Corporate Creditors

Generally, directors do not owe a fiduciary duty to a corporate creditor when that creditor has contracted exclusively with the corporation. However, a director may owe a fiduciary duty to a corporate creditor to protect the corporate assets when the corporation becomes insolvent.

In the early 1900s, a Delaware chancery court concluded that officers and directors had to consider creditors’ interests when their company became insolvent. The court found that when a corporation operates in what it called the “vicinity of insolvency,” the directors became more than the agent of the shareholders. At that point, the directors also owed a duty to the corporation’s creditors because the corporation held its assets in trust for the creditors’ interests. Many courts have adopted that view, agreeing that creditors become equitable stakeholders in the company at the point of the corporation’s insolvency. Some courts take the view that the directors are in the position of trustees who hold the corporate assets for the creditors’ benefit when the corporation becomes insolvent.

The point that the corporation falls within the “vicinity of insolvency” is not always easy to determine and is often resolved by the courts. At least one bankruptcy court has held that directors and officers personally may be held liable when corporate transactions leave the company without sufficient capital to function. Generally, a corporation is in the “vicinity of insolvency” when it no longer able to pay debts as they become due or when corporate liabilities are greater than the fair value of the corporate assets.

When a corporation is in the “vicinity of insolvency,” the directors should consider the interests of the corporation as a whole, the shareholders, the employees, and the creditors. Many courts (including the Delaware Supreme Court) have concluded that directors do not owe a fiduciary duty to owners of convertible bonds, stock options, and others who have the right to convert their property into stock.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.