.

If a corporation is insolvent, contemplating bankruptcy or has filed for bankruptcy protection a suit by its creditors is likely a useless effort. However, the corporation may have a directors and officers liability insurance policy and/or the at least some of the directors and officers may personally have money.  So if creditors can sue the directors and officers personally the suit may be worthwhile.

For the duty to creditors to exist, the corporation must be insolvent.  So when is a corporation insolvent?  A corporation can be insolvent even before it has filed for bankruptcy protection or done an assignment for the benefit of creditors.  A recent Illinois federal district court opinion stated that "A corporation is insolvent when its liabilities far exceed its assets, or when it is unable to pay its debts."

For creditors this may provide another path to repayment.  For directors and officers of financially challenged corporations, it is one more of many risks to consider.

Disclaimer

This is a passive blog and the materials contained herein are provided for informational purposes only. Nothing contained in this blog should be interpreted as a solicitation of business and none of the information contained herein constitutes legal advice. The law is subject to change without notice, and the local laws of your residence may be different from the general information displayed on this blog. You should not rely on the information provided on this blog without first consulting an attorney. Contacting this website does not establish and attorney/client relationship between you and its publisher Christopher W. Matern. 

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