Towards an Optimal Model of Directors’ Duties in the Zone of Insolvency: An Economic and Comparative Approach
Journal of Corporate Law Studies (2021), pp. 1-31.
32 Pages Posted: 29 Oct 2020 Last revised: 22 Apr 2022
Date Written: October 23, 2020
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, Middle East, 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
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