My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency
Forthcoming in Washington University Law Review.
40 Pages Posted: 2 Nov 2020 Last revised: 22 Feb 2021
Date Written: February 19, 2021
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: Suggested Citation