Directors' Duties in Failing Firms

Abstract:     
Despite many cases with seemingly contrary dicta, corporate directors of failing firms do not have special duties to creditors. This follows from the nature of fiduciary duties and of the business judgment rule. Under the business judgment rule, the directors have broad discretion to decide what to do and in whose interests to act. There is some authority for a limited creditor right to sue on behalf of the corporation to enforce this duty. However, any such right does not make the duty one owed to creditors. The creditors individually may sue the corporation for breach of specific contractual, tort and statutory duties, particularly on account of fraudulent conveyances. But the creditors are not owed general fiduciary protection even if they are subject to a special risk of abuse in failing firms.

JEL Classifications: K12, K20, K22, K35

Accepted Paper Series