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Navigating D&O Fiduciary Duties in the Zone of Insolvency

Posted on July 23, 2019 in

Significant risk could ensue when directors and officers are struggling to keep their business alive even though the chances of survival are slim. Keeping a company going when it is clearly beyond recovery or prolonging a financially distressed corporation’s life and reducing its liquidation value may cause personal liability for the directors and officers.

Shareholders and creditors frequently challenge the actions that transpired prior to financial insolvency. When companies fail, whether due to market forces, macroeconomic trends, bad luck or other problems, management and officers are blamed. This blame often comes in the form of a breach of fiduciary duty or similar claim. 

Legal battles arise in bankruptcy over whether the proceeds of a D&O policy belong to the estate or the individual directors and officers. Though they may have assumed they had adequate coverage, directors and officers may face significant out of pocket legal fees to establish their right to insurance earnings. 

Whether restructuring company assets, or filing for bankruptcy, directors and officers are not discharged of their fiduciary duties. Even while facing insolvency or dissolution, they have to affirmatively continue to monitor company assets and act in the best interest of the company.

Directors and officers must be informed and reasonably manage the wind down of the company for the benefit of its creditors. If your company finds itself facing financial distress, its directors and officers can generally avoid common pitfalls if they continue to act in a manner that maximizes company wealth and act in good faith when transferring assets. 

Myself, along with a panel of attorneys, explain the fiduciary duties of directors and officers when a company faces insolvency in this 90 minute CLE webinar. The group dives into how to identify the existence of a potential claim against former directors and officers, interpret the applicable insurance policy, and how to investigate, prosecute and, if possible, resolve such claims. We also addresses strategies to avoid and defend against breach fiduciary duty lawsuits, including D&O insurance coverage issues that arise in bankruptcy law.

Additionally, I am pleased to announce that I will be speaking in another Strafford live webinar, D&O Indemnity Claims in Bankruptcy: Navigating Third-Party Suits, Chapter 11 and D&O Insurance Coverage,” on Wednesday, August 21, from 1-2:30PM. Our panel will provide insight and analysis on the types of claims that may entitle directors and officers to indemnity protection and how their indemnity claims are treated in and affected by a company’s bankruptcy. After our presentations, we will engage in a live Q&A session with participants so we can answer your questions about these important issues directly. For more information about the upcoming webinar or to register for 50% off use discount code ZDFCA:

About the Author: Brett has been a litigator his entire career.  He advises clients in complex business and bankruptcy litigation matters with an emphasis on director and officer liability, breach of fiduciary duty, partnership and shareholder disputes, fraud, and avoidance and recovery of preferential and fraudulent transfers.  Brett represents court-appointed fiduciaries, trustees, receivers, corporations, shareholders, individuals, creditors’ committees, and secured and unsecured creditors. Click here to find out more about Brett.