Towards an Optimal Model of Directors’ Duties in the Zone of Insolvency: An Economic and Comparative Approach

31 Pages Posted: 29 Oct 2020 Last revised: 25 Jan 2021

See all articles by Aurelio Gurrea-Martínez

Aurelio Gurrea-Martínez

Singapore Management University - School of Law

Date Written: October 23, 2020

Abstract

When a company becomes factually insolvent but it is not yet subject to a formal insolvency proceeding, the shareholders –or the directors acting on their behalf– may engage, even in good faith, in various forms of behaviour that can divert or destroy value at the expense of the creditors. For this reason, most jurisdictions around the world respond to this risk of shareholder opportunism with a variety of legal strategies, including the imposition of special directors’ duties in the zone of insolvency. From a sample of more than 25 countries from North America, Europe, Latin America, Africa, and the Asia-Pacific, this article seeks to explore the most common regulatory models of directors’ duties in the zone of insolvency existing around the world. It then analyses the advantages and weaknesses of these models, as well as the country-specific factors affecting the desirability of each regulatory approach. The article concludes by providing various policy recommendations to design directors’ duties in the zone of insolvency across jurisdictions taking into account international divergences in corporate ownership structures, debt structures, level of financial development, efficiency of insolvency proceedings, and sophistication of the judiciary.

Keywords: directors, duties, insolvency, shareholder opportunism, access to finance, entrepreneurship, corporate ownership structures, debt structure, judiciary, insolvency system

Suggested Citation

Gurrea-Martínez, Aurelio, Towards an Optimal Model of Directors’ Duties in the Zone of Insolvency: An Economic and Comparative Approach (October 23, 2020). Singapore Management University School of Law Research Paper No. 22/2020, Available at SSRN: https://ssrn.com/abstract=3717631 or http://dx.doi.org/10.2139/ssrn.3717631

Aurelio Gurrea-Martínez (Contact Author)

Singapore Management University - School of Law ( email )

55 Armenian Street
Singapore, 179943
Singapore
(+65) 6808-5160 (Phone)

HOME PAGE: http://https://law.smu.edu.sg/faculty

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