Financial Twilight Re-Appraisal: Ending the Judicially Created Quagmire of Fiduciary Duties to Creditors

47 Pages Posted: 1 Apr 2017

See all articles by Anil Hargovan

Anil Hargovan

University of New South Wales

Timothy M. Todd

Liberty University School of Law

Date Written: 2016

Abstract

Directors owe fiduciary duties of care and loyalty to their corporations, and by extension to their shareholders. When a corporation approaches or enters insolvency, however, courts have recently found that the fiduciary duty calculus may change. Recognizing that creditors have financial interests similar to those of shareholders at or near insolvency, courts in several countries have extended fiduciary duty protection to creditors on equitable grounds. This trend has led to a state of flux and uncertainty in corporate law. Consequently, courts and commentators are battling to fully comprehend the controversial subject of director fiduciary duties to creditors in various jurisdictions.

Due to this jurisprudential flux, unresolved issues include, for example, the core notion that the duty arises when the company enters into an “ill-defined sphere” known as the “zone” or “vicinity” of insolvency. The law is remarkably short of specific judicial guidance as to how directors who engage in commercial risk-taking with a view to corporate rescue should discharge their duties without harming the interests of creditors. Indeed, the debate continues even on the critical doctrinal question of whether such a duty is even needed.

This Article uses corporate law in both the United States and Australia as emblematic of the real practical concerns inherent in the expansion of fiduciary duties. Consequently, the Article argues that the judicial recognition of directors’ fiduciary duties to creditors when at or near insolvency is objectionable, both from a policy and a doctrinal standpoint, and that any further attempt to develop the common law in this regard should be jettisoned in favor of reliance upon the existing, or modified, statutory regime aimed at creditor protection during times of financial distress.

Keywords: Corporations, Corporate Law, Insolvency, Fiduciary Duties, United States, Australia, Creditors

JEL Classification: K00, K1, K19, K2, K22, K39, K49

Suggested Citation

Hargovan, Anil and Todd, Timothy M., Financial Twilight Re-Appraisal: Ending the Judicially Created Quagmire of Fiduciary Duties to Creditors (2016). University of Pittsburgh Law Review, Vol. 78, No. 2, 2016 (DOI 10.5195/lawreview.2016.450), Available at SSRN: https://ssrn.com/abstract=2943069

Anil Hargovan

University of New South Wales ( email )

Kensington
High St
Sydney NSW 2052
Australia

Timothy M. Todd (Contact Author)

Liberty University School of Law ( email )

1971 University Boulevard
Lynchburg, VA 24515
United States

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