Research Handbooks in Corporate Law and Governance series
Edited by Adolfo Paolini
Chapter 11: Navigating financial turbulence: directors’ duties in the face of insolvency
In the United States, parties can elect to do business in a variety of legal entity forms. Parties – particularly those wanting to tap the public markets for financing – frequently organize their businesses in the corporate form. To an increasing extent, parties also are using unincorporated entity forms such as limited partnerships and limited liability companies. Regardless of the entity choice, the business’s affairs are managed by individuals: typically, directors of a corporation and general partners or managers of unincorporated entities. These individuals are responsible for charting the business’ course in good times and in bad, and it often is the latter scenario that proves most challenging. This chapter focuses on the duties of corporate directors when the corporation experiences financial distress. The general fiduciary duties of corporate directors and the beneficiaries of those duties are fairly well defined when the corporation is solvent. What those duties are and to whom they are owed become murky once the corporation experiences a liquidity issue, significant contingent liability, or other financial distress. This chapter explores these issues for directors of solvent, insolvent, and nearly insolvent corporations. It also highlights how these issues might impact general partners or managers of unincorporated entities and offers a brief comparison to the laws of other countries.
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