Directors' Duties in Failing Firms

24 Pages Posted: 2 Feb 2006 Last revised: 15 Sep 2011

Larry E. Ribstein

University of Illinois College of Law (deceased); PERC - Property and Environment Research Center

Kelli Alces Williams

Florida State University - College of Law

Date Written: 2007

Abstract

Despite many cases with seemingly contrary dicta, corporate directors of failing firms do not have special duties to creditors. This follows from the nature of fiduciary duties and of the business judgment rule. Under the business judgment rule, the directors have broad discretion to decide what to do and in whose interests to act. There is some authority for a limited creditor right to sue on behalf of the corporation to enforce this duty. However, any such right does not make the duty one owed to creditors. The creditors individually may sue the corporation for breach of specific contractual, tort and statutory duties, particularly on account of fraudulent conveyances. But the creditors are not owed general fiduciary protection even if they are subject to a special risk of abuse in failing firms.

JEL Classification: K12, K20, K22, K35

Suggested Citation

Ribstein, Larry E. and Williams, Kelli Alces, Directors' Duties in Failing Firms (2007). Journal of Business and Technology Law, Vol. 1, No. 2, p. 529, 2007; FSU College of Law, Public Law Research Paper No. 234; U Illinois Law & Economics Research Paper No. LE06-004. Available at SSRN: https://ssrn.com/abstract=880074

Larry Edward Ribstein (Contact Author)

University of Illinois College of Law (deceased)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Kelli Alces Williams

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

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