My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency

European Corporate Governance Institute - Law Working Paper No. 551/2020

Forthcoming in Washington University Law Review.

40 Pages Posted: 2 Nov 2020 Last revised: 22 Feb 2021

See all articles by Amir N. Licht

Amir N. Licht

Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law; European Corporate Governance Institute (ECGI)

Date Written: February 19, 2021

Abstract

Fiduciary duties in the vicinity of insolvency form a notoriously murky area where legal space warps. Courts openly acknowledge that it is difficult to identify its boundaries, and the content of these duties is equally uncertain and inconsistent across jurisdictions. This Article expands the theoretical basis for a special legal regime in virtually or liminally insolvent firms. In addition to the conventional rationale of opportunistic risk shifting, law makers should be mindful of managers’ tendency to
unjustifiably continue failing projects, known as escalation of commitment. Second, this Article addresses the substantive content of a duty to protect creditors, either as in the form of a duty to consider creditors’ interest or as the statutory rule against wrongful (or insolvent, or reckless) trading. Specifically, it argues that when these duties are enlivened at the very edge of the zone of insolvency, the mission of directors should transform from entrepreneurial to custodial and should include a trustee-like duty of caution.

Keywords: corporate governance, fiduciary duties, stakeholders, creditors, vicinity of insolvency, zone of insolvency

JEL Classification: K22

Suggested Citation

Licht, Amir N., My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency (February 19, 2021). European Corporate Governance Institute - Law Working Paper No. 551/2020, Forthcoming in Washington University Law Review., Available at SSRN: https://ssrn.com/abstract=3680768 or http://dx.doi.org/10.2139/ssrn.3680768

Amir N. Licht (Contact Author)

Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law ( email )

8 University Street
Herzliya, 4610101
Israel
972-9-952-7332 (Phone)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
952-9-9513323 (Fax)

HOME PAGE: http:/www.ecgi.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
200
Abstract Views
612
rank
185,426
PlumX Metrics