SOME GUIDELINES FOR DIRECTORS OF FINANCIALLY CHALLENGED COMPANIES
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Message: SOME GUIDELINES FOR DIRECTORS OF FINANCIALLY CHALLENGED COMPANIES
VII. SOME GUIDELINES FOR DIRECTORS OF FINANCIALLY CHALLENGED
COMPANIES
Directors of companies with financial difficulties may face a multitude of practical problems in attempting to anticipate how their actions will be evaluated after the fact. If the corporation is determined to be solvent, their actions will be evaluated in light of the best interests of the corporation and its shareholders. In the event the corporation is later found to have been insolvent, the directors may be held liable to the extent they did not act in the best interests of corporation as a whole. During insolvency, the creditors take the place of the shareholders as the stakeholders of a corporation, but the directors' duties remain the same. A board, however, may be exposed to derivative claims by creditors for breach of fiduciary duties during insolvency. Delaware courts reject the notion of a fiduciary duty change when a corporation is in the "zone" or "vicinity" of insolvency.
As a general rule, directors of companies facing financial difficulties should review the financial position of the corporation before taking action which may adversely affect either shareholders or creditors, and should avoid any impairment (e.g., marginal,questionable or other than arm's-length sales, pledges, or hypothecations) of corporate assets that would otherwise be available to creditors. Further, the directors should take extra steps to ensure that proper procedures are followed so that their decisions are based on a thorough and careful investigation and informed consideration of available information, are taken in good faith, and are for a proper corporate purpose.
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