What Fiduciary Duties are Owed by Directors to a Company in Bankruptcy?
If you are an owner, manager, or director of a company or an LLC, you may already know that you owe fiduciary duties to the company. But what are your duties to the company when the company is closing, is insolvent, or on the verge of insolvency? Do your duties and obligations to the company change?
As a general rule, directors and officers have a fiduciary duty to their companies. These individuals must act in good faith, with reasonable care, and for the benefit of the company. Officers and directors are legally bound to use reasonable care and to take actions which they honestly believe are in the best interest of the company.
So long as officers or directors act with good business judgment, they will generally be immune from liability for the company’s failings or for liabilities the company should incur, and also generally immune from shareholder derivative suits or other lawsuits challenging the management of the company.
When a company is on the verge of insolvency, the duties owed to a company can change. The officers owe a fiduciary duty not just to the company, but to the company’s potential creditors.
Many times officers or directors, seeing the end of the company is near, will start to distribute corporate assets to anyone, for any reason—including to themselves. Even if this is an innocent act, believing that these items, assets or property have no value, and won’t be needed by the company anyway, failing to preserve them for the benefit of creditors can still get directors in trouble.
Sometimes, a company isn’t fully dissolved, and isn’t fully insolvent, but it’s well on the way to being there. If company assets don’t have short term liquidity, debts are more than assets, and the company does not have the resources or capital to fund future operations, the company may legally be considered to be on the verge of insolvency.
Notification to Creditors
When a company dissolves, all creditors of the company must be notified. The notice must inform creditors of their claims, and whether the company agrees with their claims or disputes them. By doing this, the public-and more specifically, the officers and agents of your company—will know that there are creditors, thus avoiding self-dealing (that is, individuals claiming company assets or property for themselves).
Duties Upon Insolvency
There is no difference as far as fiduciary duties are concerned, between a company actually being insolvent or being on the verge of insolvency. In either case, shareholders, officers or directors’ interests should not be put ahead of creditors. Improper distribution, selling assets for pennies on the dollar to insiders, or diverting corporate opportunities to other companies, are all examples where creditors are not being adequately protected.
In these situations, directors, managers or owners could potentially have personal liability for breaching their fiduciary duties owed to the company.
Whether your business is opening or closing up, we can help you manage your corporate legal issues. Call the West Palm Beach business litigation lawyers at Pike & Lustig for help today.