Game of Thrones: Corporate Law and Bankruptcy Law in the Arena of Directors’ Liability

Abstract

A company in financial distress is bound to experience turbulence. In particular, the zone of insolvency is a crucial time in a company’s life in which conflicts of interest between shareholders, managers, and creditors are sharply enhanced. Directors’ liability during this period is a recurring topic of interest. The current COVID-19 pandemic and the global economic crisis generated by it bring this topic to the forefront once more. This Article points to two distinct approaches to this issue. The first is represented by the U.S. legal system, in which directors’ liabilities do not change in the zone of insolvency but, rather, conform to the same standards set by corporate law. We call this the “corporate law approach.” The second method is represented by the U.K. legal system, which sets different standards for directors’ actions in the zone of insolvency, requiring them to minimize creditors’ losses. We refer to this as the “bankruptcy law approach.” This Article shows that there are significant shortcomings to the latter approach. As a result, this Article concludes that the corporate law approach is comparatively more efficient. This Article further demonstrates the superiority of the corporate law approach by analyzing the shared theoretical, normative, and practical linkages between corporate and bankruptcy law. Finally, this Article discusses two possible policy implications of our discussion, one broader and one specifically tailored to minimize the negative consequences from the COVID-19 crisis.

Keywords: corporate law, bankruptcy law, directors' liability, insolvency zone, economic crisis, COVID-19, financial distress, creditors' rights, agency theory